A giant, concentrated mutual fund is taking a big performance hit over its huge stake in a scandalized drug company. Yet that's not the whole story.

Per a recent filing with the SEC, on Sunday two of the five independent directors, Sharon Osberg and Vinod Ahooja, resigned from the board of Ruane Cunniff and Goldfarb's [profile] five-star, gold-rated, $7.5-billion Sequoia Fund. Though it was beating 99 percent of its competitors this summer, as of Wednesday it's now down 3.8 percent year-to-date and is behind 89 percent of those rivals.

The fly in Ruane Cunniff's ointment is its investment in an acquisition-focused drug company called Valeant Pharmaceuticals. As of June 30, the mutual fund shop owned nearly 10 percent of Valeant's shares, and Valeant made up 29 percent of the Sequoia's funds holdings. So, the fund firm is Valeant's biggest shareholder, even as Valeant is the largest holding in its flagship mutual fund.

Barron's, Bloomberg (twice), Businesss Insider, and the Wall Street Journal are all writing about Ruane Cunniff's Valeant pain.

Valeant is under PR siege. It's become the posterchild for greedy drug companies by being called out for buying an old drug and jacking up the prices by orders of magnitude. Short sellers are accusing it of fraud and criticizing its control of its own pharmacy chain. Shares in Valeant peaked at $263.81 in August, and as of market close yesterday they had fallen 58 percent to $111.50. Ruane Cunniff president Robert Goldfarb and executive vice president David Poppe even publicly defended Valeant on Wednesday in a two-page letter to shareholders.

So, Ruane Cunniff's reported 33.9 million shares of Valeant are now worth $3.78 billion, down from $8.94 billion in August. By comparison, per Ruane Cunniff's most recent form ADV filed with the SEC on September 29, the firm's total AUM is $27.8 billion, with between 25 and 50 percent of that being in "investment companies" (i.e. Sequoia).

Though the size of the Valeant scandal and Ruane Cunniff's stake may both be unusual, the rest of the pain may be familiar to other fundsters of the concentrated persuasion. Yet it's not all bad news for Ruane Cunniff. They first bought Valeant in the Sequoia Fund five years, when its shares were about $23. Even after the post-August plunge, Valeant's shares have nearly quadrupled since Ruane Cunniff first invested. Despite all the bad PR lately, that sounds like a pretty good return for some Buffett disciples who got mutual fund fever. 

Edited by: Neil Anderson, Managing Editor


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