View From the Street: Sequoia Fund Investment Day

For those who don't know, the Sequoia Fund is one of the most successful mutual funds out there. It is rated 5 stars by Morningstar and is also one of its select gold rated funds.

As the lead portfolio manager, Robert Goldfarb said at the conference at the St. Regis Hotel in New York last Friday, the fund isn't necessarily a stock fund, it is a capital growth fund, which allows the management team to exit equities and enter bonds when they deem it prudent.

Whatever they have been doing, it has been working, as they have, as of the end of 2011, posted an annualized return of the previous ten years of 5.57%, compared to the S&P 500 returning 2.92% annualized over the same period. Also, as Mr. Goldfarb pointed out, they had a negative variance to the index, meaning that almost all of the gains were alpha generated, stock specific gains.

First off, there was a flurry of questions to the management team about the state of the financial markets, in the wake of the JP Morgan trading/hedging loss JPM. Mr. Goldfarb has said for the past year or two, and Friday was no different, that US banks are "as well capitalized as they have been in a long time." He says that most losses related to US-specific problems have been written down at the this point, but continually low net-interest margins and European risks continue to weigh on financials.

On Advanced Auto Parts AAP, the team likes the auto parts industry as a whole because of the pricing power that exists. Parts retailers such as AAP benefit from a lack of information by individual consumers; unlike groceries, customers largely do not know how much a product costs to make or even what they really need, and so retailers such as AAP have the benefit of unequal information in their market. Even though comps for the past year came in rather weak, the team believes in the long-term value of this company and believes in the management team. As they said last year, "sometimes you need to focus on the jockey, not the horse."

For those who don't know, the Sequoia Fund has been a long-term investor in Berkshire Hathaway, both the A shares (NYSE: BRK-A) and the B shares (NYSE: BRK-B). The combined position amounts to about 10% of the total portfolio. The team sees approximately 10% intrinsic value growth per year into the foreseeable future. The team sees limited downside as the market premium to intrinsic value is "lowest on memory."

The fund has about a 2% position in Google GOOG, which is a company that the team absolutely loves. The first point to realize with Google is, in the face of growing competition in its core search business from sites like Microsoft's MSFT Bing, Google has continued to grow market share. Facebook FB competes in display hits, but not in search. The team is honestly more concerned with Amazon AMZN stealing share from Google than Microsoft.

As Amazon becomes a broader company in its product offering, they will get more traffic, which could hurt Google. The team highlights that Larry Page has been over-investing, which hurts the financials now, but helps in the long-run. Lastly, on the topic of legal issues, the team believes that they are trivial and should not be too worried about. On the impending Oracle ORCL lawsuit, one analyst put it this way: "It's over 9 lines of code."