Last week, two independent directors of the Sequoia Fund resigned due to what the Wall Street Journal called a disagreement over the fund's concentration in Valeant Pharmaceuticals International Inc. Valeant has come under fire in recent months for price hikes to its acquired drugs and allegations of fraud. The Sequoia Fund is Valeant's largest shareholder at 10 percent, and the company represented 28.7% of the fund's holdings as of June 30. In a three-page letter to shareholders, the fund's portfolio managers defended the investment in Valeant and called the company "an aggressively-managed business that may push boundaries, but operates within the law."
In a recent piece, the Wall Street Journal suggested that "[c]oncentrated bets on individual stocks raise thorny issues for mutual funds and their investors" because they "increase the riskiness of a fund and raise questions about how much is too much." The article notes that Valeant's troubles precipitated the fund’s 15 percent decline for the period from September 18 to October 28, while its peers were up 2.9 percent over the same period. While Sequoia has faced sharp declines recently and is down 4.2 percent on the year, over the last 15 years it has averaged annual gains of 8.5 percent.