Painful Valeant Debacle Spurs Improvements at Sequoia

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Portfolio manager--and now CEO of advisor Ruane, Cuniff, and Goldfarb--David Poppe further clarified the changes to the team's structure and risk management policies that he first articulated in March. Going forward, the fund will cap position size at 20% of assets. Furthermore, the team will formally review positions as they grow to 10% and 15% of assets. Recall that Valeant was 28.7% of the portfolio in June 2015.

Next, the firm announced the makeup of the newly formed investment committee, including analysts Arman Gokgol-Kline, David (Chase) Sheridan, Trevor Magyar, John Harris, and Greg Alexander; Alexander will be a nonvoting member of the committee. Harris and Alexander will not be actively involved in managing Sequoia as they run their own respective separate private portfolios, Wishbone and Acacia. But they both bring extensive experience and expertise to the committee, adding a further layer of oversight. Although Poppe remains Sequoia's sole portfolio manager, the investment committee will have veto power.

Despite these changes, the team took pains to emphasize that the firm's process is not changing. What happened with Valeant, based on past interviews and in the shareholders' meeting, is that former comanager Bob Goldfarb had final say. Ultimately, despite concerns voiced regarding Valeant by members of the investment team and the board, Goldfarb decided to maintain and even add to the position. Every recent change has been designed to prevent any one person from overriding the process itself, and to prevent any one position from having an outsized impact on performance.

That said, this will remain a concentrated, high-conviction fund. It will continue to hold 25-35 stocks. Plus, while individual positions may not grow as large as in the past, the fund may also hold less cash than it has historically; the team said the fund's stock picks excluding cash have tended to perform better over time than the portfolio including cash. So, the fund's risk profile will remain idiosynchratic, even though its composition may change.

Meanwhile, governance remains a priority for Sequoia. Its board is still reshaping itself since Goldfarb's departure and the resignations of two trustees last fall. John Harris will take Goldfarb's place and will join Poppe as the other internal board member. Board chairman Roger Lowenstein says there are plans to add another independent trustee before the end of the year. The firm also announced a new firm-level management committee consisting of Poppe, Harris, and Alexander.

As for Valeant, its role in the portfolio continues to diminish. After the team sold shares in the first quarter, the position represented about 5.4% of assets as of March 31. Poppe acknowledges that Valeant faces enormous challenges and likely will not be a long-term holding. That said, he did not give the impression that the team is a motivated seller, as the company still has valuable assets and they think highly of new CEO Joe Papa.

Conclusion It can be difficult to separate Sequoia as it now stands from its incredibly tumultuous recent past. But this fund has been transformed in important ways. This is not to say that these changes will lead to immediate improvements in performance, but from a governance and structural standpoint, this fund is in a better place.