UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-01976
Sequoia Fund, Inc.
(Exact name of registrant as specified in charter)
767 Fifth Avenue, Suite 4701, New York, NY 10153-4798
(Address of principal executive offices) (Zip code)
Robert D. Goldfarb
Ruane, Cunniff & Goldfarb Inc.
767 Fifth Avenue
Suite 4701
New York, New York 10153-4798
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 832-5280
Date of fiscal year end: December 31
Date of reporting period: December 31, 2008
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
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 December 31, 2008. 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.
VALUE OF VALUE OF VALUE OF
INITIAL CUMULATIVE CUMULATIVE TOTAL
$10,000 CAPITAL GAINS REINVESTED VALUE OF
PERIOD ENDED: INVESTMENT DISTRIBUTIONS DIVIDENDS 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
Dec. 31, 2000 122,090 903,255 289,505 1,314,850
Dec. 31, 2001 130,240 1,002,955 319,980 1,453,175
Dec. 31, 2002 126,630 976,920 311,226 1,414,776
Dec. 31, 2003 147,610 1,146,523 362,790 1,656,923
Dec. 31, 2004 154,270 1,200,687 379,159 1,734,116
Dec. 31, 2005 155,450 1,331,529 382,059 1,869,038
Dec. 31, 2006 152,750 1,496,788 375,422 2,024,960
Dec. 31, 2007 139,120 1,713,258 342,768 2,195,146
Dec. 31, 2008 95,270 1,265,238 241,397 1,601,905
The total amount of capital gains distributions accepted in shares was
$1,413,907, the total amount of dividends reinvested was $124,408.
No adjustment has been made for any taxes payable by shareholders on capital
gain distributions and dividends reinvested in shares.
<Page>
TO THE SHAREHOLDERS OF SEQUOIA FUND, INC.
Dear Shareholder:
Sequoia Fund's results for the quarter and year ended December 31, 2008
appear below with comparable results for the leading market indexes:
SEQUOIA DOW JONES STANDARD &
TO DECEMBER 31, 2008 FUND INDUSTRIALS POOR'S 500*
- --------------------- ------- ----------- -----------
Fourth Quarter -19.96% -18.39% -21.94%
1 Year -27.03% -31.93% -37.00%
5 Years (Annualized) -0.67% -1.12% -2.19%
10 Years (Annualized) 2.01% 1.66% -1.38%
The performance shown above represents past performance and does not
guarantee future results. Current performance may be lower or higher than the
performance information shown.
* THE S&P 500 INDEX IS AN UNMANAGED, CAPITALIZATION-WEIGHTED INDEX OF THE
COMMON STOCKS OF 500 MAJOR US CORPORATIONS. THE DOW JONES INDUSTRIAL
AVERAGE IS AN UNMANAGED, PRICE-WEIGHTED INDEX OF 30 ACTIVELY TRADED BLUE
CHIP STOCKS. THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE AND
ASSUMES REINVESTMENT OF DIVIDENDS. THE INVESTMENT RETURN AND PRINCIPAL
VALUE OF AN INVESTMENT IN THE FUND WILL FLUCTUATE SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
YEAR TO DATE PERFORMANCE AS OF THE MOST RECENT MONTH END CAN BE OBTAINED BY
CALLING DST SYSTEMS, INC. AT (800) 686-6884.
----------
Although we suspect many shareholders will not believe it, the total return
of the Sequoia Fund has been about 1% since we last wrote you on November 18.
The stock market continues to be volatile and we fully understand the fixation
of much of America on its daily gyrations. But these fluctuations can generate a
lot of noise that is best filtered out.
While Sequoia's price is about the same as three months ago, the economy is
worse off than in November. The severe contraction in demand that corporations
were experiencing then has both deepened and broadened to almost all sectors of
the economy. We see no signs of stabilization. In the early stages of any
recession, producers reduce inventory in response to weaker demand. We believe
this destocking has exacerbated current weakness and may continue for some
months, but should reach equilibrium later this year. However, even after
inventory destocking slows or stops, we expect to see end-market demand remain
anemic.
While we can debate the merits of various economic stimulus proposals and
are well aware of the long-term costs, we believe that the U.S. government is
the only entity that can increase spending to offset a broad-based contraction
in demand.
The personal savings rate, which had been hovering near zero as a
percentage of disposable personal income in recent years, began 2008 at 0.2% but
rose rapidly during the year, reaching 3.6% by December. Many economists believe
this number will rise into the high single-digits in 2009. This reluctance to
spend does not augur well for a quick economic turnaround.
In Sequoia's portfolio, retailers whose value proposition is extremely
strong, including Costco, TJX and Wal-Mart, withstood declining consumer
spending in the first three quarters of the year. But in the holiday season, all
three posted disappointing sales. Their share prices reacted accordingly.
Retailers, whose dependence on discretionary spending is high, including Target,
were hit earlier in the year and suffered further in the fourth quarter.
<Page>
We clearly entered 2008 with too much exposure to the U.S. consumer. We
were aware of this and reduced it with the sale of all of our shares in Bed,
Bath & Beyond and Lowe's, about half our Target holdings, and a portion of our
investment in TJX. We regret that we were not more aggressive in reducing this
exposure further and earlier. Consumer-dependent stocks like Mohawk, Porsche and
Whole Foods were among our worst performing in 2008.
As we enter 2009, we will operate with a bias toward further reducing our
exposure to businesses dependent on the American consumer. It is clear that
while there is some cyclical element in the current decline in consumer spending
there is a large structural component as well. When global growth resumes, the
American consumer will not be at its epicenter.
Alongside a tapped out consumer we have an insolvent banking system that
will require a truly massive amount of taxpayer-financed assistance to be
recapitalized. However, recapitalizing the banking system and exhorting banks to
lend will not alone solve the credit problems. The securitization market, which
in recent years had become larger than bank lending, has become dysfunctional.
What Bill Gross of PIMCO calls the "shadow banks," meaning hedge funds,
investment banks and structured finance conduits, are unable to lend because
they are still de-levering or, in some cases, disappearing. Until a restructured
securitization market re-emerges, borrowers may find capital expensive and/or
scarce. This affects a broad swath of debt, including student, auto and credit
card loans, as well as residential and commercial mortgages. The Federal Reserve
is trying to jump start the securitization market with a $1 trillion infusion of
funds through its TALF program.
The problem with bubbles is that they last a long time and no one knows
when they will pop. We suspected a day of reckoning would come, but clearly were
not prepared when it did. We entered the year 97% invested in common stocks and
only 3% in cash. By June 30, we had moved to a 91% invested position. By
September 30, we had further trimmed the portfolio down to about 85% invested.
We finished the year 82% invested in stocks. While we sold some of our retail
positions and Progressive, cash rose in percentage terms partly because the
value of equities shrank during the year. Our actions were not nearly enough to
steer Sequoia out of harm's way when the market began its rapid descent in late
September. Our stock sales were more a function of our analysis of individual
companies' prospects relative to their stock prices than a response to
macroeconomic tumult.
As we think about 2009, we are skeptical of anyone who purports to estimate
what the S&P 500 might earn. For many companies in our portfolio, the range of
possible outcomes for 2009 earnings seems unusually wide. Earnings in the easy
credit era were inflated materially by cheap debt, which enabled consumers to
overspend and companies to over-earn. For 2009, we feel earnings will be
depressed because of very weak demand as the world (except governments)
delevers. We are not confident we know how low earnings could go.
The critical question for calculating intrinsic values for companies we
follow is what will their earnings be in a more normal but less levered economy?
Right now, such calculations are difficult because we are not sure what "normal"
is. To steal a phrase from General Electric CEO Jeff Immelt, for most of
Corporate America this is not a cycle, it is a reset.
From the S&P 500's peak valuation in October 2007, the index was down 45%
as of mid-February, while the Sequoia Fund was down 34%. We do not believe the
long-term earnings power of the businesses we own is 34% lower than it was 16
months ago. Unquestionably, earnings power is less in this subdued economic
environment than we thought in 2007, but when we assess the aggregate earnings
power of the Sequoia portfolio, it is down much less than the stock prices. For
example, Berkshire Hathaway's long-term earnings power may be greater today than
it seemed in 2007, thanks to its ability to deploy so much cash on favorable
terms during this crisis.
Additionally, your portfolio is dominated by companies with little or no
debt that generate enough free cash flow to be self-funding. That is, they do
not need to tap the capital markets to finance future growth or fund current
operations. This does not mean our companies will weather recession easily, but
the ability to self-finance mitigates risk. Currently, high-quality companies
with strong balance sheets are able to raise money on favorable terms. But
<Page>
companies with impaired credit, such as Vulcan Materials, which made an
ill-timed acquisition of Florida Rock at the peak of the housing bubble, find
themselves paying double-digit interest rates.
We believe we are invested alongside high quality management teams that run
companies with growth prospects superior to those of the overall stock market.
Time will tell us if our assessment is right, but our companies tend to have
strong market positions, abundant cash flows, low capital intensity and
opportunities to become significantly larger. We were slow to react to the
unfolding macroeconomic trends of 2008, and this hurt performance. But, over
time, our emphasis on picking good stocks and not trying to predict economic or
market trends has stood us in good stead. When we look at the current portfolio
and contemplate normalized earnings levels, likely future growth rates and the
resulting free cash flows, we believe future returns should prove satisfactory.
In closing, we would like to express our gratitude to Francis P. Matthews,
a Sequoia Fund director for 36 years, who retired on December 8. Frank has been
an engaged advocate for Sequoia shareholders and a wise counselor to management.
His presence will be greatly missed by his colleagues on the board. We also wish
to thank Robert L. Swiggett, who has served ably as our independent Chairman of
the Board at Sequoia for the past three years. Bob turned over the chairman's
seat to Vinod Ahooja at the start of the New Year and will remain as a director.
Sincerely,
/s/ Richard T. Cunniff /s/ Robert D. Goldfarb /s/ David M. Poppe
- ---------------------- ---------------------- ------------------------
Richard T. Cunniff Robert D. Goldfarb David M. Poppe
Vice Chairman President Executive Vice President
February 13, 2009
THE RUANE, CUNNIFF & GOLDFARB INC./SEQUOIA FUND, INC. ANNUAL INVESTOR DAY WILL
BE HELD AT 10A.M., NEW YORK CITY TIME, ON FRIDAY, MAY 15, 2009 AT THE ST. REGIS
HOTEL, TWO EAST 55TH STREET, NEW YORK, NEW YORK 10022.
<Page>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE (UNAUDITED)
The total return for the Sequoia Fund was negative 27.0% in 2008. This
compares with the negative 37.0% return of the S&P 500. Our investment
philosophy is to make concentrated commitments of capital in a limited number of
companies that have superior long-term economic prospects and that sell at what
we believe are attractive prices. Because Sequoia is deliberately not
representative of the overall market, in any given year the performance of the
Fund will often vary significantly from that of the broad market indices.
The table below shows the 12-month stock total return for the Fund's major
positions at the end of 2008.
% OF ASSETS TOTAL % OF ASSETS
POSITION 12/31/08 RETURN 12/31/07
- -------- ----------- ------ -----------
Berkshire Hathaway 22.8% -31.8% 24.8%
Martin Marietta 6.9% -25.7% 6.6%
Fastenal 5.7% -12.1% 4.7%
Mohawk 5.7% -42.2% 6.9%
Porsche 5.3% -61.3% 5.5%
Idexx Laboratories 5.3% -38.5% 5.1%
TJX 4.1% -27.4% 6.2%
The higher relative performance in 2008 vs. the Index was driven by a
variety of factors. As the year progressed, we held more cash and were not fully
exposed to the stock market decline. Several of our largest positions, including
Berkshire Hathaway (-32%), Fastenal (-12%), Martin Marietta (-26%) and TJX
(-27%), outperformed the Index. Offsetting that to some degree, the value of our
foreign holdings suffered losses when translated into dollars, as the U.S.
dollar strengthened during the year. Our worst performing large investments were
Porsche (-61% in U.S. dollars) and Mohawk (-42%).
Berkshire Hathaway has an owner-oriented management, a strong balance
sheet, an attractive portfolio of wholly- and partially-owned businesses and an
attractive valuation. Berkshire has little debt and tremendous liquidity.
Since the beginning of 2008, Berkshire deployed an unprecedented amount of
capital at potential returns that appear to us to range from solid to excellent.
Over this period, Berkshire has purchased over $19 billion of preferred stock
and debt in nine different firms, about $17 billion of which was committed to
just four firms, General Electric, Goldman Sachs, Wrigley and Swiss Re. We
estimate that the average pretax yield on the package is approximately 10%
before considering potential upside from the conversion or redemption privileges
Berkshire negotiated on the bigger deals. In addition, Berkshire has spent about
$6 billion on acquisitions and at least $7 billion, net of divestitures, on
publicly traded equity securities. Even after this spending spree, we estimate
that Berkshire still retains $35 billion or more of liquid or near liquid funds,
of which all but $10 billion are available to be put into attractive
opportunities.
During 2008, we expect that Berkshire incurred significant mark-to-market
losses on its $35 billion portfolio of equity index put options, which protect
the buyers against long term declines in the value of several global stock
market indexes. We estimate that these contracts may have suffered accounting
losses in the $6-7 billion range in 2008. These reported losses need to be taken
with the proper perspective. The puts cannot be exercised until 2019 at the
earliest, so even from these depressed levels, stock market indexes need only
appreciate at low-single-digit rates for the next 10 to 20 years for Berkshire
to avoid having to make any cash payments. In the meantime, the company has the
use of $4.5 billions of dollars of cash to invest as it seems fit, as Berkshire
need not put up material amounts of cash collateral on the contracts. Even were
stock markets never to recover from current levels, the value of that $4.5
billion, if invested wisely, should grow to levels that would offset any loss on
the contracts.
Berkshire does own some economically-sensitive businesses, particularly
lending, housing and consumer related entities. But most holdings occupy the
dominant or most profitable position in cash-generating industries with low risk
of obsolescence. A strong core group sells nondiscretionary and essential
products and services that are recession-resistant, such as insurance,
electricity, and food and beverages. Most of the businesses earn attractive
returns on tangible capital employed. The insurance group would do so were it
not for excess capital. The utilities earn adequate but safe returns with ample
reinvestment opportunities.
<Page>
At the current price of about $88,000, Berkshire sells at a reasonable
valuation for a company whose long term earnings power remains substantial. In
these difficult economic times, we believe that Berkshire could generate
look-through earnings of about $6,000 per share in 2009. In more normal economic
conditions, we think earnings power is over $8,000 per share. Thus, the earnings
multiple is in a range of about 11-14 times. Moreover, the stock trades at less
than 1.4 times our estimate of current book value.
Martin Marietta's earnings in 2008 declined 31%. Falling volumes, which
have been negatively impacted by soft demand, have only been partially offset by
higher prices and, more recently, lower energy costs.
The high weight to value of aggregates makes transporting them over long
distances uneconomical. As a result, quarries which are well-located near
customer job sites can raise prices with little risk of attracting new
competition, and as urban areas expand over time, the pricing power of incumbent
quarries climbs. Although the near term earnings outlook for MLM is poor, we
believe that the value of Martin Marietta's reserves puts a floor under the
value of the company. In our opinion, a number of companies would happily
acquire MLM's reserves for a price well above the current stock price if they
had the liquidity and the opportunity.
In 2008, Fastenal's earnings increased by 20%. However, by the fourth
quarter, the weakening industrial economy began to show in the company's
results. Monthly sales, which increased at a rate in excess of 15% during the
first nine months of the year, slowed to 12% in October, 7% in November, flat in
December and were negative 9% in January. Despite the slowing top-line growth,
fourth quarter earnings still increased 17% as Fastenal was able to exercise
better pricing discipline, shrink headcount and improve transportation costs.
These gains also reflect solid execution of the company's Pathway to Profit
strategic initiative (opening fewer stores in favor of leveraging the existing
store base by hiring more sales people).
Mohawk suffered through a difficult year in 2008. Excluding write-downs,
earnings declined 30% during the first nine months and the fourth quarter was
probably even worse. Weak demand is impacting all of the company's operations.
The hardest hit was the Mohawk carpet division, but the tile and laminate
businesses were also down markedly. We believe that the dramatic decline in
Mohawk's share price in 2008 adequately reflects these factors. Although
Mohawk's organic growth prospects are modest, it has significant and sustainable
competitive advantages, generates substantial free cash flow and, over time,
management has proven to be a shrewd allocator of capital. Moreover, while
management believes that current business conditions are the most difficult in
its memory, the company has significant earnings power relative to its stock
price once the economy emerges from recession.
Porsche recently announced that it is increasing its stake in Volkswagen to
75%. Essentially, a mouse is swallowing an elephant. We are not fans of the
volume car business. But as we have gotten to know VW, we have come to
understand it is not GM or Ford. Its market share in Europe is rising and it has
valuable brands in Audi, Skoda and Scania. It has little debt and small retiree
pension and healthcare obligations. Instead, VW's problems lie with its high
cost base, inflexible labor agreements and the involvement of the German state
of Lower Saxony, its second largest shareowner.
We feel that Porsche is currently selling for well below its intrinsic
value. Porsche and VW, like their peers, are being impacted by the
extraordinarily difficult car market. The stock price seems to reflect a belief
that these market conditions will continue indefinitely. By our calculations, if
Porsche's car volumes drop by 25% and profits by 40% for the fiscal year (ending
July 31, 2009), and Volkswagen's profit drops in half, then at the current price
of (euro)42, the stock trades for a very reasonable multiple of earnings. It is
quite possible that Porsche and VW will suffer even more dramatic earnings
declines in the coming year. But it is not difficult for us to come up with much
higher earnings estimates for the combination of core Porsche and its share of
VW's earnings in a normalized environment. We think the risk-reward ratio on the
stock is quite favorable.
<Page>
Idexx's revenue and earnings per share (excluding non-recurring items) in
2008 grew by 11% and 20%, respectively. Operating trends remained strong in
local currencies throughout the year, although there was some softening in
demand in the second half of the year because of weakening economies. We would
expect this to continue in 2009 but that a bigger adverse factor next year will
be currency headwinds. Consequently, the company now expects 2009 earnings to be
flattish relative to the $1.85 earned in 2008.
After adjusting for an extra week of sales this year, TJX is likely to
report flattish 2008 fiscal year earnings. The weak retail environment has
caused a modest deceleration in comparable store sales in recent months,
including a 4% decline in January. We expect that softening consumer demand and
weakening foreign currencies will put more pressure on earnings in fiscal year
2009. However, the recent decline in the stock price puts TJX's price earnings
multiple at a modest 12x our best estimate of 2009 earnings. We believe this
multiple is low for a well managed company generating returns on equity over 30%
with enormous amounts of free cash flow. Most years, TJX buys back roughly 5% of
its shares. TJX has temporarily suspended its stock repurchase program but we
believe the company will generate enough cash either to resume the program at a
later date or accumulate a large cash balance.
We made a number of new investments in 2008, including Brambles, Cummins,
and De la Rue. Each of these was a relatively small investment (about 1%).
Brambles is an Australian domiciled company that manages pallets used in
distribution by manufacturers and retailers in the Americas, Europe and Asia
Pacific. While the company is dependent upon the global consumer staples market,
it appealed to us because of its dominant market positions and resultant very
strong margins and profitability. Cummins manufactures engines and turbines for
the trucking, marine, energy and construction machinery markets. It has a strong
presence in the emerging world, including India and China, and benefits from
demand for power generation there. De la Rue is a UK-based printer of currencies
for dozens of countries that find it more efficient to outsource the function
than to try to run a national print works that can stay ahead of counterfeiters.
<Page>
Comparison of a change in value of a $10,000 Investment in Sequoia Fund and the
S&P 500 Index*
[PLOT POINTS FOR PRINTED GRAPHIC]
Sequoia S&P 500
10000 10000
------- --------
1/1/1999 8346 12104
12/31/2000 10020.2 11002.5
12/31/2001 11074.3 9694.33
12/31/2002 10782 7551.89
12/31/2003 12627.8 9717.77
12/31/2004 13216.3 10775.1
12/31/2005 14244.5 11304.1
12/31/2006 15432.5 13090.2
12/31/2007 16728.9 13808.8
12/31/2008 12207 8699.55
* THE S&P 500 INDEX IS AN UNMANAGED, CAPITALIZATION-WEIGHTED INDEX OF THE
COMMON STOCKS OF 500 MAJOR US CORPORATIONS.
SECTOR BREAKDOWN
PERCENT OF
AS OF DECEMBER 31, 2008 NET ASSETS
- ----------------------- ----------
U.S. Government Obligations 24.95
Diversified Companies 22.80
Retailing 10.34
Building Materials 8.03
Industrial & Construction Supplies 5.68
Flooring Products 5.66
Automotive Manufacturing 5.35
Veterinary Diagnostics 5.29
Freight Transportation 3.90
Construction Equipment 2.47
Aerospace/Defense 2.44
Auto Parts 2.10
Other 0.99
------
100.00
======
<Page>
FEES AND EXPENSES OF THE FUND
(UNAUDITED)
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (fees paid directly from your investment)
The Fund does not impose any sales charges, exchange fees or redemption fees.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
ANNUAL FUND OPERATING EXPENSES
Management Fees 1.00%
Other Expenses 0.04%
----
Total Annual Fund Operating Expenses 1.04%
Expense Reimbursement* 0.04%
----
Net Expenses 1.00%
====
* REFLECTS RUANE, CUNNIFF & GOLDFARB INC.'S ("RUANE, CUNNIFF & GOLDFARB")
CONTRACTUAL REIMBURSEMENT OF A PORTION OF THE FUND'S OPERATING EXPENSES.
THIS REIMBURSEMENT IS A PROVISION OF RUANE, CUNNIFF & GOLDFARB'S INVESTMENT
ADVISORY AGREEMENT WITH THE FUND AND THE REIMBURSEMENT WILL BE IN EFFECT
ONLY SO LONG AS THAT INVESTMENT ADVISORY AGREEMENT IS IN EFFECT.
----------
SHAREHOLDER EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management
fees and other Fund expenses. This Example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds. The Example is
based on an investment of $1,000 invested at the beginning of the period and
held for the entire period (July 1, 2008 to December 31, 2008).
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of other funds.
Please note that the expenses shown in the table are meant to highlight
your ongoing costs only and will not help you determine the relative total costs
of owning different funds.
EXPENSES
PAID DURING
ENDING PERIOD*
BEGINNING ACCOUNT JULY 1, 2008
ACCOUNT VALUE TO
VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2008 2008 2008
------------ ------------ -------------
Actual $1,000 $ 811.20 $4.55
Hypothetical
(5% return per year before
expenses) $1,000 $1,020.11 $5.08
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.00%,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY
184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).
<Page>
SEQUOIA FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2008
COMMON STOCKS (82.19%)
<Table>
<Caption>
VALUE
SHARES (NOTE 1)
- ------------ --------------
AEROSPACE/DEFENSE (2.44%)
12,410,000 Rolls-Royce Group plc (United Kingdom) $ 60,709,720
--------------
AUTO PARTS (2.10%)
1,698,778 O'Reilly Automotive Inc. * 52,220,436
--------------
AUTOMOTIVE MANUFACTURING (5.35%)
1,734,393 Porsche Automobil Holding SE (Germany) (a) 132,897,864
--------------
BUILDING MATERIALS (8.03%)
1,756,749 Martin Marietta Materials Inc. 170,545,193
419,772 Vulcan Materials Company 29,207,736
--------------
199,752,929
--------------
BUSINESS SERVICES (0.89%)
4,200,000 Brambles Ltd. (Australia) 22,150,800
--------------
CONSTRUCTION EQUIPMENT (2.47%)
730,000 Caterpillar Inc. 32,609,100
1,350,000 Ritchie Bros. Auctioneers Incorporated 28,917,000
--------------
61,526,100
--------------
DIVERSIFIED COMPANIES (22.80%)
5,861 Berkshire Hathaway Inc. Class A * 566,172,600
151 Berkshire Hathaway Inc. Class B * 485,314
--------------
566,657,914
--------------
DIVERSIFIED MANUFACTURING (0.87%)
383,880 Danaher Corporation 21,731,447
--------------
FLOORING PRODUCTS (5.66%)
3,272,155 Mohawk Industries Inc. * 140,604,500
--------------
FOOD - RETAIL (0.34%)
906,509 Whole Foods Market Inc. * 8,557,445
--------------
FREIGHT TRANSPORTATION (3.90%)
2,068,294 Expeditors International Inc. 68,812,141
1,752,000 Knight Transportation Inc. + 28,242,240
--------------
97,054,381
--------------
INDUSTRIALS (1.35%)
1,253,000 Cummins Inc. 33,492,690
--------------
</Table>
<Page>
<Table>
<Caption>
VALUE
SHARES (NOTE 1)
- ------------ --------------
INDUSTRIAL & CONSTRUCTION SUPPLIES (5.68%)
4,051,430 Fastenal Company $ 141,192,335
--------------
INFORMATION PROCESSING (1.72%)
299,274 MasterCard Inc. 42,775,233
--------------
INSURANCE BROKERS (0.97%)
1,157,910 Brown & Brown Inc. 24,200,319
--------------
PRINTING (1.02%)
1,917,307 De La Rue plc (United Kingdom) 25,329,552
--------------
RETAILING (10.34%)
39,775 Costco Wholesale Corporation 2,088,187
1,372,623 Target Corporation 47,396,672
4,947,700 TJX Companies, Inc. 101,774,189
2,118,568 Walgreen Company 52,265,073
951,630 Wal-Mart Stores, Inc. 53,348,378
--------------
256,872,499
--------------
TRUCK MANUFACTURING (0.97%)
840,572 PACCAR Inc. 24,040,359
--------------
VETERINARY DIAGNOSTICS (5.29%)
3,646,134 Idexx Laboratories Inc. + * 131,552,515
--------------
TOTAL COMMON STOCKS (Cost $1,501,266,932) $2,043,319,038
--------------
</Table>
<Table>
<Caption>
PRINCIPAL
AMOUNT
- ------------ --------------
U.S. GOVERNMENT OBLIGATIONS (24.95%)
$621,000,000 U.S. Treasury Bills due 1/2/2009 through 9/15/2009 620,373,372
--------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $620,528,897) 620,373,372
--------------
TOTAL INVESTMENTS (107.14%) ++
(Cost $2,121,795,829) 2,663,692,410
LIABILITIES LESS OTHER ASSETS (-7.14%) (177,499,812)
--------------
NET ASSETS (100.00%) $2,486,192,598
==============
</Table>
- ----------
+ Refer to Note 7.
++ The cost for federal income tax purposes is identical.
* Non-income producing.
(a) The Fund is invested in preference shares of Porsche Automobil Holding SE
which possess the same economic interest as Porsche common stock but have
no voting rights.
<Page>
Various inputs are used in determining the value of the Fund's investments.
These inputs are summarized in the three broad levels listed below:
Level 1 - quoted prices in active markets for identical securities
Level 2 - other significant observable inputs (including quoted prices for
similar securities, interest rates, prepayment speeds, credit
risk, etc.)
Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities.
The following is a summary of the inputs used to value the Fund's investments as
of December 31, 2008:
INVESTMENTS IN
VALUATION INPUTS SECURITIES
- ---------------- --------------
Level 1 - Quoted Prices $2,476,693,797
Level 2 - Other Significant Observable Inputs * 186,998,613
--------------
Total $2,663,692,410
==============
- ----------
* Represents U.S. Treasury Bills with remaining maturities of 60 days or less
which are valued at their amortized cost.
The accompanying notes form an integral part of these Financial Statements.
<Page>
SEQUOIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2008
<Table>
ASSETS:
Investments in securities, at value (Note 1)
Unaffiliated companies (cost $2,030,426,307) $2,532,139,895
Affiliated companies (cost $91,369,522) (Note 7) 131,552,515
--------------
Total investment in securities (cost $2,121,795,829) 2,663,692,410
Cash on deposit with custodian 8,089,617
Receivable for capital stock sold 2,317,001
Dividends receivable 1,739,835
Other assets 34,826
--------------
Total assets 2,675,873,689
--------------
LIABILITIES:
Payable for capital stock repurchased 697,181
Payable for investment securities purchased 186,783,755
Accrued investment advisory fee 1,981,832
Accrued other expenses 218,323
--------------
Total liabilities 189,681,091
--------------
Net assets applicable to 26,097,205 shares of capital stock outstanding (Note 4) $2,486,192,598
==============
Net asset value, offering price and redemption price per share $ 95.27
==============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) $.10 par value capital stock,
100,000,000 shares authorized $1,962,737,334
Undistributed net investment income (Note 5) 180,925
Accumulated net realized losses on investments (Note 5) (18,622,242)
Unrealized appreciation 541,896,581
--------------
Total Net Assets $2,486,192,598
==============
</Table>
The accompanying notes form an integral part of these Financial Statements.
<Page>
SEQUOIA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008
<Table>
INVESTMENT INCOME:
Income:
Dividends:
Unaffiliated companies, net of $1,940,616 foreign tax withheld $ 36,817,798
Affiliated companies (Note 7) 461,159
Interest 3,906,912
Other income 30,713
---------------
Total income 41,216,582
---------------
Expenses:
Investment advisory fee (Note 2) 30,832,201
Legal and auditing fees 200,521
Stockholder servicing agent fees 587,991
Custodian fees 80,000
Directors fees and expenses (Note 6) 308,000
Other 155,287
---------------
Total expenses 32,164,000
Less expenses reimbursed by Investment Adviser (Note 2) 1,184,000
---------------
Net expenses 30,980,000
---------------
Net investment income 10,236,582
---------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Realized gain on:
Investments:
Unaffiliated companies 238,268,621
Affiliated companies (Note 7) 1,034,318
Foreign currency transactions 341,061
---------------
Net realized gain on investments and foreign currencies 239,644,000
---------------
Net decrease in unrealized appreciation on:
Investments:
Unaffiliated companies (1,238,648,580)
Affiliated companies (Note 7) 52,412,021
---------------
Net decrease in unrealized appreciation on investments (1,186,236,559)
---------------
Net realized and unrealized loss on investments and foreign currencies (946,592,559)
---------------
Net decrease in net assets from operations $ (936,355,977)
===============
</Table>
The accompanying notes form an integral part of these Financial Statements.
<Page>
SEQUOIA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
2008 2007
--------------- --------------
INCREASE/(DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 10,236,582 $ 10,500,376
Net realized gain on investments and foreign currencies 239,644,000 580,077,673
Net decrease in unrealized appreciation on investments (1,186,236,559) (288,632,451)
--------------- --------------
Net increase (decrease) in net assets from operations (936,355,977) 301,945,598
Distributions to shareholders from:
Net investment income (10,628,918) (10,217,454)
Net realized gains (168,718,205) (617,051,755)
Capital share transactions (Note 4) 88,409,150 239,000,131
--------------- --------------
Total decrease (1,027,293,950) (86,323,480)
NET ASSETS:
Beginning of period 3,513,486,548 3,599,810,028
--------------- --------------
End of period (including undistributed net investment income
of $180,925 and $232,200, respectively) $ 2,486,192,598 $3,513,486,548
=============== ==============
</Table>
The accompanying notes form an integral part of these Financial Statements.
<Page>
SEQUOIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Sequoia Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a non-diversified, open-end management investment
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 under the supervision of 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 in accordance with NASDAQ Official
Closing Price on the last business day of the period; securities traded in
the over-the-counter market and listed securities for which no sale was
reported on that date are valued at the mean between the last reported bid
and asked prices.
Securities traded on a foreign exchange are valued at the last reported
sales price on the principal exchange on which the security is primarily
traded. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at the close of the New York Stock Exchange
on that day.
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.
When reliable market quotations are insufficient or not readily available
at time of valuation or when the Investment Adviser determines that the
prices or values available do not represent the fair value of a security,
such security is valued as determined in good faith by the Investment
Adviser, in conformity with guidelines adopted by and subject to review by
the Board of Directors.
FOREIGN CURRENCIES: Investment securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollar amounts
at the date of valuation. Purchases and sales of foreign portfolio
securities are translated into U.S. dollars at the rates of exchange
prevailing when such securities are acquired or sold. Income and expenses
are translated into U.S. dollars at the rates of exchange prevailing when
accrued. The Fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments
from the fluctuations arising from changes in market prices of securities
held. Such fluctuations are included with the net realized and unrealized
gain or loss from investments. Reported net realized foreign exchange gains
or losses arise from the sales of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Fund's books and
the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the fair
values of assets and liabilities, other than investments in securities at
fiscal period end, resulting from changes in exchange rates.
B. ACCOUNTING FOR INVESTMENTS: Investment transactions are accounted for on
the trade date and dividend income is recorded on the ex-dividend date.
Interest income is accrued as earned. Premiums and discounts on fixed
income securities are amortized over the life of the respective security.
The net realized gain or loss on security transactions is determined for
accounting and tax purposes on the specific identification basis.
<Page>
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 of
America 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.
F. INDEMNIFICATION: The Fund's officers, directors and agents are indemnified
against certain liabilities that may arise out of performance of their
duties to the Fund. Additionally, in the normal course of business, the
Fund enters into contracts that contain a variety of indemnification
clauses. The Fund's maximum exposure under these arrangements is unknown as
this would involve future claims that may be made against the Fund that
have not yet occurred. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss thereunder to be
remote.
NOTE 2--INVESTMENT ADVISORY CONTRACTS AND PAYMENTS TO INTERESTED PERSONS:
The Fund retains Ruane, Cunniff & Goldfarb Inc. as its investment adviser.
Ruane, Cunniff & Goldfarb Inc. (the "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 investment
advisory 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 year ended
December 31, 2008 and the Investment Adviser reimbursed the Fund $1,184,000.
Such reimbursement is not subject to recoupment by the Investment Adviser.
For the year ended December 31, 2008, there were no amounts accrued or paid
to interested persons, including officers and directors, other than advisory
fees of $30,832,201 to Ruane, Cunniff & Goldfarb Inc. and brokerage commissions
of $1,065,591 to Ruane, Cunniff & Goldfarb LLC, the Fund's distributor. Certain
officers of the Fund are also officers of the Investment Adviser and the Fund's
distributor. Ruane, Cunniff & Goldfarb LLC received no compensation from the
Fund on the sale of the Fund's capital shares during the year ended December 31,
2008.
NOTE 3--PORTFOLIO TRANSACTIONS:
The aggregate cost of purchases and the proceeds from the sales of
securities, excluding U.S. government obligations, for the year ended December
31, 2008 were $346,965,540 and $763,622,917, respectively. Included in proceeds
of sales is $141,910,853 representing the value of securities disposed of in
payment of redemptions in-kind, resulting in realized gains of $104,765,911.
At December 31, 2008 the aggregate gross tax basis unrealized appreciation
and depreciation of securities were $813,317,745 and $271,421,164, respectively.
<Page>
NOTE 4--CAPITAL STOCK:
At December 31, 2008 there were 100,000,000 shares of $.10 par value
capital stock authorized. Transactions in capital stock for the years ended
December 31, 2008 and 2007 were as follows:
<Table>
<Caption>
2008 2007
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ --------- ------------
Shares sold 2,890,902 $341,191,851 518,372 $ 80,168,810
Shares issued to stockholders on reinvestment of:
Net investment income 81,004 7,832,313 7,799 1,150,503
Net realized gains on investments 1,157,417 128,898,150 3,264,559 486,651,260
--------- ------------ --------- ------------
4,129,323 477,922,314 3,790,730 567,970,573
Shares repurchased 3,287,506 389,513,164 2,102,724 328,970,442
--------- ------------ --------- ------------
Net increase 841,817 $ 88,409,150 1,688,006 $239,000,131
========= ============ ========= ============
</Table>
NOTE 5--FEDERAL INCOME TAXES:
Distributions to shareholders are determined in accordance with federal tax
regulations and may differ from those determined for financial statement
purposes. To the extent these differences are permanent such amounts are
reclassified within the capital accounts based on federal tax regulations.
During the year ended December 31, 2008 permanent differences primarily due to
realized gains on redemptions in kind not recognized for tax purposes and
different book and tax treatment of net realized gains on foreign currency
transactions resulted in a net decrease in undistributed net realized gains of
$105,106,972 with a corresponding increase in paid in surplus of $104,765,911,
and an increase to undistributed net investment income of $341,061. These
reclassifications had no effect on net assets.
The tax character of distributions paid during 2008 and 2007 was as
follows:
2008 2007
------------ ------------
Distributions paid from:
Ordinary income $ 10,628,918 $ 11,700,120
Long-term capital gains 168,718,205 615,569,089
------------ ------------
Total distributions $179,347,123 $627,269,209
============ ============
As of December 31, 2008, the components of distributable earnings on a tax
basis were as follows:
Undistributed ordinary income $ 182,089
Undistributed long-term gains 4,440
Deferred post-October losses (18,627,846)
Unrealized appreciation 541,896,581
------------
$523,455,264
============
The difference between book basis and tax basis distributions is a result
of different book and tax treatments of short-term capital gain distributions.
The Fund had net realized losses of $18,627,846 during the period November 1,
2008 through December 31, 2008, which are treated for federal income tax
purposes as arising
<Page>
during the Fund's tax year ending December 31, 2009. These "post-October" losses
may be utilized in future years to offset net realized capital gains, if any,
prior to distributing such gains to shareholders.
In June 2006, the Financial Accounting Standards Board issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
Interpretation of FASB Statement No. 109" (the "Interpretation"). The
Interpretation establishes a minimum threshold for financial statement
recognition of the benefit of positions taken in filing tax returns and requires
certain expanded tax disclosures. Management has applied the Interpretation to
the Fund during the year ended December 31, 2008. As a result of the application
of the Interpretation, there was no impact on the financial statements. The
Fund's Federal tax returns filed in the three-year period ended December 31,
2008 remain subject to examination by the IRS.
NOTE 6--DIRECTORS FEES AND EXPENSES:
Directors who are not deemed "interested persons" receive fees of $10,000
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 year ended December 31, 2008 was $308,000.
NOTE 7--AFFILIATED COMPANIES:
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
December 31, 2008 aggregated $131,522,515 and $91,369,522, respectively. The
summary of transactions for each affiliate during the period of their
affiliation for the year ended December 31, 2008 is provided below:
<Table>
<Caption>
PURCHASES SALES
--------------------- ----------------------- REALIZED DIVIDEND
AFFILIATE SHARES COST SHARES COST GAIN INCOME
- --------- ------- ----------- --------- ----------- ---------- --------
Idexx Laboratories Inc. 590,300 $18,531,332 -- -- -- --
Knight Transportation Inc.* -- -- 3,045,605 $55,176,832 $1,034,318 $461,159
</Table>
- ----------
* No longer an affiliated company as of December 31, 2008.
<Page>
NOTE 8--FINANCIAL HIGHLIGHTS:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
Per Share Operating Performance (for a share
outstanding throughout the period)
Net asset value, beginning of period $ 139.12 $ 152.75 $ 155.45 $ 154.27 $ 147.61
-------- -------- -------- -------- --------
Income from investment operations:
Net investment income (loss) 0.40 0.46 (0.70) (0.75) (0.58)
Net realized and unrealized gains (losses) on
investments (37.11) 13.48 13.60 12.57 7.45
-------- -------- -------- -------- --------
Total from investment operations (36.71) 13.94 12.90 11.82 6.87
-------- -------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.42) (0.45) (0.00) (0.00) (0.00)
Distributions from net realized gains (6.72) (27.12) (15.60) (10.64) (0.21)
-------- -------- -------- -------- --------
Total distributions (7.14) (27.57) (15.60) (10.64) (0.21)
-------- -------- -------- -------- --------
Net asset value, end of period $ 95.27 $ 139.12 $ 152.75 $ 155.45 $ 154.27
======== ======== ======== ======== ========
Total Return -27.03% 8.40% 8.34% 7.78% 4.66%
Ratios/Supplementary data
Net assets, end of period (in millions) $2,486.2 $3,513.5 $3,599.8 $3,573.3 $3,772.4
Ratio to average net assets:
Expenses * 1.0% 1.0% 1.0% 1.0% 1.0%
Net investment income (loss) 0.3% 0.3% -0.5% -0.5% -0.4%
Portfolio turnover rate 12% 13% 14% 8% 6%
</Table>
- ----------
* The ratios of expenses to average net assets were not affected by the
expense reimbursement by the Investment Adviser.
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sequoia Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Sequoia Fund, Inc. (the "Fund"), including the schedule of investments, as of
December 31, 2008, the related statement of operations for the year then ended
and statements of changes in net assets and the financial highlights for each of
the years in the two year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the years in the three year period ended December 31, 2006 were audited by other
auditors whose report dated February 21, 2007 expressed an unqualified opinion
on such financial highlights.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 2008 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Sequoia Fund, Inc. as of December 31, 2008, the results of its operations for
the year then ended, and the changes in its net assets and its financial
highlights for each of the years in the two year period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
February 20, 2009
<Page>
APPROVAL OF ADVISORY CONTRACT
(UNAUDITED)
At a meeting held on December 8, 2008, the Board of Directors of Sequoia
Fund, Inc. (the "Fund"), including a majority of the independent directors,
evaluated and approved the renewal of the advisory contract between the Fund and
Ruane, Cunniff & Goldfarb Inc. (the "Investment Adviser"). In approving the
renewal of the advisory contract, the directors considered all information they
deemed reasonably necessary to evaluate the terms of the contract.
NATURE AND QUALITY OF SERVICES. The directors reviewed the nature, extent
and quality of the services provided by the Investment Adviser to the Fund. They
considered the personnel responsible for the day-to-day management of the Fund,
the Investment Adviser's existing and planned staffing levels and the Investment
Adviser's research capability and overall reputation. The directors considered
the Investment Adviser's representation that it had no current plans to change
the manner in which it managed the Fund. They considered information concerning
the Investment Adviser's compliance policies and procedures, which are designed,
among other things, to ensure the Fund's compliance with its investment
objective, policies and restrictions and those regulatory requirements
applicable to the Fund and to address the Investment Adviser's conflicts of
interest in providing services to the Fund and its other advisory clients. Based
on these factors, the directors concluded that they were satisfied with the
nature, extent and quality of services provided to the Fund by the Investment
Adviser under the advisory contract.
INVESTMENT PERFORMANCE. The directors reviewed the Fund's performance under
the Investment Adviser's management. They considered the Fund's performance and
the performance of the S&P 500 Index for the first 10 months of 2008 and for the
1-year, 3-year, 5-year and 10-year periods ended December 31, 2007. They noted
that for the first 10 months of 2008, the Fund generated a return of negative
22.2% versus a return for the S&P 500 Index of negative 32.8%. They discussed
the current market conditions and the Fund's performance in respect of those
conditions. They noted that the Fund had outperformed the S&P 500 Index for the
1-year and 10-year periods. They also considered the Fund's performance compared
to the performance of peer-group funds for the 1-year, 3-year, 5-year and
10-year periods ended October 31, 2008.
The directors reviewed specific securities that contributed positively and
negatively to the Fund's performance. The directors considered the Fund's
performance in light of information provided by the Investment Adviser
concerning the performance of the Investment Adviser's other advisory accounts.
They also considered the Fund's performance in light of the Fund's compliance
with its investment policies and legal and regulatory requirements. The
directors concluded that the Fund's overall performance was satisfactory.
FEES. Next, the directors examined the fees paid to the Investment Adviser
under the advisory contract and the Fund's overall expense ratio. They
considered the advisory fee compared to the fees charged by peer-group funds.
They noted that the Fund's expense ratio of 1.00% compared favorably with the
average expense ratio of 1.17% for the peer-group funds. They considered the
Investment Adviser's obligation under the contract to reimburse the Fund for the
excess, if any, in any year of the Fund's operating expenses over 1-1/2 % of the
Fund's average daily net asset values up to a maximum of $30 million, plus 1% of
the Fund's average daily net asset values in excess of $30 million. The
directors did not compare the fees charged to the Fund by the Investment Adviser
with the fees charged by the Investment Adviser to its other advisory accounts
because the services provided by the Investment Adviser to its other advisory
accounts are materially different from the services provided by the Investment
Adviser to the Fund. Based on these factors, the directors determined that the
fees charged to the Fund by the Investment Adviser under the advisory contract
were reasonable in light of the services provided by the Investment Adviser and
the fees charged by other advisers to similar funds offering similar services.
<Page>
PROFITABILITY AND OTHER BENEFITS TO THE INVESTMENT ADVISER. The directors
considered the income and expenses of the Fund and the profitability of the Fund
to the Investment Adviser. They reviewed a written analysis of the profitability
of the Fund to the Investment Adviser for the ten months ended October 31, 2008.
They also considered other benefits to the Investment Adviser and its affiliates
as a result of their relationship with the Fund, including a written analysis of
the amounts and rates of brokerage commissions paid by the Fund to Ruane,
Cunniff & Goldfarb LLC, a broker-dealer affiliate of the Investment Adviser,
during those months. Based on these factors, the directors concluded that the
Investment Adviser's profitability was not such as to prevent them from
approving the renewal of the contract.
ECONOMIES OF SCALE. The directors considered information concerning
economies of scale and whether the existing fees might require adjustment in
light of any economies of scale. The directors determined that no modification
of the existing fee level was necessary in light of the fact that, among other
things, the Fund's total annual expense ratio was less than the average expense
ratio of the mutual funds included in the peer group.
In light of the Fund's performance, the Investment Adviser's provision of
advisory and other services, and the reasonableness of the Fund's overall
expenses compared to the expenses of the peer-group funds, the directors
concluded that retention of the Investment Adviser was in the best interest of
the Fund and its stockholders. Based upon such conclusions, the directors,
including a majority of the independent directors, approved the renewal of the
advisory contract.
<Page>
INFORMATION ABOUT SEQUOIA FUND OFFICERS AND DIRECTORS:
(UNAUDITED)
The SAI includes additional information about Fund directors and is
available, without charge, upon request. You may call toll-free 1-800-686-6884
to request the SAI.
<Table>
<Caption>
OTHER
TERM OF OFFICE AND PRINCIPAL DIRECTORSHIPS
POSITION HELD LENGTH OF TIME OCCUPATION DURING HELD BY
NAME, AGE, AND ADDRESS WITH FUND SERVED PAST 5 YEARS DIRECTOR
- ---------------------- -------------------- ------------------ -------------------- -------------
Richard T. Cunniff, 85 Vice Chairman & Term -- 1 Year & Vice Chairman & None
767 Fifth Avenue Director Length of Time Director of Ruane,
New York, NY 10153 served -- 38 Years Cunniff & Goldfarb
Inc.
Robert D. Goldfarb, 64 President & Director Term -- 1 Year & Chairman & None
767 Fifth Avenue Length of Time Director of Ruane,
New York, NY 10153 served -- 30 Years Cunniff & Goldfarb
Inc.
David M. Poppe, 43 Executive Vice Term -- 1 Year & President & Director None
767 Fifth Avenue President & Director Length of Time of Ruane, Cunniff &
New York, NY 10153 served -- 5 Years Goldfarb Inc.
Joseph Quinones, Jr., 63 Vice President, Term -- 1 Year & Vice President, None
767 Fifth Avenue Secretary, Length of Time Secretary,
New York, NY 10153 Treasurer & Chief served -- 13 Years Treasurer & Chief
Compliance Officer Compliance Officer
of Ruane, Cunniff &
Goldfarb Inc.
Michael Valenti, 39 Assistant Secretary Term -- 1 Year & Administrator of None
767 Fifth Avenue Length of Time Ruane, Cunniff &
New York, NY 10153 served -- 2 Years Goldfarb Inc.
Francis P. Matthews, 86 * Director Term -- 1 Year & Retired None
767 Fifth Avenue Length of Time
New York, NY 10153 served -- 36 Years
C. William Neuhauser, 82 Director Term -- 1 Year & Retired None
767 Fifth Avenue Length of Time
New York, NY 10153 served -- 34 Years
Robert L. Swiggett, 86 Director Term -- 1 Year & Retired None
767 Fifth Avenue Length of Time
New York, NY 10153 served -- 38 Years
Sharon Osberg, 59 Director Term -- 1 Year & Consultant Internet None
767 Fifth Avenue Length of Time Mobile Technology
New York, NY 10153 served -- 5 Years
Roger Lowenstein, 54 Director Term -- 1 Year & Writer major None
767 Fifth Avenue Length of Time Financial and News
New York, NY 10153 served -- 10 Years Publications
Vinod Ahooja, 57 Director -- Term -- 1 Year & Retired None
767 Fifth Avenue Chairman of the Length of Time
New York, NY 10153 Board served -- 8 Years
</Table>
- ----------
* Mr. Francis P. Matthews retired effective December 8, 2008.
<Page>
OTHER INFORMATION (UNAUDITED)
The Fund files its complete schedule of portfolio holdings with the SEC for
the first and third quarters of each fiscal year on Form N-Q. Form N-Q is
available on the SEC's web site at http://www.sec.gov. The Fund's Form N- Q may
also be reviewed and copied at the SEC's Public Reference Room in Washington,
DC. For information regarding the operation of the SEC's Public Reference Room,
call 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view
the most recent quarterly, semiannual or annual report on Sequoia Fund's web
site at http://www.sequoiafund.com/fund_reports.htm.
You may obtain a description of the Fund's proxy voting policies and
procedures, and information regarding how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30,
without charge. Visit Sequoia Fund's web site at www.sequoiafund.com and use the
"Shareholder Information" link to obtain all proxy information. This information
may also be obtained from the Securities and Exchange Commission's web site at
www.sec.gov or by calling DST Systems, Inc. at (800) 686-6884.
<Page>
SEQUOIA FUND, INC.
767 FIFTH AVENUE, SUITE 4701
NEW YORK, NEW YORK 10153-4798
(800) 686-6884
WEBSITE: www.sequoiafund.com
DIRECTORS
Richard T. Cunniff
Robert D. Goldfarb
David M. Poppe
Vinod Ahooja, Chairman of the Board
Roger Lowenstein
Francis P. Matthews (Retired December 2008)
C. William Neuhauser
Sharon Osberg
Robert L. Swiggett
OFFICERS
Richard T. Cunniff -- VICE CHAIRMAN
Robert D. Goldfarb -- PRESIDENT
David M. Poppe -- EXECUTIVE VICE PRESIDENT
Joseph Quinones, Jr. -- VICE PRESIDENT, SECRETARY,
TREASURER & CHIEF COMPLIANCE
OFFICER
Michael Valenti -- ASSISTANT SECRETARY
INVESTMENT ADVISER
Ruane, Cunniff & Goldfarb Inc.
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798
DISTRIBUTOR
Ruane, Cunniff & Goldfarb LLC
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798
CUSTODIAN
The Bank of New York
MF Custody Administration Department
One Wall Street, 25th 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 LLP
One Battery Park Plaza
New York, New York 10004
This report has been prepared for the information of shareholders of Sequoia
Fund, Inc.
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of this code of
ethics is filed as an exhibit to this Form N-CSR, and also made available on the
Fund's website at: http://www.sequoiafund.com/code_of_ethics.htm. During the
period covered by this report, no substantive amendments were approved or
waivers were granted to the code of ethics.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Directors has determined that the registrant does not
have an audit committee financial expert serving on its audit committee. The
registrant's Board of Directors has determined that, based on the background and
extensive experience of each of the members of the audit committee in the
financial services industry, a designated audit committee financial expert is
unnecessary. The members of the audit committee are well-known and respected
members of the investment management industry and the registrant is satisfied
that their collective knowledge and experience is sufficient for them to perform
their duties as audit committee members.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) - (d) Aggregate fees billed to the registrant for the last two fiscal year
for professional services rendered by the registrant's independent auditor were
as follows:
December 31, 2008 December 31, 2007
----------------- -----------------
Audit Fees $29,000 $28,000
Audit-Related Fees n/a n/a
Tax Fees $4,000 $4,000
Other Fees n/a n/a
Audit fees include amounts related to the audit of the registrant's annual
financial statements and services normally provided by the auditor in connection
with statutory and regulatory filings. Tax fees include amounts related to tax
compliance and tax advice.
(e)(1) The registrant's audit committee has the responsibility to pre-approve
all audit and non-audit services provided to the registrant by its independent
auditor in advance at regularly scheduled audit committee meetings. The
registrant's audit committee also has the responsibility to pre-approve all
non-audit services provided by the registrant's independent auditor to the
registrant's investment adviser and any entity controlling, controlled by, or
under common control with the investment adviser that provides ongoing services
to the registrant, if the engagement relates directly to the operations and
financial reporting of the registrant, in advance at regularly scheduled audit
committee meetings.
(e)(2) All services included in (b)-(d) were approved pursuant to paragraph
c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) The aggregate fees billed for the most recent fiscal year and the preceding
fiscal year by the registrant's independent auditor for non-audit services
rendered to the registrant, its investment adviser, and any entity controlling,
controlled by, or under common control with the investment adviser that provides
ongoing services to the registrant were $14,500 and $41,785, respectively. Fees
paid to PricewaterhouseCoopers LLP were $2,500 and $29,785, respectively.
(h) Not applicable
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS - INCLUDED IN ITEM 1, REPORTS TO STOCKHOLDERS
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal financial
officer have concluded that as of a date within 90 days of the filing of this
report there were no significant deficiencies in the design or operation of the
disclosure controls and procedures of the registrant which would have adversely
affected the ability of the registrant to record, process, summarize and report
the subject matter contained in this report.
(b) There were no significant changes in the registrant's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ITEM 12. EXHIBITS.
(a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is
attached.
(a)(2) Separate certifications by the registrant's principal executive officer
and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of
1940, are attached.
(b) A certification by the registrant's principal executive officer and
principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and required by Rule 30a-2(b) under the Investment Company Act, is
attached.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SEQUOIA FUND, INC.
By: /s/ Robert D. Goldfarb
------------------------------
Robert D. Goldfarb
President and Principal Executive Officer
Date: February 27, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert D. Goldfarb
------------------------------
Robert D. Goldfarb
President and Principal Executive Officer
Date: February 27, 2009
By: /s/ Joseph Quinones, Jr.
---------------------------
Joseph Quinones, Jr.
Vice President, Secretary, Treasurer
Date: February 27, 2009