Charles A. Jaffe: Legendary Sequoia open for new money

For the first time since 1982, the Sequoia fund is opening its doors to new investors.

If ever there was a legendary fund, this is it. Sequoia is the mutual fund started by Warren Buffett's stockbroker. The late Bill Ruane was a friend of Buffett when he cofounded Sequoia in 1970. At the time, Buffett was liquidating his investment partnership and advising his clients to take their cash to Sequoia.

Since 1970, Sequoia (SEQUX) has returned more than three times the Standard & Poor's 500. According to Morningstar Inc., an investor who plugged $1,000 into Sequoia back when it started would have a little more than $200,000 today; by comparison, the same investment in an S&P 500 index fund would be worth about $63,000. Morningstar data showed that the fund outperformed its large-cap-blend category peers in 332 of the 333 rolling 10-year periods dating back to its 1970 start.

Performance was so good, in fact, that when the fund stopped taking new accounts, some shrewd financial advisers started purchasing shares directly from people who had gotten in during the open days; experts can't think of any other closed fund that developed that kind of black market.

But what made Sequoia special was not just its investment returns, but also a knack for doing the right things when no one else seemed to care. It was the picture of sound communications with shareholders, responsible governance and a champion of sensible, low-cost, low-turnover investing.

"Sequoia used to stand out as an isolated beacon of the fund world, of how to do everything right from a management standpoint, performance standpoint and governance standpoint," said Don Phillips, managing director at Morningstar Inc. "They were doing the right thing years before the groups we now think of as doing the right thing ever even came along."

Sequoia was such an influence that Phillips and other early researchers at Morningstar created the Steadman-Sequoia test, linking Sequoia with the Steadman funds, arguably the worst mutual fund family of all time. The Steadman-Sequoia theorem - which some Morningstar analysts still use today - was that if a research study didn't put Sequoia at or near the top of the heap and Steadman at or near the bottom, the research must be flawed. (The Steadman funds were ultimately renamed the Ameritor funds, and one of those two issues closed last year, having finally lost all of its money to the point where its shares were completely worthless, the first fund ever to go all the way to zero.)

Reopening May 1 serves a key purpose for the Sequoia fund. The shareholder base stopped growing 26 years ago, and management is concerned about attrition. Assets topped $5 billion a decade ago; today they stand at about $3.8 billion.

That money is invested in less than 25 stocks, and one-quarter of its cash is invested in Berkshire Hathaway (BRK.A), paying homage to the fund's Buffett roots.

That said, investors don't really need Sequoia for that anymore. Over the last five years, plenty of similar funds have blown past Sequoia, most notably the Fairholme fund (FAIRX), which has a similar focus on investing the Buffett way and which also owns a big slug of Berkshire stock. Some observers worry that Sequoia could be like the classic restaurant that was so exclusive, no one could get reservations; when the doors finally opened to the masses, those consumers found that the restaurant's glory days were past.

"This fund has been challenged by the last five years," says Geoff Bobroff, an industry consultant from East Greenwich, R.I. "It's a fair worry that this was the fund that your father would have wanted to own, and now that you can get it, there's more reputation than performance left. . . . But it's hard to argue with a fund that has done pretty much everything right, because most people can't say that about what they own now."

Skeptics will note that Ruane died several years ago, and they have suggested that the reopening is designed to position the fund to make more money if the current management team decides to sell out. And no one expects Sequoia to take a flood of cash and go on some kind of short-term performance tear; this is a fund for investors who plan to be there a lifetime.

That said, an optimist would look at the timing and take Sequoia's reopening to a much bigger conclusion.

"The very fact that Sequoia is opening right now is a sign that some very good, smart people are thinking this is a time to be allocating capital, not retreating," said Morningstar's Phillips, who noted that he is likely to buy Sequoia simply because it's the one issue he has always wanted, but wasn't able to purchase. "They have resisted so many temptations to reopen in the past that they must have strong feelings about the market to do it now. That makes this even more intriguing; it may not be a world-beater anymore, but you can still feel pretty good about it."