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Sequoia Fund Sticks To Its Guns

Posted: Mar 31, 2009 14:39 PM by Eric Fox

Tickers in this Article: MHK, FAST, NYSE:BRK-B, NYSE:BRK-A, VMC, MLM

The Sequoia Fund is one of the premier value mutual funds in the market today, and has outperformed the market handily since its inception in 1970 and over one-, three-, five- and 10-year time horizons. But before jumping in, it might be instructive to look at the fund's position in order to see where money is being distributed in the current market.

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The fund is different from most equity mutual funds because it concentrates its positions and holds large amount of cash, or short-term securities, when it doesn't feel there are enough stocks to purchase. At the end of 2008, the fund's top four positions totaled 46.4% of its assets, and it held nearly 25% in government securities. This, of course, defies the conventional wisdom on diversification that is taught in both the academic and investing areas. (For more, read Why Invest In International Equity Mutual Funds?)

The Buffett Connection
The fund's largest position is Berkshire Hathaway (NYSE:BRK.A, BRK.B) at 22.8%, and a further analysis shows that this position is probably one of the main reasons the fund has such an outstanding long-term investment record. This large position makes sense also since the late William Ruane, who founded Sequoia in 1970, was a friend of Warren Buffett. The two met in the early 1950s when they both studied under Benjamin Graham. When Buffett closed his partnership in 1969, many of the limited partners moved their money to Ruane's shop.

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Aggregate Strength
Martin Marietta Materials (NYSE:MLM) is the fund's second largest position at 6.9%. The company is in the aggregates business, selling granite, limestone, sand and gravel to the construction industry. The company saw a 21% drop in aggregate volume on the fourth quarter due, although pricing was up 9%. The business has high barriers to entry and this may be one of the reasons why the fund likes it. Another large publicly traded aggregates company is Vulcan Materials (NYSE:VMC). Both Vulcan and Martin Marietta should benefit from the infrastructure spending contained in the stimulus bill passed in early 2009.

Fast Times
Fastenal (Nasdaq:FAST) is an industrial company that sells a wide variety of thread fasteners to the construction and manufacturing industry, and accounts for 5.7% of net assets. The company is holding out fairly well during the recession, and increased sales and earnings per share by 5% and 11.3% respectively in the fourth quarter of 2008.

From the Floor Up
Mohawk Industries (NYSE:MHK) is another company that accounts for 5.7% of net assets. The company manufactures floor coverings - rugs and tile - for residential and commercial customers. Mohawk did not have a great 2008. The company posted a loss of $21.32 per share due to a $1.5 billion impairment charge related to an impairment of goodwill.

Piggybacking on another investor's stock picks is possibly the worst reason to own a stock. Still, some investors take comfort in reviewing the portfolio holdings of well-respected mutual fund managers. However, rather than blindly buying what the funds own, investors should instead understand the reasoning behind why they own what they do. Although mimmicking another investor's portfolio can get you in trouble, knowing the science behind the picks and making educated predictions can set you apart from the crowd. (Read why copying the portfolios of big-time investors doesn't always yield comparable returns in Why Being A Copycat Investor Can Get You Hurt.)

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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