SEQUOIA FUND, INC.

SEMI-ANNUAL REPORT

June 30, 1999

 

 

 

 

 

 

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, 1999. 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 Contributions

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

June 30, 1999

149,420

784,195

328,598

1,262,213

 

The total amount of capital gains distributions accepted in shares was $316,164, the total amount of dividends reinvested was $84,696.

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 1999 are shown below with comparable results for the leading market indexes:

To June 30, 1999

Sequoia Fund

Dow Jones Industrials

Standard & Poor's 500

3 Months

-0.8%

+12.5%

+7.0%

6 Months

-3.8%

+20.4%

+12.4%

 

As indicated by the numbers above, Sequoia's year-to-date performance is seriously lagging the returns of the major market indexes. It is never pleasant to report poor relative performance. However, we thought it might be helpful to put Sequoia's current performance in a longer-term perspective.

Over its entire 29-year history, Sequoia has returned over 12,500%, compared to a 4,900% gain in the S&P 500 over the same period (we are obligated to interject here that past performance is no guarantee of future performance). However, the Fund has underperformed the S&P 500 in 12 of its 29 calendar years - on average, more than four years out of ten. There were two periods of sustained and significant underperformance, when we declined to participate in market sectors that were red hot. From 1970-1973, the Fund lagged the return of the S&P 500 by a cumulative 39%. Our long-term shareholders will recall that during this period, the market was dominated by the high-flying Nifty Fifty, which we did not own despite the nearly universal opinion that they were "sure things". In 1979 and 1980, the Fund underperformed the S&P 500 by a cumulative 30%. The 1979-1980 market was primarily driven by the oil stocks with an assist from the technology and defense sectors, none of which we participated in. Remember those days when - without a doubt - oil prices would continue to rise forever?

We cite this history to make an important point: when you maintain a consistent investment philosophy and invest for the long term, you do not need to outperform every calendar year in order to outperform in the long term. Indeed, because market sectors and investment styles move in and out of favor, it is virtually certain that you will not outperform every calendar year.

The market's recent gains have been fueled by moves in technology and a broad array of economically sensitive stocks. We do not make any attempt to mirror the market in the composition of our portfolio, and in a focused portfolio like ours, deviation from the norm is highly probable. In making decisions to buy and/or hold stocks, we put almost all of our analytical focus on the particular company's long term economic prospects, with little emphasis on shorter term factors. The facts are that in today's inflated stock market we continue our search for attractive equity values but have found little we want to buy with deep conviction. Investing is a long term game and, as always, we prefer to stick to what we know and feel comfortable with, and wait for those inevitable but unpredictable market opportunities to deploy our capital aggressively when we find the risk/reward relationship more heavily weighted towards reward.

Like many others, we are bemused by the bedlam surrounding the internet stocks as well as the dramatic increase in day trading. In a recent op-ed article in The Wall Street Journal, financial journalist Daniel Akst commented "Ah, what a time to be a financial pundit. A new crop of active investors, innocent of anything like a prolonged bear market, is armed with online trading accounts and an apparently insatiable appetite for investment guidance. The result is a bull market for the services of financial reporters, analysts and commentators. We are everywhere, it seems: on the air, in print and online. Unfortunately, this cacophony of investment advice tends to promote the very thing it should be discouraging, which is obsessive meddling with one's investments."

The tag line in a major advertising campaign by a leading online broker reads "In the world of investing, twenty minutes can make you -- or break you." Another electronic broker markets what it calls "bed-and-breakfast" specials: if you buy a stock online from them one day and sell it the next morning, there is no commission charge. The New York Times reports of a $100,000 investment account opened at a leading electronic broker. In a one year period, this account generated a staggering $1.1 billion in principal value of total purchases and sales of stocks. The return to the investor as a result of all this frantic activity? The account earned $15,000.

As further evidence of the judgment-clouding effects of a rising stock market, The Wall Street Journal recently reported that a growing number of municipalities, faced with woefully underfunded pension plans for municipal workers, are issuing pension-obligation bonds. This type of bond was unheard of until a few years ago. Instead of facing up to the politically difficult alternatives of raising taxes to make good on its promises or cutting pension benefits, the municipality instead raises money by selling long term bonds with an interest rate of about 6.5%. The municipality then essentially goes on margin by contributing the borrowed funds to its underfunded pension plan to be invested in stocks. The theory is that as long as the stocks generate a return in excess of the 6.5% annual interest cost on the bonds, the pension fund profits accordingly. Twenty-eight pension-obligations bonds were sold in 1998, up from seven in 1997. Philadelphia sold $1.3 billion this year. Los Angeles has a $2 billion issue outstanding. A recent conference on the subject drew 500 government officials from around the country. "We naturally wanted to play the equity markets like everyone else," says the auditor of the city of Worcester in discussing the city's recent pension bond issue. Another official, awaiting state approval for his city's proposed pension bond, cheerfully concedes, ".it's taking a gamble, like going to Foxwoods (Casino)".

Warren Buffett gave a talk about the stock market at a recent Allen & Co. gathering of media and technology executives in Sun Valley, Idaho, which is described by Ken Auletta in the July 26th issue of The New Yorker. During his remarks Buffett told an old joke which we feel captures the mood of many of today's stock buyers: An oil prospector dies and goes to Heaven. He asks St. Peter to be admitted, but is told that there is no room because there are already too many oil prospectors in Heaven. "Do you mind if I say four words?" he asks. "No harm in that," says St. Peter. The prospector cries out "Oil discovered in Hell!" With that, the resident prospectors stampede out the Heavenly gates and St. Peter invites the new arrival to come on in. "No thanks," the prospector muses, " I think I'll go along with the rest of the boys. There may be some truth to that rumor."

Sincerely,

Carley Cunniff

Robert D. Goldfarb

Richard T. Cunniff

William J. Ruane 

 

July 27, 1999

 

Please note that the mailing address for Sequoia's transfer agent has been changed. The new address is:

DST Systems

P.O. Box 219477

Kansas City, Missouri 64121

 

SEQUOIA FUND, INC.

Statement of Investments

June 30, 1999 (Unaudited)

 

COMMON STOCKS (79.23%)

Shares

 

Cost

Value (Note 1)

 

BANK HOLDING COMPANIES (12.39%)

 

 

6,001,562

Fifth Third Bancorp

$ 89,869,388

$ 399,478,971

326,000

Mercantile Bankshares Corporation

3,362,542

11,532,250

1,154,100

National Commerce Bancorp

7,160,816

25,245,937

4,172,100

U.S. Bancorp

52,698,217

141,851,400

 

 

153,090,963

578,108,558

 

CONSUMER PRODUCTS (.07%)

 

 

327,600

Sturm, Ruger & Company, Inc.

355,900

3,501,225

 

DIVERSIFIED COMPANIES (30.01%)

 

 

20,320

Berkshire Hathaway Inc. Class A*

161,825,595

1,400,048,000

 

INSURANCE (11.90%)

 

 

3,828,200

Progressive Corporation-Ohio+

130,018,624

555,089,000

 

MANUFACTURING - MOTORCYCLES (5.61%)

 

 

4,811,900

Harley Davidson, Inc.

64,628,722

261,647,063

 

PERSONAL CREDIT (1.80%)

 

 

1,777,700

Household International, Inc.

22,359,859

84,218,537

 

SERVICES (15.82%)

 

 

12,723,800

Freddie Mac

52,697,585

737,980,400

 

Miscellaneous Securities (1.63%)

72,924,380

76,265,000

 

TOTAL COMMON STOCKS

$ 657,901,628

$3,696,857,783

 

 

SEQUOIA FUND, INC.

Statement of Investments

June 30, 1999 (Unaudited)

(continued)

 

 

Principal Amount

 

Cost

Value (Note 1)

U.S. GOVERNMENT OBLIGATIONS (20.77%)

 

 

$ 22,000,000

U.S. Treasury Bills due 7/22/99

$ 18,951,012

$ 18,951,012

266,000,000

U.S. Treasury Notes, 5 7/8% due 8/31/99

266,116,531

266,581,875

271,000,000

U.S. Treasury Notes, 5 5/8% due 12/31/99

271,387,736

271,677,500

259,000,000

U.S. Treasury Notes, 5 5/8% due 4/30/2000

260,427,947

259,728,437

152,000,000

U.S. Treasury Notes, 5 3/8% due 7/31/2000

153,038,020

152,047,500

 

TOTAL U.S. GOVERNMENT OBLIGATIONS

969,921,246

968,986,324

 

TOTAL INVESTMENTS (100%) ++

$1,627,822,874

$4,665,844,107

 

++ The cost for federal income tax purposes is identical.

* Non-income producing.

+ Refer to Note 6.

 

SEQUOIA FUND, INC.

Statement of Assets and Liabilities

June 30, 1999 (Unaudited)

Assets

Investments in securities, at value (cost $1,627,822,874) (Note 1)

$4,665,844,107

Cash on deposit with custodian

11,243,412

Receivable for capital stock sold

98,826

Dividends and interest receivable

12,733,834

Other assets

28,727

Total Assets

4,689,948,906

Liabilities

Payable for capital stock repurchased

2,089,342

Accrued expenses

4,171,308

Total liabilities

6,260,650

Net assets applicable to 31,345,559 shares of capital stock outstanding (Note 4)

$4,683,688,256

Net asset value, offering price and redemption price per share

$149.42

 

See Notes to Financial Statements.

 

SEQUOIA FUND, INC.

Statement of Operations

Six Months Ended June 30, 1999 (Unaudited)

 

Investment Income

Income:

 

Dividends:

 

Unaffiliated companies

$9,772,715

Affiliated companies (Note 6)

526,526

Interest

26,018,378

Total income

36,317,619

Expenses:

 

Investment advisory fee (Note 2)

23,896,575

Legal and auditing fees

46,782

Stockholder servicing agent fees

204,034

Custodian fees

40,000

Directors fees and expenses (Note 5)

92,664

Other

118,345

Total expenses

24,398,400

Less expenses reimbursed by Investment Adviser (Note 2)

428,000

Net expenses

23,970,400

Net investment income

12,347,219

 

 

 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

Realized gain on investments:

 

Unaffiliated companies

70,098,655

Affiliated companies (Note 6)

53,596,729

Net realized gain on investments

123,695,384

Net decrease in unrealized appreciation on:

 

Investments

( 320,830,848)

Net realized and unrealized (loss) on investments

( 197,135,464)

Decrease in net assets from operations

($ 184,788,245)

 

See Notes to Financial Statements.

 

SEQUOIA FUND, INC.

Statements of Changes in Net Assets

  

Six Months Ended 6/30/99 (Unaudited)

Year Ended 12/31/98

INCREASE (DECREASE) IN NET ASSETS:

 

 

From operations:

 

 

Net investment income

$12,347,219

$ 11,736,732

Net realized gain

123,695,384

431,381,943

Net increase (decrease) in unrealized appreciation

(320,830,848)

859,089,190

Net increase (decrease) in net assets from operations

(184,788,245)

1,302,207,865

Distributions to shareholders from:

 

 

Net investment income

( 781,080)

( 10,988,302)

Net realized gains

( 158,544,077)

( 238,181,010)

Capital share transactions (Note 4)

25,910,222

276,288,024

Total increase (decrease)

( 318,203,180)

1,329,326,577

NET ASSETS:

 

 

Beginning of period

5,001,891,436

3,672,564,859

End of period

$4,683,688,256

$5,001,891,436

NET ASSETS CONSIST OF:

 

 

Capital (par value and paid in surplus)

$1,589,834,231

$1,483,849,808

Undistributed net investment income

12,314,569

748,430

Undistributed net realized gains (Note3)

43,518,222

158,441,116

Unrealized appreciation

3,038,021,234

3,358,852,082

Total Net Assets

$4,683,688,256

$5,001,891,436

 

 

 

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 generally accepted accounting principles 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, 1999 and the Investment Adviser reimbursed the Fund $428,000. For the six months ended June 30, 1999, there were no amounts accrued to interested persons, including officers and directors, other than advisory fees of $23,896,575 and brokerage commissions of $111,445 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, 1999.

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, 1999 were $74,599,042 and $161,005,037,respectively. Included in proceeds of sales is $93,911,913 representing the value of securities disposed of in payment of redemptions in-kind resulting in realized gains of $80,074,201. 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, 1999 the aggregate gross unrealized appreciation and depreciation of securities were $3,039,711,263 and $1,690,030, respectively.

NOTE 4--CAPITAL STOCK:

At June 30, 1999 there were 100,000,000 shares of $.10 par value capital stock authorized. Transactions in capital stock for the six months ended June 30, 1999 and the year ended December 31, 1998 were as follows:

  

 

1999

1998

 

Shares

Amount

Shares

Amount

Shares sold

792,318

$ 121,093,453

2,164,908

$ 319,175,918

Shares issued to stockholders on reinvestment of:

Net investment income

3,851

568,922

54,399

7,959,038

Net realized gains on investments

970,281

143,329,905

1,470,593

215,201,334

 

1,766,450

264,992,280

3,689,900

542,336,290

Shares repurchased

1,546,781

239,082,058

1,796,644

266,048,266

Net increase

219,669

$ 25,910,222

1,893,256

$ 276,288,024

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, 1999 was $92,664.

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, 1999 aggregated $555,089,000 and $130,018,624, respectively. The summary of transactions for each affiliate during the period of their affiliation for the six months ended June 30, 1999 is provided below:

 

Affiliate

Purchases

Sales

Realized

Gain

Dividend

Income

Shares

Cost

Shares

Cost

Progressive Corp-Ohio

--

--

524,300

$18,563,238

$53,596,729

$526,526

 

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--SELECTED FINANCIAL INFORMATION:

Six Months Ended June, 30 1999

Year Ended December 31,

1998

1997

1996

1995

1994

Per Share Operating Performance (for a share outstanding throughout the period) 

 

 

 

 

 

Net asset value, beginning of period

$160.70

$125.63

$88.44

$78.13

$55.59

$54.84

Income from investment operations:

 

 

 

 

 

 

Net investment income

0.39

0.39

0.08

0.38

0.31

0.42

Net realized and unrealized Gains (losses) on investments

(6.57)

43.07

38.10

16.41

22.62

1.41

Total from investment operations

(6.18)

43.46

38.18

16.79

22.93

1.83

Less distributions:

 

 

 

 

 

 

Dividends from net investment income

(0.03)

(0.37)

(0.08)

(0.38)

(0.31)

(0.42)

Distributions from net realized gains

(5.07)

(8.02)

(0.91)

(6.10)

(0.08)

(0.66)

Total distributions

(5.10)

(8.39)

(0.99)

(6.48)

(0.39)

(1.08)

Net asset value, end of period

$149.42

$160.70

$125.63

$88.44

$78.13

$55.59

Total Return

-3.8%+

35.3%

43.2%

21.7%

41.4%

3.3%

Ratios/Supplemental data

 

 

 

 

 

 

Net assets, end of period (in millions)

$4,683.7

$5,001.9

$3,672.6

$2,581.0

$2,185.5

$1,548.3

Ratio to average net assets:

 

 

 

 

 

 

Expenses

1.0%*

1.0%

1.0%

1.0%

1.0%

1.0%

Net investment income

0.5%*

0.3%*

0.1%

0.4%

0.5%

0.8%

Portfolio turnover rate

5%*

21%*

8%

23%

15%

32%

 

+ Not annualized

* Annualized

 

SEQUOIA FUND, INC.

767 Fifth Avenue, Suite 4701

New York, New York 10153-4798

  

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

90 Washington Street

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.