Saturday, May 3, 2008

Legendary Sequoia Fund to Reopen to New Investors...A Cause for Jubilation or Avoidance?

I noticed a piece today on the reopening of the Sequoia Fund (SEQUX), which for the prior investing generation, was the pinnacle of mutual fund excellence. The fund was started by Warren Buffet's stockbroker Bill Ruane, now deceased. For years, it outperformed the indices in stellar fashion, besting the S&P500 by a factor of 3 between 1970 and present. As legend has it, Morningstar used to view any research study that didn't rank Sequoia at the top as inherently flawed. So, the news that the fund is reopening to new investors should be met with jubilation, right?

Not So Fast...

First of all, why would a famed fund that closed its previously be opening its doors now? Redemptions? Lack of fund inflows (Assets once stood at $5 billion, now they're at $3.8 billion)? Is it even the same fund now that the founder has passed? Based on its recent performance, I don't endorse the fund.

The recent performance has been unacceptable. As shown below, the 5-year performance stands at a paltry 8% compared to the S&P's return of 56%.

In very recent history, the fund suffered terribly during the December market swoons with the past 6 month period resulting in a decline of -17% vs. -9% for the S&P500.

If you're considering an actively managed fund, check out this Diamond Hill Fund that bests the indices in all relevant timeframes, including the recent market mayhem; note the YTD performance of 4% up vs. 5% down for the S&P500 (full writeup here).

I think the Sequoia one is more nostalgia and name recognition than prudent investing. Following the herd and yesterday's winners has proven painful enough for individual investors. Following the prior generation's winner with no rational benefit could be similarly dangerous.

Morningstar now ranks it as a 3 star fund and its expense ratio is 1.0%. A Vanguard S&P500 Fund or major index ETF can be had with better performance and a tenth the expense ratio to boot.

No comments: