Sequoia (SEQUX) has always been a Gold fund in the judgment of Morningstar's analysts. Today it was placed "under review." Morningstar offers two reasons for that: (1) investors are bailing out and have pulled $800 million over the past six months. That goofs with both execution and tax efficiency. (2) "[T]he team does not seem to have taken any steps to mitigate the risks of such a large position.... Because of these concerns, we have placed this fund under review."
Oddly, they also placed it "under review" on October 30, 2015. At that point, Valeant was over 30% of the fund, investors had presumably been pulling money and the management team conducted their slightly-freakish public defense of their Valeant stake. Following the review, the analysts reaffirmed their traditional judgment: Gold! The described it as "compelling" in the week before the review and "a top choice" in the week afterward.
There's no evidence in the reaffirmation statement that the analysts actually talked to Sequoia management. If they didn't, they were irresponsible. If they did and asked about risk management, they were either deceived by management ("don't worry, we're clear-eyed value investors and we're acting to control risk") or management was honest ("we're riding out the storm") and the analysts thought "good enough for us!" I don't find any of that reassuring.
Similarly, up until quite recently Morningstar's stock analyst assigned to Valeant recognized "near-term pain" while praising the firms "flawless execution" of its acquisition strategy and the "opportunities [that] exist for Valeant long term."
David
Comments
Regards,
Ted
http://news.morningstar.com/articlenet/article.aspx?id=745818
This whole Sequoia thing does bring up something I have long wondered about, namely, what explains why it is so difficult for active managers to beat a simple index, and can we learn something from the Sequoia meltdown? It appears to me that for some reason Sequoia fell head over heals in love with Valeant, to the point where they would overweight this stock beyond any reasonable level. Why? I think a major factor here is the "superior company management" which Sequoia thought they found in Valeant. But how did they determine this? I think it was largely from a few conversations with the CEO and a few top leaders. Personally I don't believe a few discussions with a few top company leaders (who after all are mostly cheerleaders) will reveal anything about the overall management of a company (and to go further, I think it is rather the exception when a few people at the top of a large organization have that much influence on the success of the business anyhow.) So I guess my working hypothesis would be to avoid placing much confidence in a manager who believes his success in stock derives from identifying outstanding management.
Valeant is owned by 1226 mutual funds, including Vanguard's Total International Index. You beat the crowd (and the index) only by acting differently than they act. In Sequoia's case, that meant going all-in. They had 30% in Valeant. The second most-committed set of funds are all sitting around 4% in Valeant. And that did promise returns unlike any other.
David
Regards,
Ted
Sequoia 12,803,392
T. Rowe Price Growth Stock 4,878,500
T. Rowe Price Blue Chip Growth 2,722,700
T. Rowe Price Health Sciences 2,319,205
T. Rowe Price Instl Large Cap Growth 1,567,179
T. Rowe Price Value 1,165,000
And actually, SEQUX's drop of -7.7% with VRX's drop of 52% says that the Sequoia percentage in VRX is "only" about 15% (all other investments being flat).
PRGFX: $41.6B
TRBCX: $28.9B
PRHSX: $11.7B
TRLGX: $12.4B
TRVLX: 21.6B
Total TRP: $116.2B
Sequoia: $5.7B, or about 1/20th the size, i.e. 20x as committed as these T. Rowe Price funds.
David wrote that after Sequoia, the next most committed funds had 4%. These T. Rowe Price funds collectively have about 1.5% (1/20th of 30%). For funds that hold around 100 positions that's more a run-of-the-mill position than an infatuation.
Big families buy big positions in lots of stocks.
Huh. Well, this fine deep piece of reporting appeared mid-January:
http://nymag.com/daily/intelligencer/2016/01/valeant-wall-st-darling-to-pariah.html
See if you can follow all the twists and turns. What a story, and what sketchy types.
Wonder which Fido funds owned it and how much.
A more interesting statistic is the list of the most "concentrated shareholders," which can be found on Morningstar: http://investors.morningstar.com/ownership/shareholders-concentrated.html?t=VRX®ion=can&culture=en-US&ownerCountry=USA
Portfolio dates differ for different funds, but at least of the most recent data available, Sequoia had 19.31% of its portfolio invested in VRX. The decrease in portfolio percentage is almost certainly because of the fall in VRX's stock price, since Sequoia actually added more shares during this period.
After Sequoia, the next most concentrated holders of VRX are a couple of Diamond Hill funds, First Eagle, and the Nicholas fund, all with 4-5% of their portfolio in VRX.
At least as far as their stock ratings go it might be possible to assess whether they get it right more than they get it wrong if they were transparent about the results. In fact they were until sometime in 2013 when they wrote an article that extolled the importance of transparency, covered the results of their ratings and then from anything I can determine never wrote again about the performance of their ratings. I'm not aware that they're any better with their fund ratings. They report in a minimalistic way about their "batting average" with gold funds and how many end up in the top 25% of their category over various time periods in their Fund Investor newsletter but I haven't been able to find anything available even to premium website subscribers that shows what kind of returns or category rankings are achieved by their various ratings.
There's no question people screwed up at Valeant, Sequoia, Pershing Square and probably other places but I think David has it very right that M* screwed up too. My humble opinion is that it's not new and we'd all be wise to learn just as much from that as we should try to learn from what happened to others who've been criticized far more extensively for their poor decisions.