--I was trying to figure out how problems with a single stock could have caused a 20% drop in the value of the Sequoia Fund, SEQUX, in less than three months.A fund's portfolio must meet stringent diversification and liquidity standards.
However, it appears that a mutual fund need not meet those "stringent diversification standards"--as long as it tells you that it doesn't.
The prospectus for the Sequoia Fund is clear enough, if you read it:
The Fund is classified as non-diversified.
Here's something interesting to me. This rather important fact--"the Fund is classified as non-diversified" is not, as far as I can see, mentioned in their fairly detailed summary description. You have to go to the prospectus to learn it (or read the actual list of investments).
So, the questions I have are: have you read the prospectuses for your funds? Do you know--either by reading the prospectus or in some other way--whether you are holding any funds that are "classified as non-diversified?"The Fund’s investment objective is long-term growth of capital. In pursuing this objective the Fund focuses on investing in equity securities that it believes are undervalued at the time of purchase and have the potential for growth. A guiding principle is the consideration of equity securities, such as common stock, as units of ownership of a business and the purchase of them when the price appears low in relation to the value of the total enterprise. No weight is given to technical stock market studies. The balance sheet and earnings history and prospects of each company are extensively studied to appraise fundamental value. The Fund normally invests in equity securities of U.S. and non-U.S. companies. The Fund may invest in securities of issuers with any market capitalization. The Fund typically sells the equity security of a company when the company shows deteriorating fundamentals, its earnings progress falls short of the investment adviser’s expectations or its valuation appears excessive relative to its expected future earnings.
Ordinarily, the Fund’s portfolio is invested in equity securities of U.S. and non-U.S. companies. The Fund is not required, however, to be fully invested in equity securities and, in fact, usually maintains a portion of its total assets in cash and securities generally considered to be cash equivalents, including, but not limited to, short-term U.S. Government securities. Depending upon market conditions, cash reserves may be a significant percentage of the Fund’s net assets. The Fund usually invests its cash reserves principally in U.S. Government securities.
For advisors, if you are reading this: have you recommended any non-diversified mutual funds like Sequoia to your clients, and were you careful to point out that they were not diversified?