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SEMI-ANNUAL REPORT
June 30, 1997
Dear Shareholder:
Sequoia Fund's results for the second quarter of 1997
are shown below with the usual comparable results for the leading
market indexes:
Sequoia Dow Jones Standard &
To June 30, 1997 Fund Industrials Poor's 500
3 months +21.5% +17.1% +17.5%
6 months +24.3 +20.1 +20.6
As we write this letter, Sequoia is up 25%, roughly in
line with the return on the S&P 500. We must admit that it is a
pleasant surprise to be able to report such strong returns to you
this year. Twenty-five percent years are certainly well in
excess of both our short-and long-term investment performance
expectations, as well as definitively higher than the underlying
earnings growth rate of our very fine stable of portfolio
companies. To an important extent, this year's broad market
gains reflect the upward valuation effects of the continuing
decline in long-term interest rates, a phenomenon which commenced
way back in the early '80s. In addition, corporate earnings
gains have continued to be fairly robust in the aggregate,
increasing at low double digit rates, somewhat in excess of
earlier estimates. Add in persistently low inflation, a capital
gains tax cut and perhaps a dash of "irrational exuberance", and
you get to 25%.
While our portfolio companies in general continue to
post impressive business results, we must concede that a fair
amount of their outsized investment returns to date are a result
of the macro-valuation effects of the very benign investment
climate. These macro-effects are hard to predict and we
certainly can't claim to have seen them coming. Momentum is a
powerful and dangerous force and we are well aware that it can
act in both directions. In fact, the phrase "Beware of
momentum!" is a key investment tenet of at least one stock market
sage we knew and hold in high regard.
However, with the S&P 500 up over 100% in the last 30
months or so, people's investment return expectations are
soaring. A recent consumer survey of mutual fund holders
conducted by Montgomery Asset Management revealed average return
expectations from stock investments over the next ten years to be
26% per year! To put this in perspective, Warren Buffett, one of
the most successful investors in world history, has only
compounded Berkshire Hathaway's book value at 23% per year and
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the very long-term annual rate of return on all equities doesn't
even reach double digits. Another recent survey indicated that
two-thirds of people owning mutual funds could not name a single
company in which their mutual funds owned stock. (One woman even
expressed surprise to learn that her equity mutual fund owned
stocks!) So we have an anomalous situation where expectations
are high but decoupling from rational underpinnings. Rear view
driving with a heavy foot on the accelerator! As Yogi Berra
said, "If you don't know where you're going, you're going to end
up somewhere else."
It may surprise you to learn that we feel somewhat
perversely relieved that the modest market decline in recent days
has also moderated our own gains. While we continue to expect
our terrific portfolio companies to provide us with attractive
returns over a five year period, we prefer a more measured pace.
We urge you to have low expectations during this period
of full equity valuations. Furthermore we recommend, from a
financial planning perspective, that you maintain sufficient cash
reserves to fund anticipated expenditures over the next few years
as insulation from the effects of short-term market gyrations.
Sincerely,
/s/ Richard T. Cunniff
/s/ William J. Ruane
/s/ R.D. Goldfarb
August 14, 1997
2
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SEQUOIA FUND, INC.
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
With Income Dividends Reinvested and Capital Gains
Distributions Accepted in Shares
The table below covers the period from July 15, 1970
(the date Fund shares were first offered to the public) to
June 30, 1997. 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 Reinvested Value of
PERIOD ENDED: Investment Distributions Dividends Shares
- ----------- ---------- ------------- ---------- --------
July 15, 1970 $ 10,000 $0 $0 $10,000
May 31, 1971 11,750 0 184 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
June 30, 1997 109,770 492,948 239,106 841,824
3
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The total amount capital gains distributions accepted in
shares was $206,108, the total amount of dividends reinvested was
$81,635.
No adjustment has been made for any taxes payable by
shareholders on capital gain distributions and dividends
reinvested in shares.
4
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SEQUOIA FUND, INC.
Statement of Investments
June 30, 1997 (Unaudited)
COMMON STOCKS (95.28%)
Value
Shares Cost (Note 1)
- ------ ---- --------
BANK HOLDING COMPANIES (17.80%)
2,761,050 Fifth Third Bancorp $ 92,765,943 $ 226,578,666
2,100,000 First Bank System, Inc. 80,610,090 179,287,500
225,000 Mercantile Bankshares
Corporation 3,475,625 9,000,000
597,400 National Commerce Bancorp 7,406,981 13,142,800
320,000 Regions Financial Corporation 5,348,750 10,120,000
479,900 Wells Fargo & Company 119,285,679 129,333,050
------------ --------------
308,893,068 567,462,016
------------ --------------
CONSUMER PRODUCTS (.21%)
339,200 Sturm, Ruger & Company, Inc. 361,700 6,656,800
------------ --------------
FINANCIAL SERVICES (31.13%)
21,034 Berkshire Hathaway Inc.* 165,788,581 992,804,800
------------ --------------
INSURANCE (12.00%)
4,400,000 Progressive Corporation-Ohio+ 150,092,362 382,800,000
------------ --------------
MANUFACTURING - MOTORCYCLES (3.74%)
2,490,600 Harley Davidson, Inc. 66,707,726 119,393,138
------------ --------------
MOTION PICTURES & VIDEO PRODUCTION (3.93%)
1,560,924 The Walt Disney Company 63,866,333 125,264,151
------------ --------------
OFFICE SUPPLIES AND BUSINESS FORMS (3.01%)
3,191,600 Wallace Computer
Services, Inc. + 98,833,184 95,947,475
------------ --------------
PERSONAL CREDIT (2.26%)
613,400 Household International, Inc. 23,103,672 72,036,162
------------ --------------
5
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PHARMACEUTICALS (5.57%)
2,760,000 Johnson & Johnson 55,292,182 177,675,000
------------ --------------
SERVICES (15.31%)
14,200,000 Freddie Mac # 58,732,552 488,125,000
------------ --------------
Miscellaneous Securities
(.32%) 8,288,641 10,245,250
------------ --------------
TOTAL COMMON STOCKS $ 999,960,001 $3,038,409,792
-------------- --------------
6
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SEQUOIA FUND, INC.
Statement of Investments
June 30, 1997 (Unaudited)
(continued)
Principal Value
Amount Cost (Note 1)
--------- ---- -------
U.S. GOVERNMENT OBLIGATIONS (4.72%)
$ 20,200,000 U.S. Treasury Bills due
7/3/97 through 8/21/97 $ 20,091,838 $ 20,091,838
130,000,000 U.S. Treasury Notes,
6% due 5/31/98 129,746,970 130,325,000
------------ ------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 149,838,808 150,416,838
------------ ------------
TOTAL INVESTMENTS (100%)++ $1,149,798,809 $3,188,826,630
============== ==============
++ The cost for federal income tax purposes is identical.
* Non-income producing.
+ Refer to Note 6.
# Name changed from Federal Home Loan Mortgage Corporation effective 7/1/97.
SEQUOIA FUND, INC.
Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
ASSETS:
Investments in securities, at value
(cost $1,149,798,809) (Note 1) $3,188,826,630
Cash on deposit with custodian 3,426,240
Receivable for capital stock sold 1,194,506
Dividends and interest receivable 1,911,227
Other assets 30,411
--------------
Total assets 3,195,389,014
==============
7
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LIABILITIES:
Payable for capital stock repurchased 2,961,636
Accrued expenses 2,659,225
--------------
Total liabilities 5,620,861
--------------
Net assets applicable to 29,058,986
shares of capital stock outstanding
(Note 4) $3,189,768,153
==============
Net asset value, offering price and
redemption price per share $109.77
========
See Notes to Financial Statements.
8
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SEQUOIA FUND, INC.
Statement of Operations
Six Months Ended June 30, 1997 (Unaudited)
INVESTMENT INCOME:
Income:
Dividends:
Unaffiliated companies $ 10,670,313
Affiliated companies (Note 6) 1,354,938
Interest 5,246,564
------------
Total income 17,271,815
------------
Expenses:
Investment advisory fee (Note 2) 13,976,038
Legal and auditing fees 40,652
Stockholder servicing agent fees 129,763
Custodian fees 50,000
Directors fees and expenses (Note 5) 75,212
Other 47,735
------------
Total expenses 14,319,400
Less expenses reimbursed by Investment Adviser (Note 2) 269,000
------------
Net expenses 14,050,400
------------
Net investment income 3,221,415
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Realized gain on investments:
Unaffiliated companies 45,807
Net increase in unrealized appreciation on:
Investments 620,648,643
------------
Net realized and unrealized gain on investments 620,694,450
------------
Increase in net assets from operations $623,915,865
============
See Notes to Financial Statements.
9
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SEQUOIA FUND, INC.
Statements of Changes in Net Assets
Six Months
Ended Year
6/30/97 Ended
(Unaudited) 12/31/96
----------- ----------
INCREASE (DECREASE) IN NET ASSETS:
From operations:
Net investment income $ 3,221,415 $ 10,489,277
Net realized gain 45,807 181,100,219
Net increase in unrealized
appreciation 620,648,643 284,570,632
-------------- --------------
Net increase in net assets from operations 623,915,865 476,160,128
Distributions to shareholders from:
Net investment income (3,194,351) ( 10,387,500)
Net realized gain on investments (290,440) (166,897,159)
Capital share transactions (Note 4) (11,661,418) 96,600,320
-------------- --------------
Total increase 608,769,656 395,475,789
NET ASSETS:
Beginning of period 2,580,998,497 2,185,522,708
-------------- --------------
End of period $3,189,768,153 $2,580,998,497
============== ==============
NET ASSETS CONSIST OF:
Capital (par value and paid in surplus) $1,150,562,294 $1,162,223,712
Undistributed net investment income 134,294 107,230
Undistributed net realized gains 43,744 288,377
Unrealized appreciation 2,039,027,821 1,418,379,178
-------------- --------------
Total Net Assets $3,189,768,153 $2,580,998,497
============== ==============
See Notes to Financial Statements.
10
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SEQUOIA FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES:
Sequoia Fund, Inc. is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, open-end
management company. The investment objective of the Fund is
growth of capital from investments primarily in common stocks and
securities convertible into or exchangeable for common stock.
The following is a summary of significant accounting policies,
consistently followed by the Fund in the preparation of its
financial statements.
A. Valuation of investments: Investments are carried at market
value or at fair value as determined by the Board of
Directors. Securities traded on a national securities
exchange are valued at the last reported sales price on the
principal exchange on which the security is listed on the
last business day of the period; securities traded in the
over-the-counter market are valued at the last reported sales
price on the NASDAQ National Market System on the last
business day of the period; listed securities and securities
traded in the over-the-counter market for which no sale was
reported on that date are valued at the mean between the last
reported bid and asked prices; U.S. Treasury Bills with
remaining maturities of 60 days or less are valued at their
amortized cost. U.S. Treasury Bills that when purchased have
a remaining maturity in excess of sixty days are stated at
their discounted value based upon the mean between the bid
and asked discount rates until the sixtieth day prior to
maturity, at which point they are valued at amortized cost.
B. Accounting for investments: Investment transactions are
accounted for on the trade date and dividend income is
recorded on the ex-dividend date. The net realized gain or
loss on security transactions is determined for accounting
and tax purposes on the specific identification basis.
C. Federal income taxes: It is the Fund's policy to comply with
the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its
taxable income to its stockholders. Therefore, no federal
income tax provision is required.
D. Use of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
11
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of the financial statements and the reported amounts of
increases and decreases in net assets from operations during
the reporting period. Actual results could differ from those
estimates.
E. General: Dividends and distributions are recorded by the Fund
on the ex-dividend date. Interest income is accrued as
earned.
NOTE 2--INVESTMENT ADVISORY CONTRACTS AND PAYMENTS TO INTERESTED
PERSONS:
The Fund retains Ruane, Cunniff & Co., Inc., as its
investment adviser. Ruane, Cunniff & Co., Inc. (Investment
Adviser) provides the Fund with investment advice, administrative
services and facilities.
Under the terms of the Advisory Agreement, the
Investment Adviser receives a management fee equal to 1% per
annum of the Fund's average daily net asset values. This
percentage will not increase or decrease in relation to increases
or decreases in the net asset value of the Fund. Under the
Advisory Agreement, the Investment Adviser is obligated to
reimburse the Fund for the amount, if any, by which the operating
expenses of the Fund (including the management fee) in any year
exceed the sum of 1-1/2% of the average daily net asset values of
the Fund during such year up to a maximum of $30,000,000, plus 1%
of the average daily net asset values in excess of $30,000,000.
The expenses incurred by the Fund exceeded the percentage
limitation during the six months ended June 30, 1997 and the
Investment Adviser reimbursed the Fund $269,000.
For the six months ended June 30, 1997, there were no
amounts accrued to interested persons, including officers and
directors, other than advisory fees of $13,976,038 and brokerage
commissions of $15,435 to Ruane, Cunniff & Co., Inc. Certain
officers of the Fund are also officers of the Investment Adviser
and the Fund's distributor. Ruane, Cunniff & Co., Inc., the
Fund's distributor, received no compensation from the Fund on the
sale of the Fund's capital shares during the six months ended
June 30, 1997.
NOTE 3--PORTFOLIO TRANSACTIONS:
The aggregate cost of purchases and the proceeds from
the sales of securities, excluding U.S. government obligations,
for the six months ended June 30, 1997 were $58,382,328 and
- -0-,respectively.
12
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At June 30, 1997 the aggregate gross unrealized
appreciation and depreciation of securities were $2,041,913,530
and $2,885,709, respectively.
NOTE 4--CAPITAL STOCK:
At June 30, 1997 there were 40,000,000 shares of $.10
par value capital stock authorized. Transactions in capital
stock for the six months ended June 30, 1997 and the year ended
December 31, 1996 were as follows:
1997 1996
--------------------- -------------------
Shares Amount Shares Amount
-------- -------- -------- --------
Shares sold 887,963 $ 85,458,099 1,605,188 $ 136,443,268
Shares issued to
stockholders on
reinvestment of:
Net investment income 21,191 2,331,456 88,467 7,512,710
Net realized gain on
investments 2,422 266,471 1,739,720 149,633,365
---------- ----------- ---------- -----------
911,576 88,056,026 3,433,375 293,589,343
Shares repurchased 1,037,646 99,717,444 2,220,186 196,989,023
---------- ----------- ---------- -----------
Net (decrease) increase (126,070) $ (11,661,418) 1,213,189 $ 96,600,320
========== =========== ========== ===========
NOTE 5--DIRECTORS FEES AND EXPENSES:
Directors who are not deemed "interested persons"
receive fees of $6,000 per quarter and $2,500 for each meeting
attended, and are reimbursed for travel and other out-of-pocket
disbursements incurred in connection with attending directors
meetings. The total of such fees and expenses paid by the Fund
to these directors for the six months ended June 30, 1997 was
$75,212.
NOTE 6--AFFILIATED COMPANIES:
Investment in portfolio companies 5% or more of whose
outstanding voting securities are held by the Fund are defined in
the Investment Company Act of 1940 as "affiliated companies."
The total value and cost of investments in affiliates at June 30,
1997 aggregated $478,747,475 and $248,925,546, respectively. The
13
<PAGE>
summary of transactions for each affiliate during the period of
their affiliation for the six months ended June 30, 1997 is
provided below:
Purchases Sales
-------------- ------------- Realized Dividend
Affiliate Shares Cost Shares Cost Gain Income
----------------------- ------ ----- ------ ---- ----- -------
Progressive Corp - Ohio -- -- -- -- -- $ 528,000
Wallace Computer Service,
Inc. 1,599,600 $50,093,687 -- -- -- 826,938
$1,354,938
==========
NOTE 7--SELECTED FINANCIAL INFORMATION:
Six
Months Year Ended December 31,
Ended ------------------------
June 30
1997 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------
Per Share Operating
Performance (for a share
outstanding throughout
the period) Net asset
value, beginning of
period $88.44 $78.13 $55.59 $54.84 $56.66 53.31
------ ------ ------ ------ ------ -----
Income from investment
operations:
Net investment
income 0.12 0.38 0.31 0.42 0.64 0.93
Net realized and
unrealized gains
on investments 21.33 16.41 22.62 1.41 5.39 3.98
------ ------ ------ ------ ------ ------
Total from investment
operations 21.45 16.79 22.93 1.83 6.03 4.91
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income (0.11) (0.38) (0.31) (0.42) (0.65) (0.93)
14
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Distributions from
net realized gains (0.01) (6.10) (0.08) (0.66) (7.20) (0.63)
------ ------ ------ ------ ------ ------
Total distributions (0.12) (6.48) (0.39) (1.08) (7.85) (1.56)
------ ------ ------ ------ ------ ------
Net asset value,
end of period $109.77 $88.44 $78.13 $55.59 $54.84 $56.66
====== ====== ====== ====== ====== ======
Total Return 24.3%+ 21.7% 41.4% 3.3% 10.8% 9.4%
Average commission
rate paid ++ $.056 $.055 --- --- -- --
Ratios/Supplemental data
Net assets, end
of period (in
millions) $3,189.8 $2,581.0 $2,185.5 $1,548.3 $1,512.1 $1,389.3
Ratio to average
net assets:
Expenses 1.0%* 1.0% 1.0% 1.0% 1.0% 1.0%
Net investment
income 0.2%* 0.4% 0.5% 0.8% 1.1% 1.8%
Portfolio turnover
rate 4% 23% 15% 32% 24% 28%
+ Not annualized
* Annualized
++ Required by regulations issued in 1995
15
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SEQUOIA FUND, INC.
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798
DIRECTORS
William J. Ruane
Richard T. Cunniff
Robert D. Goldfarb
John M. Harding
Francis P. Matthews
C. William Neuhauser
Robert L. Swiggett
OFFICERS
William J. Ruane - Chairman of the Board
Richard T. Cunniff - President
Robert D. Goldfarb - Vice President
Carol L. Cunniff - Vice President
Joseph Quinones, Jr. - Vice President, Secretary &
Treasurer
INVESTMENT ADVISER & DISTRIBUTOR
Ruane, Cunniff & Co., Inc.
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798
CUSTODIAN
The Bank of New York
90 Washington Street
New York, New York 10286
REGISTRAR AND SHAREHOLDER
SERVICING AGENT
DST Systems, Inc.
P.O. Box 419477
Kansas City, Missouri 64141
LEGAL COUNSEL
Seward & Kissel
One Battery Park Plaza
New York, New York 10004
This report has been prepared for the information of shareholders
of Sequoia Fund, Inc.
16
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