Valeant Stake Continues to Cost Sequoia

We have placed the Morningstar Analyst Rating for

Top-holding

As Valeant's largest shareholder, this fund has been hit hard on a number of fronts. With Valeant's shares down more than 70% since mid-September, the fund's once-exceptional trailing results are in tatters going back 10 years. The damage has been so severe because the Valeant position was 28.7% of assets in June 2015 before the share price started falling last August.

Exiting shareholders have put further pressure on the fund by pulling out nearly $800 million over the six months through February 2016. Given that the fund held just 5.2% of assets in cash as of year-end 2015, which was low by historical standards, managers Bob Goldfarb and David Poppe have likely been selling shares to meet redemptions. Valeant's crash could accelerate outflows in March. This could then lead to a hefty capital gains distribution for remaining shareholders.

These events also raise questions about the fund itself. Goldfarb, Poppe, and their team of analysts have long been known for their in-depth knowledge of their holdings. We don't doubt their efforts to understand Valeant's challenges, but the fund's process should be re-evaluated. Specifically, the team does not seem to have taken any steps to mitigate the risks of such a large position. In fact, they bought additional shares in 2015's fourth quarter, which famously led to the resignation of two board members. Because of these concerns, we have placed this fund under review.

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