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Talking Points: February/March 2011

What Morningstar's analysts are hearing about Sequoia's Bob Goldfarb and David Poppe.

Morningstar Analysts, 02/14/2011

This article first appeared in the February/March 2011 issue of Morningstar Advisor magazine. Get your free subscription here. 

What Morningstar's analysts are hearing from mutual fund managers about tech..

The Issues
Bob Goldfarb and David Poppe of Sequoia SEQUX are Morningstar's Domestic-Stock Managers of the Year for 2010. The choice recognizes the power of strong and consistent execution of a straightforward approach. Bill Ruane set up the fund in 1970 to absorb investors sent over by Warren Buffett, and from day one, Sequoia's managers have succeeded by buying proven companies hiding in plain sight. Goldfarb has been at the firm since 1971 and has been lead manager on the fund since 1998, during which time the fund has crushed its rivals and the S&P 500 Index. A successful twist on a familiar strategy gives the fund its edge. This is not cigar-butt investing, as the managers are willing to pay up a bit for quality companies.

"One thing I have always respected about Sequoia is that they've been willing to take the value philosophy and push it forward. There are a lot of names in there, which some dyed-in-the-wool value managers might turn up their noses at. They really follow Charlie Munger's philosophy that there are some businesses that are worth paying up for, then you ride those for a long time, and it compounds value," says Pat Dorsey, Morningstar's director of equity research.

The Points
* The main risk with Sequoia is a risk most can easily stomach, though they may not appreciate it at the time. The fund cranks out solid absolute returns but typically lags the pack in more-speculative bull markets, such as those of 2003 and 2009. But it holds up better than nearly all equity funds in downdrafts. Net result: a great risk/reward profile over time. In late 2006, for example, the fund had just gained an average of 9% annually the prior three years but lagged more than 80% of its peers. Many investors questioned whether the managers had lost their touch. But then the fund lost less than nearly all rivals in the bear market from late 2007 through early 2009, and its midterm relative returns quickly vaulted to the top of the category. Expect this pattern to hold true.

* Sequoia knows a good thing when it sees it--and sticks with it. The fund has long had a huge chunk of assets in Warren Buffett's Berkshire Hathaway BRK.A--a big winner for it. That's led some to criticize the managers. The skeptics say anyone could outperform having a double-digit bet on Buffett's company. Exactly. But no other fund made the same big bet on Berkshire that Sequoia did years ago. Having the courage of your convictions works only when you're right. These managers are usually right.

* Sequoia is staffed for continued success. Goldfarb shows no signs of retiring, and most of the analysts have been at the shop for more than a decade, with many being lifers like Greg Alexander, who started in 1985.

"When I wound up the Buffett Partnership, I asked Bill Ruane if he would set up a fund to handle all of our partners, so he set up the Sequoia Fund . . . . Bill was the only person I recommended to my partners."
--Warren Buffett, Berkshire Hathaway

"Sequoia is a role model. Since our start, we have tried to emulate their success and behavior."
--Bruce Berkowitz, Fairholme Capital, Morningstar Domestic-Stock Manager of the Decade

"I have great long-term respect for Sequoia and the investment culture they've created. So much so that we added Sequoia to Ariel Investment's 401(k) plan, taking advantage of the fund's reopening to new investors."
--John Rogers, Ariel Investments

"Sequoia Fund has a great shareholder meeting. I have been going to it for more than 10 years. It's a real stock-picker's meeting."
--John Fox, FAM Value Fund FAMVX, Sequoia shareholder

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