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, 2010
<Page>
ITEM 1. REPORTS TO STOCKHOLDERS.
<Page>
ANNUAL REPORT
DECEMBER 31, 2010
<Page>
SEQUOIA FUND, INC.
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000 WITH INCOME DIVIDENDS AND
CAPITAL GAINS DISTRIBUTIONS REINVESTED 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, 2010. 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 CUMULATIVE VALUE OF
INITIAL REINVESTED 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
Dec. 31, 2009 109,900 1,459,533 278,860 1,848,293
Dec. 31, 2010 129,290 1,745,828 333,509 2,208,627
The total amount of capital gains distributions reinvested in shares was
$1,469,368. The total amount of dividends reinvested was $130,082, including
return of capital distributions reinvested of $5,294. 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 quarter and year ended December 31, 2010
appear below with comparable results for the S&P 500 Index:
To December 31, 2010 SEQUOIA FUND STANDARD & POOR'S 500*
--------------- -------------------------
Fourth Quarter 6.16% 10.76%
1 Year 19.50% 15.06%
5 Years (Annualized) 3.40% 2.29%
10 Years (Annualized) 5.32% 1.41%
The performance shown above represents past performance and does not
guarantee future results. The table does not reflect the deduction of taxes
that a shareholder would pay on Fund distributions or the redemption of Fund
shares. 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 U.S. CORPORATIONS. THE PERFORMANCE DATA QUOTED
REPRESENTS PAST PERFORMANCE AND ASSUMES REINVESTMENT OF DISTRIBUTIONS. 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.
The Fund outperformed the S&P 500 Index for the year, though it
underperformed during the fourth quarter. For the second consecutive year, the
stock market posted significant gains as the economy recovered from the
financial crisis of 2008. After losing 37% of its value in 2008, the S&P 500
gained 26.5% in 2009 and 15.1% in 2010, meaning an investor in the Index who
stayed the course over three years would have lost about 8 cents on every
dollar invested at the end of 2007. An investor in Sequoia would have had a
fractional gain over the same three-year period, net of fees.
In 2010, Sequoia generated a 19.5% return despite holding a large cash
balance all year. Indeed, we ended the year 79% invested in equities and 21% in
cash. Had we been more fully invested in the stocks we already own, performance
would have been better.
A lot happened at Sequoia in 2010. Most notably, we sold nearly half the
Fund's holding in Berkshire Hathaway. After comprising more than 30% of
Sequoia's assets as recently as 2006, Berkshire amounted to 10.6% of assets at
the end of 2010.
In the same year we sold so much Berkshire, we bought a large position in
Valeant Pharmaceuticals and a smaller one in Biovail, a Canadian
pharmaceuticals manufacturer. Valeant and Biovail merged during the year, and
on December 31 the combined company, called Valeant, was our second largest
holding. In recent weeks, rapid appreciation in Valeant shares caused it to
surpass Berkshire and become Sequoia's largest holding. It is the first time in
nearly 20 years that Berkshire has not been the largest investment in the
Fund.
At the time we sold Berkshire we felt the buyers would probably end up
earning reasonable returns on their investment. That's not a typical sentiment
for a seller. But our sale of Berkshire was unusual in several ways.
At the heart of the matter, we continue to believe that Berkshire Hathaway
represents an excellent collection of businesses helmed by the best capital
allocator in America. But in recent years Warren Buffett has announced
loudly and clearly that the law of large numbers is working against Berkshire.
That is, as the company's market capitalization has grown to $200 billion and
its shareholders' equity to $150 billion, it has become harder for Berkshire to
grow organically at a fast rate or to make investments large enough to propel
earnings rapidly forward. When Warren Buffett tells the public that Berkshire's
growth rate will slow in the future, it behooves one to listen.
Our feeling is that Berkshire is a very fine holding. It delivers to an
investor a diversified earnings stream, a fortress-like balance sheet and a CEO
who has the courage to make opportunistic investments when others are fearful.
But to justify a 20% weighting in the Fund, we must believe a business trading
at Berkshire's valuation level can compound its earnings at a fast rate for a
long time. We think Berkshire's growth rate will be respectable in the future,
but not torrid. As a consequence, we believe it makes more sense for Berkshire
to be a large, but not outsized, percentage of Sequoia.
Of course, cash currently delivers a negligible return these days and as we
sold Berkshire we effectively increased our cash position. But timing also
played a role in our decision to sell shares. The entry of Berkshire into the
S&P 500 index, and later into the Russell 1000 and 3000, created enormous
demand for shares by index funds. We took advantage of this demand by selling a
large volume of shares as Berkshire entered these indices.
Valeant is a pharmaceutical company that doesn't spend much money on
research and development. Over the years it has acquired a stable of older
branded drugs that often are off-patent, plus a portfolio of generic and OTC
drugs. Many of its drugs are steady sellers in niche categories of dermatology
or neurology. Valeant also focuses on markets such as Mexico, Brazil and
Poland, where market dynamics are different than in the U.S. In Mexico, for
example, there is little government regulation of pharmaceutical products and
most people pay for medicine out of pocket. There are lots of dubious products
on the market and low trust in prescription medication. Given this, Valeant has
been able to brand generic drugs. The patient trusts a branded generic more
than a no-name generic, and is willing to pay a premium for it. Valeant then is
able to command a good price for what is a low-cost product.
While Valeant doesn't spend much money on R&D, it does invest heavily in its
sales force. Often, it is able to buy older drugs for low multiples of
operating profit and then expand distribution fairly quickly. The company made
14 small acquisitions in 2009 before embarking on its transforming merger with
Biovail last year. In that deal, Valeant obtained some tax shields in Barbados
that should enable it to lower its corporate tax rate dramatically. In the
first five weeks of 2011, Valeant has announced two more sizable acquisitions.
The CEO of Valeant, Mike Pearson, strikes us as exceptionally capable and
shareholder focused. For many years, Mr. Pearson ran the pharmaceutical
consulting practice at McKinsey, where his clients included several of the best
drug companies in the world. We think he is ideally suited to run a business
that is at heart a value investor in pharmaceutical products.
The Fund began buying Valeant last spring and as of early February had
earned roughly a 100% return in the stock. That pace of growth can't continue,
but we remain confident in Valeant's prospects.
One thing that didn't change in 2010 was our continued ownership of
long-time holdings TJX, Fastenal, Idexx Laboratories and Mohawk. Those four
stocks made up 23% of Sequoia's assets at year-end. The worst performing stock
of the group was Mohawk, which rose 19.2% for the year. In all, our top six
holdings made up 43% of assets at year end and substantially outperformed the
Index. Our founder Bill Ruane liked to say that his top six ideas would do
better than all his other ideas, so best to concentrate in them. We still
adhere to that advice, and in 2010 the top six delivered terrific results.
That said, another gradual change at Sequoia has been an increase in the
number of holdings. At the end of 2010, we held 34 stocks in the Fund, which we
believe is an all-time high. A decade ago, we finished 2001 with
17 stocks (five of which are still in the Fund). Every year, it seems, there
are a few more stocks in the Fund than the year before.
This isn't really part of an effort to diversify away from our core belief
in the benefits of concentration. The top six holdings remain
disproportionately large. But in recent years, we've been adding steadily to
our research team, and this talented group has broadened our reach without
sacrificing any of the rigor we've always demanded. In recent years, we've
looked at scores of European stocks for the first time. We've looked
selectively at technology stocks we thought we could understand, like IBM and
Google. We've looked for health care stocks that aren't subject to
reimbursement pressure and ended up owning Valeant and private label
over-the-counter drug maker Perrigo.
Our goal will always be to concentrate an outsized portion of our capital in
a relatively small number of businesses that we've studied intensively. We
believe the best way to outperform the market index while reducing risk is to
have a deep understanding of a group of high-quality companies that have been
carefully purchased. We have a great degree of confidence in our research team
and believe we will uncover more than six good ideas in the future. As we move
into an era where we no longer have 30% of assets in a single security,
investors should expect Sequoia to own more stocks than in the past.
At the same time, we would point out that the eight smallest positions in
Sequoia at year-end cumulatively represented 1.0% of assets. This is not an
ideal way to construct a portfolio, but in the tumult of the past 2 1/2 years,
we've tried to buy some stocks that moved out of our price range very quickly.
Rather than give up and sell the positions we've opted to hold them. This
requires us to keep an eye on them. Hopefully, we will have an opportunity to
add to some of these positions in the future.
Looking ahead, we regret that our crystal ball is never very helpful. A year
ago we told you that in a robust economic recovery, Sequoia would probably lag
the market. We lacked exposure to cyclicals or leveraged financials, which we
presumed would lead a recovery. We also carried a large cash balance at the end
of 2009 that would act as a drag on results in a bull market. So what happened?
The economy proceeded to grow better than many prognosticators forecast and the
S&P rose 15%, with cyclical stocks in particular performing well. Yet we beat
the Index.
Rather than try to guess at what might happen in 2011, we'll just remind you
that the Sequoia portfolio is dominated by market leading companies that earn
high returns on capital, boast extremely strong balance sheets and self-fund
their growth. Our companies are run by high quality management teams. Speaking
very broadly, the kinds of companies Sequoia owns tend to outperform the market
during downturns as investors seek quality and safety. Our portfolio has
sometimes underperformed in upturns, as investors focus on stocks that get
greater leverage from a growing economy.
If the stock market continues its upward march, our large cash position will
hurt investment results. Conversely, in a market correction we would have the
flexibility to make new investments. We do not lack for ideas.
We were extremely gratified and humbled to be chosen by Morningstar as
domestic stock fund managers of the year for 2010. While we had a fine year,
a number of other managers did as well or better than we did. In making the
announcement, Morningstar said it views the manager of the year as akin to a
Hall of Fame election recognizing a long career rather than as an All-Star
selection for a single great year. We wish Bill Ruane could have enjoyed this
recognition in his lifetime, but are honored to enter Morningstar's Hall of
Fame with him. However, we are not hanging up our spikes! We intend to keep
improving and hopefully making more All-Star teams in the future. We have a
young and talented research team propelling us forward and we aim to build a
track record in the '10s worthy of the record Sequoia achieved in its first
40 years. Please visit our website at www. sequoiafund.com for more
information on the award, and to view video clips of the analyst interviews.
In closing, we remind you that a concentrated portfolio of stocks will not
track the results of the S&P Index closely from year to year. Over time, a well
selected portfolio should outperform the Index. We believe the current
portfolio will generate satisfactory returns over time for Sequoia
shareholders.
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 7, 2011
THE RUANE, CUNNIFF & GOLDFARB INC./SEQUOIA FUND, INC. ANNUAL INVESTOR DAY WILL
BE HELD AT 10 A.M., NEW YORK CITY TIME, ON FRIDAY, MAY 20, 2011 AT
THE ST. REGIS HOTEL, TWO EAST 55TH STREET, NEW YORK, NEW YORK 10022
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE (UNAUDITED)
The total return for the Sequoia Fund was 19.5% in 2010. This compares with
the 15.1% return of the S&P 500 Index. 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 may 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 2010.
% OF ASSETS TOTAL % OF ASSETS
POSITION 12/31/10 RETURN 12/31/09
----------------------- -------------- --------- --------------
Berkshire Hathaway 10.6% 21.4% 20.3%
Valeant Pharmaceuticals 9.2% 78.9%* 0.0%
Idexx Laboratories Inc. 6.4% 29.5% 6.8%
TJX Companies, Inc. 6.3% 23.1% 6.3%
Fastenal Company 6.0% 47.7% 5.1%
Mohawk Industries, Inc. 4.3% 19.2% 4.4%
* PERFORMANCE FROM 4/28/10, DATE OF FIRST PURCHASE OF VALEANT SHARES.
The outperformance vs. the Index in 2010 was driven by strong performance of
the Fund's equity holdings, partially offset by a large cash position
maintained throughout the year which produced a negligible return. Each of the
Fund's six largest holdings outperformed the Index during the year, as shown in
the table above.
We believe Berkshire Hathaway achieved record earnings per share in 2010, a
pleasing result considering the depth of the recent downturn. The Burlington
Northern Santa Fe railroad has vastly outperformed expectations since Berkshire
acquired it in early 2010. We believe BNSF's 2010 net income should exceed
original estimates by 40%, as strong volume gains, firm pricing and good cost
control drive record earnings. We expect continued volume and earnings growth
at the railroad to boost Berkshire's after tax return on the acquisition to 10%
by 2012. Meanwhile, insurance profits are still high despite declining rates
and the profits of most of the other non-insurance businesses are recovering
nicely.
In 2010, Berkshire spent $2 billion for 10% of Munich Re at a price of eight
times 2011 earnings estimates. It added to its Wells Fargo stake at a similar
multiple. In recent months, Berkshire subsidiaries have made such diverse
bolt-on acquisitions as a jewelry designer, a tester of moisture content for
grain, two liquor distributors, and a brick maker. Berkshire is also scheduled
in 2011 to purchase minority interests in majority-owned affiliates Marmon and
Wesco.
We sold nearly half of the Fund's shares in Berkshire Hathaway in 2010.
Berkshire remained our largest holding at the end of the year, and we have
great confidence in the company's outlook. However, given Berkshire's valuation
and comments from management about the difficulty of maintaining a high growth
rate given the company's size, we felt it prudent to reduce Berkshire from
20.3% of the Fund's assets at the end of 2009.
Valeant caught our eye last year for its approach to the pharmaceutical
business. In an industry marked by heavy spending on research and development,
Valeant over a period of years has acquired a stable of older branded drugs
that often are off-patent, plus a diverse portfolio of generic and OTC drugs.
Many of its drugs are steady sellers in niche categories of dermatology or
neurology. Valeant also focuses on markets such as Mexico, Brazil and Poland,
where market dynamics are different than in the U.S.
In our view, Valeant is essentially a value investor in pharmaceutical
products. Because it has a large sales force in numerous countries, it is often
able to buy older drugs for low multiples of operating profit and then expand
distribution. The company made 14 small acquisitions in 2009 before embarking
on its transforming merger with Biovail last year. In that deal, Valeant
obtained some tax shields in Barbados that should enable it to lower its
corporate tax rate dramatically. In the first five weeks of 2011, Valeant has
announced two more sizable acquisitions.
The Fund began buying Valeant in April and earned a 79% return on its
original purchases by year-end. Valeant continued to appreciate in the first
weeks of 2011 and as of this writing is now the largest holding in
Sequoia. This marks the first time in 19 years that Berkshire Hathaway is not
the largest holding in the Fund.
Veterinary clinic revenues followed their first drop in more than a decade
in 2009 with a worse mid-single digit fall in 2010. It has become clear to us
that pet healthcare spending is tied closely to employment and we suspect that
spending in the industry will not recover materially until employment levels in
the U.S. improve. Despite continued market weakness, Idexx Labs managed to grow
revenue by 6% and earnings per share by 18%. These results were driven by new
companion animal products, stronger international markets (which now drive over
a third of revenues) and market share gains in its important reference
laboratories business. While Idexx is an extremely strong and well-managed
franchise, we sold some shares during the year based on the stock's valuation
coupled with our concerns about the outlook for pet healthcare spending.
We have held shares of TJX in the Fund for 10 years. The company has been a
very good performer for a long time, but earnings growth has accelerated in
recent years. TJX is the largest off-price apparel and home goods retailer in
the United States, Canada and the UK, and now has a growing presence in Germany
and Poland. After the 2008 financial crisis, TJX benefited from large levels of
high quality surplus in the marketplace. But more than two years after the
crisis began, TJX continues to source high-quality goods and to report
increasing levels of customer traffic in stores. In 2007, TJX earned $1.68 per
share. For the 2010 fiscal year, which has not yet been reported, it appears
TJX will earn about $3.47 per share, marking a three-year compound growth rate
for earnings of 27%. TJX earns extremely high returns on capital, enjoys ample
free cash flows and returns most of that free cash to its owners in the form of
dividends and stock buybacks. We believe it can grow its store base by roughly
5% per year and repurchase 4%-6% of its shares annually.
Fastenal turned in a very impressive year. In late 2008 and much of 2009,
falling industrial production resulted in a sharp contraction in demand for
Fastenal's products, which caused the company's earnings to decline in 2009
for the first time since 2001. Fastenal management responded by slowing new
store growth, reducing headcount, and reining in other costs. In 2010, the
industrial economy improved and Fastenal saw its growth and profitability
accelerate dramatically. The company entered 2011 with considerable sales
momentum and we believe it has an opportunity to grow at a rapid rate for
years to come.
End markets for Mohawk Industries' floor covering products remained
difficult during 2010. Despite showing signs of improvement early in the year,
residential and commercial construction contracted further. Remodeling
spending, which is more important to Mohawk overall than new construction, rose
only modestly from depressed levels. Total sales for the company were
essentially flat with the year before, but management's restructuring efforts
moved the business solidly back into profitability. The company continued to
produce enough cash for management to retire $200 million of debt, establish a
promising joint venture in China and boost capital spending in preparation of a
rebound in U.S. demand. Mohawk begins 2011 with a leaner cost structure,
innovative new products and significant potential for profitable growth in new
markets.
We sold several large positions during 2010. In the case of Martin Marietta
Materials, demand for crushed stone and sand in the United States shows no sign
of recovering, as construction and infrastructure spending remains depressed.
While Martin Marietta owns well located quarries that generally face limited
competition, demand in some of its key states is down 50% from the peak. We
believe earnings will remain under pressure until construction activity
normalizes. The company's net income has dropped by 63% since 2007 and we are
not confident we know when demand will stabilize. Yet the stock market is
valuing Martin Marietta as if a robust construction recovery were imminent. We
elected to sell the stock in 2010.
Porsche remains the world's most profitable car maker and one of the best
luxury brands in the world. Alas, the company's stock price no longer seems
related to its performance selling cars but to speculation about the nature and
timing of its pending acquisition by Volkswagen. In what has become a
long-running
melodrama, Porsche attempted to take over Volkswagen a few years ago in part by
borrowing heavily to accumulate options to buy VW stock. When the financial
crisis hit, Porsche was unable to refinance its options and was unable to find
a partner to assist it with a takeover. Ultimately, the families that control
Porsche agreed to sell the company to Volkswagen. We never invested in Porsche
in the hopes that our stock in this world-class luxury brand would one day
convert to an interest in a volume car company, even one as well-run as
Volkswagen. Last year we exited the position.
We also sold our long-time holding in Walgreen during 2010. Simply put, we
believe the economics of the drug store business have deteriorated in recent
years as the pharmacy benefit managers, or PBMs, have been successful at
reducing the reimbursement paid to pharmacies for dispensing prescriptions, and
at enticing patients to fill long-term prescriptions via mail order services
operated by the PBMs. Despite consistent sales growth in recent years,
Walgreen's operating margin has steadily receded since 2007 and its earnings
have barely grown. The company should benefit in the short-term from a wave of
new generic drug introductions. New generic drugs are initially quite
profitable for pharmacies as payers offer incentives to convert patients from
branded medicines. In the longer-term, however, it must find a way to stop the
slide in its operating margin.
We made a number of new investments in 2010, including Valeant, Goldman
Sachs, Google, IBM and Perrigo. We thought Goldman Sachs, Google and IBM were
premier franchises trading at sizable discounts to their earnings power as
investors seemed to shun blue chip stocks early in the year. Perrigo makes
private label over-the-counter drugs and has an enormous market share in the
U.S. for widely-used products like omeprazole and loratidine. Consumers
increasingly seem willing to trade down from branded OTC drugs to store brands,
such that Perrigo has nearly doubled EPS over the past two years. With a strong
pipeline of prescription medication scheduled to move to OTC, including the
allergy drug Allegra, we believe Perrigo has bright prospects.
In addition to sales of Berkshire and Idexx discussed above, we also sold
shares in De la Rue, Expeditors International and Paccar. In the case of De la
Rue, a scandal that resulted in the resignation of the CEO caused us to lose
faith in management. Expeditors is a marvelous business but we believed the
shares were expensive relative to our growth expectations for earnings. We
still own some Expeditors. At Paccar, we greatly admire the company but felt
the stock was expensive relative to our outlook for the heavy duty truck
market.
Comparison of a change in value of a $10,000 Investment in Sequoia Fund and the
S&P 500 Index*
[CHART]
<Table>
<Caption>
SEQUOIA S&P
FUND 500*
10,000.00 10,000.00
11,052.00 8,811.00
10,760.20 6,863.77
12,602.40 8,832.30
13,189.70 9,793.25
14,215.80 10,274.10
15,401.40 11,897.40
16,695.10 12,550.60
12,182.40 7,906.86
14,056.10 9,999.02
16,797.00 11,504.90
</Table>
The performance shown above represents past performance and does not
guarantee future results. The graph does not reflect the deduction of taxes
that a shareholder would pay on Fund distributions or the redemption of Fund
shares. 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.
SECTOR BREAKDOWN
(UNAUDITED)
Percent of
AS OF DECEMBER 31, 2010 NET ASSETS
---------------------------------- ----------
U.S. Government Obligations 21.87
Healthcare 11.16
Diversified Companies 10.63
Retailing 10.19
Aerospace/Defense 8.58
Veterinary Diagnostics 6.43
Industrial & Construction Supplies 5.97
Auto Parts 5.81
Flooring Products 4.32
Internet Software & Services 2.22
Investment Banking & Brokerage 2.10
IT Consulting & Other Services 2.01
Information Processing 1.92
Miscellaneous Securities 1.49
Advertising 1.23
Diversified Manufacturing 1.04
Construction Equipment 1.00
Other 2.03
----------
100.00
----------
----------
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 0.05%
Total Annual Fund Operating Expenses* 1.05%
* DOES NOT REFLECT 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. FOR THE
YEAR ENDED DECEMBER 31, 2010, THE FUND'S ANNUAL OPERATING EXPENSES NET OF SUCH
REIMBURSEMENT WAS 1.00% .
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, 2010 to December 31, 2010).
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, 2010
ACCOUNT VALUE TO
VALUE DECEMBER 31, DECEMBER 31,
JULY 1, 2010 2010 2010
------------ --------- ---------------
Actual $1,000 $1,148.90 $5.47
Hypothetical
(5% return
per year
before
expenses) $1,000 $1,020.11 $5.14
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.01%,
MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY 184/365
(TO REFLECT THE ONE-HALF YEAR PERIOD).
SEQUOIA FUND, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2010
COMMON STOCKS (78.69%)
VALUE
SHARES (NOTE 1)
---------- ------------
ADVERTISING (1.23%)
933,743 Omnicom Group Inc $ 42,765,429
------------
AEROSPACE/DEFENSE (8.58%)
947,406 Precision Castparts Corp 131,888,389
23,161,200 Qinetiq Group plc (United Kingdom) 46,970,914
12,376,114 Rolls-Royce Group plc (United Kingdom) 120,271,076
------------
299,130,379
------------
AUTO PARTS (5.81%)
1,549,400 Advance Auto Parts, Inc 102,492,810
1,656,139 O'Reilly Automotive Inc. * 100,063,918
------------
202,556,728
------------
CONSTRUCTION EQUIPMENT (1.00%)
1,520,736 Ritchie Bros. Auctioneers Incorporated 35,052,965
------------
CRUDE OIL & GAS PRODUCTION (0.23%)
179,508 Canadian Natural Resources Limited 7,973,745
------------
DIVERSIFIED COMPANIES (10.63%)
3,055 Berkshire Hathaway Inc. Class A * 367,974,750
33,000 Berkshire Hathaway Inc. Class B * 2,643,630
------------
370,618,380
------------
DIVERSIFIED MANUFACTURING (1.04%)
765,664 Danaher Corporation. 36,116,371
------------
ELECTRONIC MANUFACTURING SERVICES (0.09%)
77,500 Trimble Navigation Limited * 3,094,575
------------
FLOORING PRODUCTS (4.32%)
2,656,923 Mohawk Industries Inc. * 150,806,949
------------
FREIGHT TRANSPORTATION (0.42%)
271,300 Expeditors International Inc 14,812,980
------------
HEALTHCARE (11.16%)
418,000 Becton, Dickinson and Company 35,329,360
529,800 Perrigo Company 33,552,234
11,320,000 Valeant Pharmaceuticals International Inc 320,242,800
------------
389,124,394
------------
VALUE
SHARES (NOTE 1)
--------- --------------
INDUSTRIAL & CONSTRUCTION SUPPLIES (5.97%)
3,475,384 Fastenal Company $ 208,210,255
--------------
INDUSTRIAL GASES (0.98%)
359,017 Praxair, Inc 34,275,353
--------------
INFORMATION PROCESSING (1.92%)
298,457 MasterCard Inc 66,887,198
--------------
INSURANCE BROKERS (0.77%)
1,124,830 Brown & Brown Inc 26,928,430
--------------
INTERNET SOFTWARE & SERVICES (2.22%)
130,571 Google Inc. * 77,555,257
--------------
INVESTMENT BANKING & BROKERAGE (2.10%)
435,000 The Goldman Sachs Group Incorporated 73,149,600
--------------
IT CONSULTING & OTHER SERVICES (2.01%)
477,000 International Business Machines Corp 70,004,520
--------------
LABORATORY SUPPLIES (0.08%)
19,247 Mettler-Toledo International Inc. * 2,910,339
--------------
PROPERTY AND CASUALTY INSURANCE (0.02%)
21,000 Verisk Analytics, Inc. * 715,680
--------------
RETAILING (10.19%)
39,666 Costco Wholesale Corporation 2,864,282
1,368,875 Target Corporation 82,310,454
4,934,190 TJX Companies, Inc 219,028,694
949,032 Wal-Mart Stores, Inc 51,181,296
--------------
355,384,726
--------------
VETERINARY DIAGNOSTICS (6.43%)
3,240,578 Idexx Laboratories Inc. [] * 224,312,809
--------------
Miscellaneous Securities (1.49%) (a) 51,989,261
--------------
TOTAL COMMON STOCKS (Cost $1,425,410,960) $2,744,376,323
--------------
PRINCIPAL VALUE
AMOUNT (NOTE 1)
------------ --------------
$ 763,000,000 U.S. GOVERNMENT OBLIGATIONS (21.87%)
U.S. Treasury Bills, 0.08%-0.13% due 1/13/2011 through 2/24/2011 $ 762,950,799
--------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $762,950,799) 762,950,799
--------------
TOTAL INVESTMENTS (100.56%)
(Cost $2,188,361,759) ++ 3,507,327,122
LIABILITIES LESS OTHER ASSETS (-0.56%) (19,612,483)
--------------
NET ASSETS (100.00%) $3,487,714,639
--------------
--------------
+ Refer to Note 7.
++ The cost for federal income tax purposes is identical.
* Non-income producing.
(a) "Miscellaneous Securities" include holdings in their initial period of
acquisition that have not previously been publicly disclosed.
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, 2010:
U.S. GOVERNMENT
VALUATION INPUTS COMMON STOCKS OBLIGATIONS TOTAL
------------------------------------------------ ------------------ --------------- --------------
Level 1 -- Quoted Prices $2,744,376,323 -- $2,744,376,323
Level 2 -- Other Significant Observable Inputs * -- $762,950,799 762,950,799
------------------ --------------- --------------
Total $2,744,376,323 $762,950,799 $3,507,327,122
------------------ --------------- --------------
------------------ --------------- --------------
* 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.
SEQUOIA FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2010
ASSETS
Investments in securities, at value (Note 1)
Unaffiliated companies (cost $2,107,610,650) $3,283,014,313
Affiliated companies (cost $80,751,109) (Note 7) 224,312,809
-----------------
Total investments in securities (cost $2,188,361,759) 3,507,327,122
Cash on deposit with custodian 3,347,275
Receivable for capital stock sold 4,493,855
Dividends receivable 1,867,419
Receivable for investment securities sold 4,335,150
Other assets 34,074
-----------------
Total assets 3,521,404,895
-----------------
LIABILITIES
Payable for capital stock repurchased. 26,772,978
Payable for investment securities purchased 3,789,150
Accrued investment advisory fee 2,961,099
Accrued other expenses. 167,029
-----------------
Total liabilities 33,690,256
-----------------
Net assets applicable to 26,976,872 shares of capital stock outstanding (Note 4) $3,487,714,639
-----------------
-----------------
Net asset value, offering price and redemption price per share $129.29
-----------------
-----------------
NET ASSETS CONSIST OF
Capital (par value and paid in surplus) $.10 par value capital stock,
100,000,000 shares authorized $2,168,782,276
Accumulated net realized losses on investments (Note 5) (33,000)
Unrealized appreciation 1,318,965,363
-----------------
Total Net Assets $3,487,714,639
-----------------
-----------------
The accompanying notes form an integral part of these Financial Statements.
SEQUOIA FUND, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2010
INVESTMENT INCOME
Income
Dividends, net of $2,114,683 foreign tax withheld $ 30,945,101
Interest 535,678
---------------
Total income 31,480,779
---------------
Expenses
Investment advisory fee (Note 2) 31,360,973
Legal and auditing fees 156,000
Stockholder servicing agent fees 577,938
Custodian fees 80,000
Directors fees and expenses (Note 6) 284,128
Other 160,144
---------------
Total expenses 32,619,183
Less expenses reimbursed by Investment Adviser (Note 2) 1,110,000
---------------
Net expenses 31,509,183
---------------
Net investment loss (28,404)
---------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY TRANSACTIONS
Realized gain (loss) on
Investments
Unaffiliated companies 140,218,063
Affiliated companies (Note 7) 14,043,184
Foreign currency transactions (30,323)
---------------
Net realized gain on investments and foreign currencies 154,230,924
---------------
Net increase in unrealized appreciation on
Investments
Unaffiliated companies 365,698,264
Affiliated companies (Note 7) 40,400,738
---------------
Net increase in unrealized appreciation on investments. 406,099,002
---------------
Net realized and unrealized gain on investments and foreign currencies 560,329,926
---------------
Net increase in net assets from operations $560,301,522
---------------
---------------
The accompanying notes form an integral part of these Financial Statements.
SEQUOIA FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
-----------------------------------
2010 2009
----------------- -----------------
INCREASE/(DECREASE) IN NET ASSETS
From operations
Net investment income (loss) $ (28,404) $ 172,532
Net realized gain on investments and foreign currencies 154,230,924 7,653,549
Net increase in unrealized appreciation on investments 406,099,002 370,969,780
----------------- -----------------
Net increase in net assets from operations 560,301,522 378,795,861
Distributions to shareholders from
Net investment income -- (582,316)
Net realized gains (43,650,447) (5,604)
Return of capital (8,344,749) --
Capital share transactions (Note 4) 111,636,350 3,371,424
----------------- -----------------
Total increase 619,942,676 381,579,365
NET ASSETS
Beginning of period 2,867,771,963 2,486,192,598
----------------- -----------------
End of period (including undistributed net investment income
of $0 and $0, respectively) $3,487,714,639 $2,867,771,963
----------------- -----------------
----------------- -----------------
The accompanying notes form an integral part of these Financial Statements.
SEQUOIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Sequoia Fund, Inc. (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 the 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 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.
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 contractually 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, 2010 and the Investment Adviser
reimbursed the Fund $1,110,000. Such reimbursement is not subject to recoupment
by the Investment Adviser.
For the year ended December 31, 2010, there were no amounts accrued or
paid to interested persons, including officers and directors, other than
advisory fees of $31,360,973 to Ruane, Cunniff & Goldfarb Inc. and brokerage
commissions of $545,394 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, 2010.
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, 2010 were $567,738,908 and $757,968,488, respectively. Included in proceeds
of sales is $52,896,079 representing the value of securities disposed of in
payment of redemptions in-kind, resulting in realized gains of $42,755,343.
At December 31, 2010 the aggregate gross tax basis unrealized appreciation
and depreciation of securities were $1,328,535,552 and $9,570,189,
respectively.
NOTE 4--CAPITAL STOCK
At December 31, 2010 there were 100,000,000 shares of $.10 par value
capital stock authorized. Transactions in capital stock for the years ended
December 31, 2010 and 2009 were as follows:
2010 2009
---------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ------------ ------------
Shares sold 3,352,182 $406,319,850 3,033,183 $296,063,317
Shares issued to stockholders on reinvestment of.
Net investment income -- -- 4,351 463,286
Net realized gains on investments 283,070 35,256,313 35 3,490
Return of capital 53,730 6,750,472 -- --
--------- ------------ ------------ ------------
3,688,982 448,326,635 3,037,569 296,530,093
Shares repurchased 2,807,613 336,690,285 3,039,271 293,158,669
--------- ------------ ------------ ------------
Net increase (decrease) 881,369 $111,636,350 (1,702) $ 3,371,424
--------- ------------ ------------ ------------
--------- ------------ ------------ ------------
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, 2010 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
$42,735,019 with a corresponding increase in paid in surplus of $42,706,615,
and an increase to undistributed net investment income of $28,404. These
reclassifications had no effect on net assets.
The tax character of distributions paid during 2010 and 2009 was as follows:
2010 2009
----------- --------
Distributions paid from
Ordinary income $ -- $583,480
Long-term capital gains 43,650,447 4,440
Return of capital 8,344,749 --
----------- --------
Total distributions $51,995,196 $587,920
----------- --------
----------- --------
As of December 31, 2010, the components of distributable earnings on a tax
basis were as follows:
Undistributed ordinary income $ --
Undistributed long-term gain --
Deferred post-October losses (33,000)
Unrealized appreciation 1,318,965,363
---------------
$1,318,932,363
---------------
---------------
As of December 31, 2009, the Fund had $61,261,515 of capital loss
carryforwards for federal income tax purposes. These capital loss carryforwards
were fully utilized during the year ended December 31, 2010 to offset net
realized capital gains prior to distributing such gains to shareholders.
The Fund recognizes the tax benefits or expenses of uncertain tax
positions only when the positions are "more likely than not" to be sustained
assuming examination by tax authorities. Management has reviewed the Fund's tax
positions taken on federal income tax returns for all open years (tax years
ended December 31, 2007 through December 31, 2010) and has concluded that no
provision for unrecognized benefits or expenses is required in these financial
statements.
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, 2010 was $284,128.
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, 2010 aggregated $224,312,809 and $80,751,109, respectively. The
summary of transactions for this affiliate during the period of its affiliation
for the year ended December 31, 2010 is provided below:
PURCHASES SALES REALIZED DIVIDEND
-------------------- -------------------- ----------------------
AFFILIATE SHARES COST SHARES COST GAIN INCOME
------------------------- ------ ------------- -------- ----------- ----------- ----------
Idexx Laboratories Inc -- -- 395,600 $10,405,281 $14,043,184 --
NOTE 8--SUBSEQUENT EVENTS
Accounting principles generally accepted in the United States of America
require the Fund to recognize in the financial statements the effects of all
subsequent events that provide additional evidence about conditions that
existed as of the date of the Statement of Assets and Liabilities. For
non-recognized subsequent events that must be disclosed to keep the financial
statements from being misleading, the Fund is required to disclose the nature
of the event as well as an estimate of its financial effect, or a statement
that such an estimate cannot be made. Management has evaluated subsequent
events through the issuance of these financial statements and has noted no such
events.
NOTE 9--NEW ACCOUNTING PRONOUNCEMENT
In January 2010, the Financial Accounting Standards Board issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements." ASU No. 2010-06 clarifies existing disclosure and
requires additional disclosures regarding fair value measurements. Effective
for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years, entities will need to disclose information about
purchases, sales, issuances and settlements of Level 3 securities on a gross
basis, rather than as a net number as currently required. Management is
currently evaluating the impact ASU No. 2010-06 will have on its financial
statement disclosures.
NOTE 10--FINANCIAL HIGHLIGHTS
YEAR
ENDED DECEMBER 31,
----------- ------- --------------------------------------- -----------
2010 2009 2008 2007 2006
----------- ----------------- ----------------- ----------- -----------
Per Share Operating Performance (for a
share outstanding throughout
the period)
Net asset value, beginning of period $ 109.90 $ 95.27 $ 139.12 $ 152.75 $ 155.45
----------- ----------------- ----------------- ----------- -----------
Income from investment operations
Net investment income (loss) (0.00)(a) 0.00(a) 0.40 0.46 (0.70)
Net realized and unrealized gains
(losses) on investments 21.35 14.65 (37.11) 13.48 13.60
----------- ------- --------- ------- --------- ----------- -----------
Total from investment operations 21.35 14.65 (36.71) 13.94 12.90
----------- ------- --------- ------- --------- ----------- -----------
Less distributions
Dividends from net investment income -- (0.02) (0.42) (0.45) (0.00)
Distributions from net realized gains (1.65) (0.00)(a) (6.72) (27.12) (15.60)
Return of capital. (0.31) -- -- -- --
----------- ------- --------- ------- --------- ----------- -----------
Total distributions (1.96) (0.02) (7.14) (27.57) (15.60)
----------- ------- --------- ------- --------- ----------- -----------
Net asset value, end of period $ 129.29 $ 109.90 $ 95.27 $ 139.12 $ 152.75
----------- ----------------- ----------------- ----------- -----------
----------- ----------------- ----------------- ----------- -----------
Total Return 19.50% 15.38% (27.03)% 8.40% 8.34%
Ratios/Supplementary data
Net assets, end of period (in millions) $3,487.7 $2,867.8 $2,486.2 $3,513.5 $3,599.8
Ratio of expenses to average net assets
Before expense reimbursement 1.04% 1.05% 1.04% 1.03% 1.03%
After expense reimbursement 1.00% 1.01% 1.00% 1.00% 1.00%
Ratio of net investment income (loss) to
average net assets (0.00)% 0.01% 0.33% 0.29% (0.46)%
Portfolio turnover rate 23% 15% 12% 13% 14%
(a) Represents less than $0.01 per share.
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, 2010, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two year
period then ended and the financial highlights for each of the years in the
four 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 the year 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, 2010 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, 2010, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two year period then ended, and its financial highlights for each of the years
in the four year period then ended, in conformity with accounting principles
generally accepted in the United States of America.
BBD, LLP
Philadelphia, Pennsylvania
February 18, 2011
APPROVAL OF ADVISORY CONTRACT
(UNAUDITED)
At a meeting held on December 6, 2010, 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 information describing 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 reasonably designed to,
among other things, prevent violations of the Investment Advisers Act of 1940
and 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
2010. They noted that for the first 10 months of 2010, the Fund generated a
total return of 15.8% versus a return for the S&P 500 Index of 7.8% . They
reviewed information concerning those portfolio holdings that contributed most
to the Fund's performance during that period. They also considered the Fund's
performance compared to the performance of peer-group funds for the
year-to-date, 3-year, 5-year and 10-year periods ended November 4, 2010. They
considered the source of the information and discussed performance of certain
funds included in the peer group. 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.
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 reviewed
information provided by the Investment Adviser comparing the Fund's advisory
fee and expense ratio to the advisory fees charged by, and the expense ratios
of, peer-group funds. They reviewed information showing that the Fund's expense
ratio was 1.01% and that the average expense ratio for the peer-group funds was
1.12% . 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 also considered information
regarding the fees charged by the Investment Adviser to its other advisory
accounts. Based on these and other 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.
PROFITABILITY AND OTHER BENEFITS TO THE INVESTMENT ADVISER. The directors
considered the profitability of the Fund to the Investment Adviser for the ten
months ended October 31, 2010. 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 would not 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 paid by the Fund to the
Investment Adviser might require adjustment in light of any economies of scale.
The directors determined that no modification of the existing fee level was
necessary because, among other things, the Fund's total annual expense ratio
was comparable to the average expense ratio of the peer-group funds.
In light of the Fund's performance, the extent and quality of the
Investment Adviser's provision of advisory and other services, the
reasonableness of the Fund's advisory fee compared to the advisory fee of
peer-group funds and other factors, the directors concluded that retention of
the Investment Adviser was in the best interest of the Fund and its
stockholders. This conclusion was not based on any single factor, but on an
evaluation of the totality of factors and information reviewed and evaluated by
the directors. Based upon such conclusions, the directors, including a majority
of the independent directors, approved the renewal of the advisory contract.
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.
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, 87 Vice Chairman & Term -- 1 Year & Vice Chairman & None
767 Fifth Avenue Director Length of Time Director of Ruane,
New York, NY 10153 served -- 40 Years Cunniff & Goldfarb
Inc.
Robert D. Goldfarb, 66 President & Director Term -- 1 Year & Chairman & None
767 Fifth Avenue Length of Time Director of Ruane,
New York, NY 10153 served -- 32 Years Cunniff & Goldfarb
Inc.
David M. Poppe, 45 Executive Vice Term -- 1 Year & President & Director None
767 Fifth Avenue President & Director Length of Time of Ruane, Cunniff &
New York, NY 10153 served -- 7 Years Goldfarb
Inc.
Joseph Quinones, Jr., 65 Vice President, Term -- 1 Year & Vice President, None
767 Fifth Avenue Secretary, Length of Time Secretary,
New York, NY 10153 Treasurer & Chief served -- 15 Years Treasurer & Chief
Compliance Officer Compliance Officer
of Ruane, Cunniff &
Goldfarb Inc.
Michael Valenti, 41 Assistant Secretary Term -- 1 Year & Administrator of None
767 Fifth Avenue Length of Time Ruane, Cunniff &
New York, NY 10153 served -- 4 Years Goldfarb Inc.
C. William Neuhauser, 84 Director Term -- 1 Year & Retired None
767 Fifth Avenue Length of Time
New York, NY 10153 served -- 36 Years
Robert L. Swiggett, 88 Director Term -- 1 Year & Retired None
767 Fifth Avenue Length of Time
New York, NY 10153 served -- 40 Years
Sharon Osberg, 61 Director Term -- 1 Year & Consultant Internet None
767 Fifth Avenue Length of Time Mobile Technology
New York, NY 10153 served -- 7 Years
Roger Lowenstein, 56 Director Term -- 1 Year & Writer major None
767 Fifth Avenue Length of Time Financial and News
New York, NY 10153 served -- 12 Years Publications
Vinod Ahooja, 59 Director -- Term -- 1 Year & Retired None
767 Fifth Avenue Chairman of the Length of Time
New York, NY 10153 Board served -- 10 Years
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 Forms 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.
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
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
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/si-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, 2010 December 31, 2009
----------------- -----------------
Audit Fees $30,500 $30,000
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) None.
(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 $22,500 and $12,000, 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: March 1, 2011
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: March 1, 2011
By: /s/ Joseph Quinones, Jr.
---------------------------
Joseph Quinones, Jr.
Vice President, Secretary, Treasurer
Date: March 1, 2011