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the Sequoia ETF

Apparently Ruane, Cunniff & Goldbarb plan to launch a non-transparent, active ETF version of the Sequoia Fund. The expense ratio has not been disclosed.

The current Sequoia team began digging out from under the rubble almost exactly five years ago.

Good news: Ummm ... an opportunity to write nostalgic pieces about The Titan That Once Was?

Bad news: since the new team took over, Sequoia's rank in its 138 fund Lipper Multi-Cap Growth peer group is ...

Annual return: 110th
Sharpe ratio: 111th
Capture ratio (S&P500): 115th
Downside deviation: 97th, that is, 97 have better "bad volatility" scores than Sequoia
Maximum drawdown: 120th

I wonder where else there would be any buzz around the announcement, "hey, guys, we're offering a clone of the 115th best fund in its peer group! Climb abroad"?

David

Comments

  • It always amazes me how people who did such a great job for so long a time could collectively agree to violate one of the most fundamental rule of investing DIVERSIFY!

    If they had remembered, betting on Valeant would have been a 5% blip, not 50%

    OF course they are in a not so small group. Bruce Berkowitz immediately comes to mind, Third Avenue Value etc.
  • I could name 50 funds I'd rather see in an etf wrapper- JABAX FBALX VWINX FTANX etc, but never in a thousand years SEQUX !
  • @David: when you put the managers names on the marquee, as you did, they remind me of some law firm that has its crappy office near a traffic court and a bail bondsman’s hole-in-the-wall.
  • The question is have the Valeant lessons been learned?
  • Interesting take. David, would it be possible to get Ed’s perspective in a future commentary? I’m a shareholder myself and recall him writing about the fund in the past.

    If this is a non-transparent ETF, would that mean capacity/size wouldn’t be an issue for smaller cap holdings?

    Thanks.
  • Hi, Guy.

    I'll ask Ed on your behalf.

    On the capacity question, no. Being an ANT does not reduce any capacity constraints the strategy might otherwise have. That being said, it looks like they're running at $3 billion below their former peak. It appears as if Rolls Royce is their smallest cap name at $12 billion. If that's as small as they want to get, then a rough calculation gives them $18 billion in strategy capacity. (That's based on the assumption that they don't want to own more than 5% of the float for their smallest name, and that each name could represent one-thirtieth of the portfolio.)

    David
  • Thanks David.

    I'm a little disappointed that this means they won't be able to cap off their fund's assets...if they ever get there. Part of my attraction was the belief they'd curtail their fund size if needed.
  • edited September 11
    It is a large cap growth fund with $5B AUM. It can grow 10 fold before I would worry about capacity constraints. It has had net outflows for each of the past 9 years. If it reaches capacity constraints in the next 10 years means the fund becomes enormously successful, a good problem to have.
  • My rough formula for capacity starts with the smallest firm that they would like to include in the portfolio. Currently, that's Rolls Royce. You don't want to own more than 5% of the float or you become a controlling owner, which complicates the manager's life. So 5% of Rolls is $600 million in stock. If you want a concentrated portfolio (and they do), I multiple the maximum size of their smallest firm's holding by the target number of companies in the portfolio. $600M x 30 = $18B.

    That's rough because (1) there can be other constraints on the managers in terms of their internal capacity, (2) part of the strategy capacity can be committed to SMAs or other vehicles, and (3) the managers could choose to underweight their smaller companies. I tend not to make the latter assumption with concentrated go-anywhere portfolios because it's equally likely that they would want to overweight the smallest firm.

    When we publish a fund's strategy capacity, it's almost always based on a conversation with the adviser who sometimes (Grandeur Peak) has it down to the dollar and other times, they just laugh and exclaim "as if!"

    If you're smallest firm is $100B and you're targeting 50 names, this particular match does give you effectively unlimited strategy capacity: $250 billion or so.

    For what that's worth,

    David
  • One thing I question is the assumption that an ETF can’t close to investors. They have in the past I believe but for bad non-capacity issues, like liquidity issues with the underlying securities. After closing, the ETF would effectively become a closed-end fund trading at a premium or discount to its underlying portfolio value. But in the example we’re discussing where the ETF attracts many billions of assets because of strong performance if it closed it would almost certainly trade at a premium for a while as investors would still want access to a high performing fund. This premium would be to the advantage of existing shareholders as they could sell their shares for more than they really should be worth. It would be a disadvantage to new investors paying the premium. But as has already been mentioned, that’s a nice problem for a fund to have as it would mean the fund has been very successful. I doubt that will be the problem here and if it is, not for some years.
  • edited September 12
    That makes sense, David.

    Since there seems to be keen interest in this fund on this board, do we know what is the max any current manager has invested in the fund? M* says more than a million dollars, which does not impress me as I think that would be less than 1 yr of compensation for each of the managers. M* reports from SAI. I would like to see 3-5 yrs of annual compensation before putting any positive weight on managers’ economic participation. I get that having too much of managers’ wealth could be a detriment too but 3-5 years of annual comp is not too much, given a lot investors put 5-10% of their wealth in a fund.

    P.S.: I have never invested in this fund but am open to investing in it, not withstanding its misadventures in 2015-16.
  • edited September 12
    The SEC requires disclosure of portfolio managers' ownership in the following ranges: none, $1–$10,000, $10,001–$50,000, $50,001–$100,000, $100,001–$500,000, $500,001–$1 million, and over $1 million.
    Unless managers with more than $1 million invested in funds publicly reveal a specific amount or threshold, it may be difficult to ascertain this information.
  • edited September 12
    Yes, sometimes managers make comments outside SEC disclosures about their direct economic participation. I was asking folks to share if they are aware of such information.

    I read this AM the M* analyst report for this fund. M* gives a Neutral rating, only one level above Negative, but gushes over with "[Managers] invest heavily in the strategy alongside fundholders." Who knows what the "heavily" means but hopefully not just the over $1M disclosed in the SAI (SEC filing).

    Evidently, the current four managers have been with this fund for at least 10 years, which includes 2015-16.

    The above is just an FYI.
  • The underperformance unfortunately goes beyond 2015-16. Prior to this year in which the fund is winning, Sequoia has underperformed its Morningstar Large-Cap Growth fund category peers for seven straight calendar years. Admittedly, one could argue it is miscategorized as large-growth. I wonder how it would hold up versus say the large-blend category. But 2021 so far has been a good year for this fund.
  • LB stalwart PRBLX has a higher 3 year return, Sharpe Ratio and lower SD than Sequoia.
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