Bill Ruane, a great friend of Warren Buffett, died in 2005. But he lives on in the Sequoia Fund he founded and managed since 1998 by Robert Goldfarb. The fund is open to new investors for the first time since 1982. Might it beat investing directly in Buffett’s Berkshire Hathaway?
Ruane—who espoused the same value investing techniques and plain speaking as his friend—and Goldfarb have certainly turned in strong numbers. From 1970 to the end of March, the fund has returned a cumulative 15% a year, against 11% for the S&P 500 index of US stocks.
Buffett’s record, though, is even better. Berkshire’s book value grew 21% a year from 1965 to the end of 2007. That compares with a 10.3% returns on the S&P 500 index for the period, including dividends. Berkshire also doesn’t charge fees, aside from the cost of its 19-person headquarters, while Sequoia’s managers charge 1% annually.
Sequoia does look more manoeuvrable. It had some $3.3 billion (Rs13,414 crore) worth of net assets at the end of March (including a chunky stake in Berkshire).
Buffett’s company, by contrast, had a book value of $121 billion at the end of 2007. He admits it’s tough finding opportunities big enough to move the needle.
Goldfarb’s fund also makes distributions—something Berkshire doesn’t do, to the frustration of some shareholders. That’s one reason Sequoia’s assets have declined in recent years, and may help explain the decision to reopen it. New fund investors will, however, buy themselves a potential tax issue. About 45% of Sequoia’s net asset value represents capital gains.
If it makes distributions having realized those gains, shareholders take the whole tax hit—even if they only just invested. Berkshire shares don’t present this problem.
Fans of value investing guru Benjamin Graham’s legacy may want to own both if Sequoia’s tax position doesn’t put them off. For those who have to choose but can’t decide, Berkshire may be the answer. At least it comes with a 30,000-strong annual meeting where they serve Dairy Queen sundaes.
The Sequoia Fund reopened to new investors on 1 May. The fund had seen assets declining in recent years despite investment gains. At the end of March, about 45% of its net asset value comprised net unrealized appreciation, meaning fund investors could face significant tax liabilities if Sequoia sells assets that have appreciated and distributes the profits.
Berkshire’s book value of $120 billion was equivalent to $78,008 per class A share, significantly less than its share price at the time of $141,600. The shares have recently traded nearer to $130,000.
On 2 May, Berkshire reported first quarter results suggesting that it has entered into new credit default contracts, taking its maximum remaining exposure up to $8.5 billion.
Equity index put exposure also increased and $1.6 billion of unrealized derivative losses contributed to a sharp fall in quarterly profit.