An epic winning streak on Wall Street - then one ugly loss

THE FINANCIAL whizzes cocooned in the serene offices of the Sequoia Fund atop one of New York’s iconic office buildings seem far removed from the noise of the city far below.

But the 48-year-old mutual fund known as much for its ties to billionaire Warren Buffett as for its uncanny stock picks that created massive wealth for clients - retirement funds, pension funds, university endowments and regular-Joe investors - has had to descend from its lofty perch in the past two years and rescue its good name.

A big miscalculation on one stock, Valeant Pharmaceuticals International, has cost the Sequoia Fund billions of dollars and compromised its reputation for market-beating performance earned over decades.

The rebuilding process comes at time when investors are leaving stock-picking funds such as Sequoia for index-based mutual funds, which track a fixed basket of stocks. Value stocks such as the ones Sequoia seeks out are finding themselves less loved by a bull market that is on the hunt for the next Apple or Facebook.

Sequoia grew to maturity under the glow of Buffett, the folk-hero money mind whose stewardship of Berkshire Hathaway prompted a national following based on the virtues of common-sense investing and avoiding mistakes.

The Sequoia Fund has long stood near the top of the Wall Street pyramid. It enjoyed a reputation for sobriety, transparency and a resistance to volatility, which drew blue-chip clients such as The Washington Post. The newspaper for years has listed the Sequoia Fund among its retirement fund options. (This reporter has been a modest Sequoia investor for 20 years.)

The Valeant stumble has reverberated.

“It was quite painful, but most clients made money on Valeant,” said chief executive David Poppe, sitting in a conference room overlooking the regal Plaza Hotel below, with leafy Central Park and the Bronx in the distance.

Sequoia bet - and bet big on Valeant. It stuck with the shares even as Valeant was battered by Wall Street and by relentless media coverage of its strategy of using debt to buy drug companies, then laying off employees, doing away with research and jacking up prices which resulted in embarrassing congressional hearings and federal investigations.

Sequoia’s returns eventually tumbled. Its assets under management have been halved from US$8 billion pre-scandal to US$4.2 billion, with a big chunk attributable to a nose-dive in Valeant stock. It fell from US$257 two years ago to less than US$15 (RM68) now, a loss of more than 90 per cent.

Looking up from the wreckage, Berkshire Hathaway Vice Chairman Charlie Munger called Valeant “a sewer” and its business practices “deeply immoral.” Buffett called it a “Wall Street scheme” with an “enormously flawed” business model.

The Sequoia Fund’s Morningstar rating, a respected metric in the mutual-fund industry, dropped from gold to bronze. Longtime fund comanager Bob Goldfarb, known for contrarian views that unearthed stock gems, retired. Through a spokesman, Goldfarb declined to comment for this article.

Sequoia once enjoyed such prestige that it closed itself to new investors. Now, after the loss of some major investors because of Valeant, Sequoia has installed a more rigorous approach to picking stocks and selling them. The company’s annual Investor Day meetings are now more tension-filled affairs with pointed questions.

“It’s fun to play on a winning team,” Poppe said. “Suddenly we look like a losing team.”