Caesar’s Wife Must Be Above Suspicion

Caesar divorced Pompeia at once, but when he was summoned to testify at the trial, he said he knew nothing about the matters with which Clodius was charged. His statement appeared strange, and the prosecutor therefore asked, “Why, then, didst thou divorce thy wife?”

“Because,” said Caesar, “I thought my wife ought not even to be under suspicion.”

Plutarch’s ‘The Life of Julius Caesar’

The Sequoia – Valeant saga is a Lehman Moment for actively managed mutual funds. I know the ol’ LM is one of the most widely overused idioms in finance, but it’s appropriate here, I assure you.

For me, this is the final nail in a coffin we (the proverbial we) have been pressing shut for eight years now.

Sequoia was the very best that the industry had to offer. The gold standard. Forever. Long-term oriented, unselfish and willing to close down when too much money had poured in, intelligently run, brimming with continuity and experience, legendarily cautious, reliably faithful to its mandate. It had the imprimatur of being the only fund blessed by Warren Buffett himself, who exhorted his investors to put their cash there when he closed down his private partnership. It had a universe-beating track record that was decades and decades in the making. It did Ben Graham-style value investing better than Graham did it himself.

Here is the ultra long-term view of the fund’s performance versus the large cap US stock index (S&P 500):

all time

And in the span of a year, and as a result of a single stock position, all was undone. Valeant Pharmaceuticals, once a high-flying winner for the Sequoia fund, had become an oversized albatross of a holding, dragging the fund and its investors back down to earth, and negating years and years worth of alpha in the process. The position led to an internal revolt and an external investor exodus as it crashed from $250 to $25. In the end, the old man got shoved out and then so did the last of the VRX stock holding. I wrote about this at length as it unfolded last fall for Fortune Magazine (see: The Stock That Ate Wall Street)

Here is what has happened to the fund, vs the same benchmark over the last 5 years:

5 year

…and now, we zoom in on the last 3 years:

3 year

But perhaps, the most devastating view – 10 years worth of underperformance, a period considered the “long-term” in an age where the average holding period for all mutual funds is under 36 months:

10 year

Sequoia is now underperforming 83% of its peer group – not the benchmark, but other funds in its category – over the last decade. This equates to quite a bit of lost goodwill:

rank

Ruane, Cunniff & Goldfarb, the management team that runs Sequoia, wrote the following in a letter to shareholders today:

As we have previously reported, our longtime chief executive officer and co-manager of Sequoia, Robert D. Goldfarb, retired from our firm at the end of March 2016. Our new leadership elected to sell our position in Valeant Pharmaceuticals, exiting completely by mid-June. Valeant was our largest position to start the year and its 80% decline through June 30 badly penalized our results. For the first half, Sequoia generated a negative 13.2% return vs. a positive 3.8% return for the S&P 500 Index.*

“So what?” you might ask. It’s one bad trade versus a lifetime of solid returns and stewardship. And you’d be partly right. Who doesn’t make mistakes? I could fill a set of encyclopedias with everything I’ve been wrong about.

But it’s the nature of the mistake and the structure of the investment committee that allowed it that is the real issue. Sequoia’s always been a concentrated fund with a relatively small amount of holdings, and to some extent, this has been their secret sauce. They’ve taken risks that have mostly paid off before. But this was the one that undid the benefits of a lot of their more successful wagers. And now, the revamped investment committee almost has to be chastened. There is no way the destruction of their track record and reputation won’t affect their behavior in the future.

The question now is about how this will manifest itself in the fund’s decision-making process going forward. We’re talking about human beings here. How is it possible that preservation of reputation and risk aversion don’t come to the fore in palpable ways, given what they’ve just survived?

Mark Twain said, “We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and that is well but also she will never sit down on a cold one anymore.” You could forgive David Poppe and Co if lots of cold stoves begin to resemble hot ones for the remainder of their tenure

But in the bigger picture, something greater than money or the reputation of one firm has been lost here. The entire concept of fund management due diligence has been jeopardized. You couldn’t find a fund that checked more positive boxes than Sequoia. And if this could happen to them…

Sequoia, as an exemplar of everything good about the industry, must be above suspicion, in order for the whole idea of active management and professional stewardship to be a viable one in the eyes of the end-investor.

And it is no longer so.

 

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. خرید next vpn commented on Sep 22

    vpn ایفون

    the time to review or get a look at the content material or internet-websites we have joined to beneath the

  2. سرویس vpn commented on Sep 23

    vpn ایفون

    listed here are some back links to internet sites that we link to since we think they are really worth visiting

  3. w88 commented on Sep 21

    … [Trackback]

    […] Information to that Topic: thereformedbroker.com/2016/07/13/caesars-wife-must-be-above-suspicion/ […]

  4. Cannabis Oil for Sale commented on Oct 13

    … [Trackback]

    […] Read More on to that Topic: thereformedbroker.com/2016/07/13/caesars-wife-must-be-above-suspicion/ […]

  5. alcacarpentry.com commented on Oct 19

    … [Trackback]

    […] Find More Info here on that Topic: thereformedbroker.com/2016/07/13/caesars-wife-must-be-above-suspicion/ […]

  6. devops commented on Nov 10

    … [Trackback]

    […] Read More on to that Topic: thereformedbroker.com/2016/07/13/caesars-wife-must-be-above-suspicion/ […]

  7. mail order weed online commented on Nov 21

    … [Trackback]

    […] There you can find 95719 additional Information to that Topic: thereformedbroker.com/2016/07/13/caesars-wife-must-be-above-suspicion/ […]

  8. REPLICAS LOUBOUTIN replica commented on Dec 31

    … [Trackback]

    […] There you will find 91167 additional Info to that Topic: thereformedbroker.com/2016/07/13/caesars-wife-must-be-above-suspicion/ […]

  9. Denso Unknown manuals commented on Jan 24

    … [Trackback]

    […] There you will find 43767 additional Info to that Topic: thereformedbroker.com/2016/07/13/caesars-wife-must-be-above-suspicion/ […]