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Sequoia
Fund, Inc.

 

 

SEMI-ANNUAL
REPORT
JUNE 30, 2000

 

SEQUOIA FUND, INC.
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
With Income Dividends Reinvested and Capital Gains
Distributions Accepted in Shares

The table below covers the period from July 15, 1970 (the date Fund shares were first offered to the public) to June 30, 2000. This period was one of widely fluctuating common stock prices. The results shown should not be considered as a representation of the dividend income or capital gain or loss which may be realized from an investment made in the Fund today.

 

PERIOD ENDED:

Value of
Initial
$10,000
Investment
Value of
Cumulative
Capital Gains
Distributions
Value of
Cumulative
Reinvested
Dividends
 

Total
Value of
Shares

July 15, 1970 $10,000 $— $— $10,000
May 31, 1971 11,750 184 11,934
May 31, 1972 12,350 706 451 13,507
May 31, 1973 9,540 1,118 584 11,242
May 31, 1974 7,530 1,696 787 10,013
May 31, 1975 9,490 2,137 1,698 13,325
May 31, 1976 12,030 2,709 2,654 17,393
May 31, 1977 15,400 3,468 3,958 22,826
Dec. 31, 1977 18,420 4,617 5,020 28,057
Dec. 31, 1978 22,270 5,872 6,629 34,771
Dec. 31, 1979 24,300 6,481 8,180 38,961
Dec. 31, 1980 25,040 8,848 10,006 43,894
Dec. 31, 1981 27,170 13,140 13,019 53,329
Dec. 31, 1982 31,960 18,450 19,510 69,920
Dec. 31, 1983 37,110 24,919 26,986 89,015
Dec. 31, 1984 39,260 33,627 32,594 105,481
Dec. 31, 1985 44,010 49,611 41,354 134,975
Dec. 31, 1986 39,290 71,954 41,783 153,027
Dec. 31, 1987 38,430 76,911 49,020 164,361
Dec. 31, 1988 38,810 87,760 55,946 182,516
Dec. 31, 1989 46,860 112,979 73,614 233,453
Dec. 31, 1990 41,940 110,013 72,633 224,586
Dec. 31, 1991 53,310 160,835 100,281 314,426
Dec. 31, 1992 56,660 174,775 112,428 343,863
Dec. 31, 1993 54,840 213,397 112,682 380,919
Dec. 31, 1994 55,590 220,943 117,100 393,633
Dec. 31, 1995 78,130 311,266 167,129 556,525
Dec. 31, 1996 88,440 397,099 191,967 677,506
Dec. 31, 1997 125,630 570,917 273,653 970,200
Dec. 31, 1998 160,700 798,314 353,183 1,312,197
Dec. 31, 1999 127,270 680,866 286,989 1,095,125
June 30, 2000 123,600 661,313 282,339 1,067,252

The total amount of capital gains distributions accepted in shares was $329,005, the total amount of dividends reinvested was $95,580.

No adjustment has been made for any taxes payable by shareholders on capital gain distributions and dividends reinvested in shares.

To the Shareholders of Sequoia Fund, Inc.

Dear Shareholder:

Sequoia Fund's results for the second quarter of 2000 are shown below with comparable results for the leading market indexes:

 

To June 30, 2000

Sequoia
Fund
Dow Jones
Industrials
Standard &
Poor's 500
3 months -2.6% -4.0% -2.7%
6 months -2.6 -8.4 -0.4

The first six months of 2000 were certainly a bizarre period for the shareholders and management of the Sequoia Fund. From January 1st to March 10th of 2000, the Fund declined by 18%, while the technology-laden NASDAQ rose 24%. However, from March10th through the date of this letter, Sequoia rebounded by 29%, while the NASDAQ declined by 26%. In our 30-year history, this is far and away the most dramatic divergence between Sequoia and such a large sector of the market over such a short period of time. Today, most of our holdings have returned to what we believe are more sensible levels. Lo and behold, as we write this letter, the Fund is up 4.9% year-to-date. This compares to the S&P at +0.1%, the Dow at -4.3% and the NASDAQ at -7.5%.

The Fund is currently in a conservative posture, with about 30% of our investments in two-year Treasuries yielding about 6 1/4%. This is certainly not the first time we have held a sizeable cash reserve for future investments. Indeed, we held large cash reserves during much of the 1980s and the early 1990s. Over the years we have found that investment patience is eventually rewarded. At year-end 1993, for example, about one third of our assets were in Treasuries and cash. This allowed us to make an aggressive move into financial services stocks in 1994 when they became very attractively priced. These positions were strong contributors to the Fund's performance in the latter half of the 1990s.

Our current conservative posture is in no way an attempt to time the market. It is simply the result of our usual stock-by-stock evaluation that has led us to be sellers more often than buyers during the past several quarters. After a bull market of unprecedented duration, stock market investors increasingly demand that their funds remain fully invested in equities regardless of market opportunities. In this environment, it is perhaps ironic (and certainly little remarked) that, so far in 2000, cash has outperformed all the major stock market indexes.

We believe the recipe for delivering superior long-term performance requires equal parts of picking the right stocks and avoiding the wrong ones. We were not even tempted to join the recent speculative frenzy in the dot.com sector. But avoiding other, more subtle value traps is also critical, as well as more analytically taxing. Today's volatile and multi-tiered market offers us a variety of possible strategies for new investments.

Searching among the "old economy" stocks, we have identified and studied a number of companies with fine historical track records selling at apparently modest valuations. We have not infrequently concluded that, due to product maturity, technological change or other competitive factors, these companies are unlikely to sustain their enviable track records. As a result, their current stock prices may appropriately reflect limited prospects for growth in value over the long term. However, we have also identified companies with very low price/earnings multiples, limited growth prospects (but also minimal downside), earnings that are mostly cash, and the ability and willingness to return this cash to shareholders through dividends or share repurchases. While these companies may not be glamorous, the mathematics of their current valuations can provide very attractive returns over time.

Our large cash reserve may permit us to capitalize on other occasionally dysfunctional aspects of the current market environment. Investors often dump the shares of a company or an entire industry sector indiscriminately based on fears of an economic slowdown or in the wake of a strong company's shortfall, however modest, from analysts' expectations. This can create potential buying opportunities, although in any number of cases, even after severe price declines, we have found these to be surprisingly marginal rather than compelling opportunities, and often of very brief duration. Nevertheless, this price volatility has permitted us to establish some new positions over the past several quarters.

We do not normally provide you with an early estimate of Sequoia's year-end capital gains distribution. However, due to the magnitude of this distribution in 2000, we felt we should alert our tax-paying shareholders that it is likely to be in excess of $20 per share, payable in December. At the 20% federal tax rate on long-term capital gains, the federal tax due on a $20 capital gains distribution, for example, would be $4.00 per share. We recommend that you keep this in mind for your tax planning.

In closing, we highly recommend to our shareholders who are interested in the general investment scene that you add Pioneering Portfolio Management by David F. Swensen to your summer reading list. Swensen, Chief Investment Officer at Yale University, provides a thoughtful and provocative overview of the investment management process.

Sincerely,

Carley Cunniff Richard T. Cunniff
   
Robert D. Goldfarb William J. Ruane
   
August 10, 2000

SEQUOIA FUND, INC.
Schedule of Investments
June 30, 2000 (Unaudited)

COMMON STOCKS (66.11%)

Shares   Cost Value
(Note 1)
  BANK HOLDING COMPANIES (13.71%)
5,958,662 Fifth Third Bancorp $89,279,910 $376,885,372
249,700 Mercantile Bankshares Corporation 2,610,505 7,444,181
1,145,900 National Commerce Bancorp 7,110,847 18,406,019
3,799,700 U.S. Bancorp 48,179,594 73,144,225
  147,180,856 475,879,797
  DIVERSIFIED COMPANIES (31.26%)
20,175 Berkshire Hathaway Inc. Class A* 160,993,354 1,085,415,000
  HOME FURNISHINGS (1.46%)
2,115,500 Ethan Allen Interiors Inc.† 53,478,605 50,772,000
  INSURANCE (8.10%)
3,800,900 Progressive Corporation† 129,150,484 281,266,600
  INDUSTRIAL AND COMMERCIAL MACHINERY (2.53%)
2,163,400 Dover Corporation 72,424,416 87,752,913
  MANUFACTURING—MOTORCYCLES (1.32%)
1,191,850 Harley Davidson, Inc. 7,824,981 45,886,225
  PERSONAL CREDIT (2.00%)
1,667,200 Household International, Inc. 21,044,799 69,293,000
  SERVICES (3.90%)
3,344,600 Freddie Mac 13,263,099 135,456,300
  Miscellaneous Securities (1.83%) 63,842,533 63,696,212
  TOTAL COMMON STOCKS 669,203,127 2,295,418,047

Principal
Amount

 
  U.S. GOVERNMENT OBLIGATIONS (33.89%)
$ 42,000,000 U.S. Treasury Bills due 7/06/00 through 8/17/00 41,776,181 41,776,181
242,000,000 U.S. Treasury Notes, 5 1/2% due 08/31/01 241,375,418 239,428,750
763,500,000 U.S. Treasury Notes, 6 1/8% due 12/31/01 760,055,090 760,159,687
135,500,000 U.S. Treasury Notes, 6 3/8% due 01/31/02 134,864,463 135,351,797
  TOTAL U.S. GOVERNMENT OBLIGATIONS 1,178,071,152 1,176,716,415
  TOTAL INVESTMENTS (100%)†† $1,847,274,279 $3,472,134,462

 

†† The cost for federal income tax purposes is identical.
* Non-income producing.
Refer to Note 6.

The accompanying notes form an integral part of these Financial Statements

SEQUOIA FUND, INC.
Statement of Assets and Liabilities
June 30, 2000 (Unaudited)

ASSETS:
Investments in securities, at value (cost $1,847,274,279) (Note 1) $3,472,134,462
Cash on deposit with custodian 399,136
Receivable for investment securities sold 15,011,547
Receivable for capital stock sold 320,476
Dividends and interest receivable 10,270,841
Other assets 24,946
Total assets 3,498,161,408
LIABILITIES:
Payable for capital stock repurchased 260,418
Accrued investment advisory fee 3,161,349
Accrued other expenses 88,066
Total liabilities 3,509,833
Net assets applicable to 28,274,033 shares of capital stock outstanding (Note 4) $3,494,651,575
Net asset value, offering price and redemption price per share $123.60

The accompanying notes form an integral part of these Financial Statements.

SEQUOIA FUND, INC.
Statement of Operations
Six Months Ended June 30, 2000 (Unaudited)

INVESTMENT INCOME:
Income:
Dividends:
Unaffiliated companies $9,472,261
Affiliated companies (Note 6) 494,117
Interest 28,624,881
Total income 38,591,259
Expenses:
Investment advisory fee (Note 2) 17,991,351
Legal and auditing fees 42,808
Stockholder servicing agent fees 193,641
Custodian fees 40,000
Directors fees and expenses (Note 5) 97,538
Other 84,162
Total expenses 18,449,500
Less expenses reimbursed by Investment Adviser (Note 2) 383,000
Net expenses 18,066,500
Net investment income 20,524,759
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on investments:  
Unaffiliated companies 630,629,484
Net realized gain on investments 630,629,484
Net decrease in unrealized appreciation on:
Investments (764,759,790)
Net realized and unrealized (loss) on investments (134,130,306)
Decrease in net assets from operations $(113,605,547)

The accompanying notes form an integral part of these Financial Statements.

SEQUOIA FUND, INC.
Statements of Changes in Net Assets

  Six Months
Ended
6/30/00
(Unaudited)
 

Year
Ended
12/31/99

INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $20,524,759 $25,437,067
Net realized gain 630,629,484 146,273,356
Net (decrease) in unrealized appreciation (764,759,790) (969,232,109)
Net (decrease) in net assets from operations (113,605,547) (797,521,686)
Distributions to shareholders from:
Net investment income (12,811,957) (26,006,104)
Net realized gains (284,685) (204,435,454)
Capital share transactions (Note 4) (275,529,572) (77,044,856)
Total (decrease) (402,231,761) (1,105,008,100)
NET ASSETS:
Beginning of period 3,896,883,336 5,001,891,436
End of period $3,494,651,575 $3,896,883,336
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) $1,275,454,512 $1,506,881,082
Undistributed net investment income 7,892,195 179,393
Undistributed net realized gains (Note 3) 586,444,685 202,888
Unrealized appreciation 1,624,860,183 2,389,619,973
Total Net Assets $3,494,651,575 $3,896,883,336

The accompanying notes form an integral part of these Financial Statements

SEQUOIA FUND, INC.
Notes to Financial Statements

NOTE 1—SIGNIFICANT ACCOUNTING POLICIES:

Sequoia Fund, Inc. is registered under the Investment Company Act of 1940, as amended, as a non-diversified, open-end management company. The investment objective of the Fund is growth of capital from investments primarily in common stocks and securities convertible into or exchangeable for common stock. The following is a summary of significant accounting policies, consistently followed by the Fund in the preparation of its financial statements.

A. Valuation of investments: Investments are carried at market value or at fair value as determined by the Board of Directors. Securities traded on a national securities exchange are valued at the last reported sales price on the principal exchange on which the security is listed on the last business day of the period; securities traded in the over-the-counter market are valued at the last reported sales price on the NASDAQ National Market System on the last business day of the period; listed securities and securities traded in the over-the-counter market for which no sale was reported on that date are valued at the mean between the last reported bid and asked prices; U.S. Treasury Bills with remaining maturities of 60 days or less are valued at their amortized cost. U.S. Treasury Bills that when purchased have a remaining maturity in excess of sixty days are stated at their discounted value based upon the mean between the bid and asked discount rates until the sixtieth day prior to maturity, at which point they are valued at amortized cost.
B. Accounting for investments: Investment transactions are accounted for on the trade date and dividend income is recorded on the ex-dividend date. The net realized gain or loss on security transactions is determined for accounting and tax purposes on the specific identification basis.
C. Federal income taxes: It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to its stockholders. Therefore, no federal income tax provision is required.
D. Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
E. General: Dividends and distributions are recorded by the Fund on the ex-dividend date. Interest income is accrued as earned.

NOTE 2—INVESTMENT ADVISORY CONTRACTS AND PAYMENTS TO INTERESTED PERSONS:

The Fund retains Ruane, Cunniff & Co., Inc., as its investment adviser. Ruane, Cunniff & Co., Inc. (Investment Adviser) provides the Fund with investment advice, administrative services and facilities.

Under the terms of the Advisory Agreement, the Investment Adviser receives a management fee equal to 1% per annum of the Fund's average daily net asset values. This percentage will not increase or decrease in relation to increases or decreases in the net asset value of the Fund. Under the Advisory Agreement, the Investment Adviser is obligated to reimburse the Fund for the amount, if any, by which the operating expenses of the Fund (including the management fee) in any year exceed the sum of 1 1/2% of the average daily net asset values of the Fund during such year up to a maximum of $30,000,000, plus 1% of the average daily net asset values in excess of $30,000,000. The expenses incurred by the Fund exceeded the percentage limitation during the six months ended June 30, 2000 and the Investment Adviser reimbursed the Fund $383,000.

For the six months ended June 30, 2000, there were no amounts accrued to interested persons, including officers and directors, other than advisory fees of $17,991,351 and brokerage commissions of $844,288 to Ruane, Cunniff & Co., Inc. Certain officers of the Fund are also officers of the Investment Adviser and the Fund's distributor. Ruane, Cunniff & Co., Inc., the Fund's distributor, received no compensation from the Fund on the sale of the Fund's capital shares during the six months ended June 30, 2000.

NOTE 3—PORTFOLIO TRANSACTIONS:

The aggregate cost of purchases and the proceeds from the sales of securities, excluding U.S. government obligations, for the six months ended June 30, 2000 were $112,425,607 and $734,616,740, respectively. Included in proceeds of sales is $57,679,644 representing the value of securities disposed of in payment of redemptions in-kind resulting in realized gains of $44,103,002. As a result of the redemptions in-kind, net realized gains differ for financial statements and tax purposes. These realized gains have been reclassified from undistributed realized gains to paid in surplus in the accompanying financial statements.

At June 30, 2000 the aggregate gross unrealized appreciation and depreciation of securities were $1,637,151,367 and $12,291,184, respectively.

NOTE 4—CAPITAL STOCK:

At June 30, 2000 there were 100,000,000 shares of $.10 par value capital stock authorized. Transactions in capital stock for the six months ended June 30, 2000 and the year ended December 31, 1999 were as follows:

  2000 1999
Shares Amount Shares Amount
Shares sold 362,887 $44,802,729 1,202,565 $176,388,982
Shares issued to stockholders on reinvestment of:
Net investment income 66,535 8,782,617 145,003 18,304,561
Net realized gains on Investments 1,900 250,835 1,296,655 184,338,802
  431,322 53,836,181 2,644,223 379,032,345
Shares repurchased 2,775,925 329,365,753 3,151,477 456,077,201
Net (decrease) (2,344,603) $(275,529,572) (507,254) $ (77,044,856)

NOTE 5—DIRECTORS FEES AND EXPENSES:

Directors who are not deemed "interested persons" receive fees of $6,000 per quarter and $2,500 for each meeting attended, and are reimbursed for travel and other out-of-pocket disbursements incurred in connection with attending directors meetings. The total of such fees and expenses paid by the Fund to these directors for the six months ended June 30, 2000 was $97,538.

NOTE 6—AFFILIATED COMPANIES:

Investment in portfolio companies 5% or more of whose outstanding voting securities are held by the Fund are defined in the Investment Company Act of 1940 as "affiliated companies." The total value and cost of investments in affiliates at June 30, 2000 aggregated $332,038,600 and $182,629,089, respectively. The summary of transactions for each affiliate during the period of their affiliation for the six months ended June 30, 2000 is provided below:

 

Affiliate

Purchases Sales Realized
Gain
Dividend
Income
Shares Cost Shares Cost
Progressive Corporation $494,117
Ethan Allen Interiors 2,115,500 $53,478,605
  $494,117

NOTE 7—The interim financial statements have not been examined by the Fund's independent accountants and accordingly they do not express an opinion thereon.

NOTE 8—FINANCIAL HIGHLIGHTS:

  Six
Months
Ended
June 30,
Year Ended December 31,
2000 1999 1998 1997 1996 1995
Per Share Operating Performance (for a share outstanding throughout the period)
Net asset value, beginning of Period $ 127.27 $ 160.70 $ 125.63 $88.44 $78.13 $55.59
Income from investment operations:
Net investment income 0.72 0.84 0.39 0.08 0.38 0.31
Net realized and unrealized gains
(losses) on investments (3.93) (26.83) 43.07 38.10 16.41 22.62
Total from investment operations (3.21) (25.99) 43.46 38.18 16.79 22.93
Less distributions:
Dividends from net investment income (0.45) (0.85) (0.37) (0.08) (0.38) (0.31)
Distributions from net realized gains (0.01) (6.59) (8.02) (0.91) (6.10) (0.08)
Total distributions (0.46) (7.44) (8.39) (0.99) (6.48) (0.39)
Net asset value, end of period $ 123.60 $ 127.27 $ 160.70 $125.63 $88.44 $78.13
Total Return -2.6%† -16.5% 35.3% 43.2% 21.7% 41.4%
Ratios/Supplemental data
Net assets, end of period (in millions) $3,494.7 $3,896.9 $5,001.9 $3,672.6 $2,581.0 $2,185.5
Ratio to average net assets:
Expenses 1.0%* 1.0% 1.0% 1.0% 1.0% 1.0%
Net investment income 1.1%* 0.6% 0.3% 0.1% 0.4% 0.5%
Portfolio turnover rate 52%* 12% 21% 8% 23% 15%

 

Not annualized
* Annualized

SEQUOIA FUND, INC.
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798
Website: www.sequoiafund.com

DIRECTORS

William J. Ruane
Richard T. Cunniff
Robert D. Goldfarb
Carol L. Cunniff
John M. Harding
Francis P. Matthews
C. William Neuhauser
Robert L. Swiggett
Roger Lowenstein

OFFICERS

William J. Ruane — Chairman of the Board
Richard T. Cunniff — Vice Chairman
Robert D. Goldfarb — President
Carol L. Cunniff — Executive Vice President
Joseph Quinones, Jr. — Vice President, Secretary & Treasurer

INVESTMENT ADVISER & DISTRIBUTOR

Ruane, Cunniff & Co., Inc.
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798

CUSTODIAN

The Bank of New York
MF Custody Administration Department
100 Church Street, 10th Floor
New York, New York 10286

REGISTRAR AND SHAREHOLDER SERVICING AGENT

DST Systems, Inc.
P.O. Box 219477
Kansas City, Missouri 64121

LEGAL COUNSEL

Seward & Kissel
One Battery Park Plaza
New York, New York 10004

This report has been prepared for the information of shareholders of Sequoia Fund, Inc.