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Sequoia
Fund, Inc.

 

 

SEMI-ANNUAL
REPORT
JUNE 30, 2001

 

 

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, 2001. 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.

PERIOD ENDED: Value of
Initial
$10,000
Investment		 Value of
Cumulative
Capital Gains
Distributions		 Value of
Cumulative
Reinvested
Dividends		 Total
Value of
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
June 30, 2001 123,920 942,526 294,011 1,360,457

The total amount of capital gains distributions accepted in shares was $599,919, the total amount of dividends reinvested was $106,189.

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 second quarter of 2001 are shown below with comparable results for the leading market indexes:

To June 30, 2001 Sequoia
Fund		 Dow Jones
Industrials		 Standard &
Poor's 500
3 Months 7.85% 6.71% 5.83%
6 Months 3.47

-1.83

 -6.72
1 Year 27.62 2.21 -14.85
5 Years (Annualized) 18.32 15.17 14.47
10 Years (Annualized) 17.79 16.31 15.09

The S&P 500 Index is an unmanaged, capitalization-weighted index of the common stocks of 500 major US corporations. The Dow Jones Industrial Average is an unmanaged, price-weighted index of 30 actively traded blue chip stocks. The performance data quoted represents past performance and assumes reinvestment of dividends. The investment return and principal value of an investment in the Fund will fluctuate. An investor's shares, when redeemed, may be worth more or less than their original cost.

As we write, the Fund is up 4.8% compared to a decline of 11.3% in the S&P 500 Index.

We are always on the lookout for factors in the economic landscape which may be changing in ways that will impact corporate prospects and profitability, and, therefore, stock values. One issue with immediate consequences for American business and our social fabric is the rising cost trend in health care. Medical costs, as reported by large managed health care and indemnity insurers, are increasing at very high single digit or low double digit rates (although Aetna, the country's largest health insurer, recently reported that medical costs in its HMO business increased an astonishing 17-18% from last year's second quarter). The Wall Street Journal notes that "employee benefit managers across the country report that they have been getting higher-than-expected premium rate increases for next year from various health plans. Some HMOs are asking for increases in excess of 20%.''

A number of companies have recently cited rising health care costs as a source of earnings pressure. With almost all of American industry having zero pricing power in the current environment, if this trend does not abate materially, it will exert noticeable downward pressure on corporate profit margins. In addition, double digit rates of increase in the costs of Medicare and Medicaid will have national budget-busting consequences with or without a prescription drug benefit.

Another issue, the consequences of which may take more time to become apparent, is the threat to American manufacturing posed by the increase in low cost, high quality Chinese manufacturing. One of our companies, Ethan Allen, recently announced a joint venture with a Chinese manufacturer, Markor, under which Markor will manufacture furniture for Ethan Allen and the two companies will co-develop stores in China that will sell both Ethan Allen and Markor brand furniture. We consider this arrangement a modest win for Ethan Allen since it will secure lower cost manufacturing capability in China as well as gain a market in China for its own product. However, to the extent that Ethan Allen closes American plants, this move will be a loss for American labor and for our balance of payments. Ethan Allen is following a number of American furniture companies that have closed plants in the U.S. in order to secure cheaper product in China. A second Sequoia-owned company has told us that the very high quality American-sourced product it has been buying from another of our portfolio companies is now very close to being matched in quality at a much lower price by a Chinese company.

China possesses a potent combination of highly educated and skilled engineers, an endless supply of very low paid workers, a huge domestic market for some goods and services and a large potential market for others, an entrepreneurial culture and a strong work ethic. In addition, its legal system offers little protection for patents and copyrights. While this combination has different implications for specific American companies, it is overwhelmingly negative for American labor and for our already unbalanced balance of payments, and its net impact is negative for American capital. Also unsettling, as pointed out in a recent article in The New York Times, is the fact that the result of the ongoing shift in technology manufacturing from Taiwan to China will be that "the United States' main supplier of PCs [personal computers] and other info technology gear will be its main strategic adversary.''

The near term outlook for the U.S. economy is very uncertain. American industry's 2001 earnings are plunging 20% to 30% depending on how one factors in restructurings. (Definition of restructuring: the CEO says, "The dog ate my homework last year, teacher, and it cost my stockholders a fortune.'') It is clear to us that expectations remain too high and shareholders maintain a certain complacency about the safety of their capital. Perhaps given a rearview mirror approach, the most important reason for complacency is that "old economy'' stocks as a sub-group of the S&P 500 are selling near an all time high and even the average technology stock is selling at almost twice its January 1998 price. Moreover, anyone who simply bought an S&P 500 index fund in 1991 would now have over three times his or her original investment. Not bad!

However, we suspect the climate is changing. Stocks are down 19% since the beginning of the Millennium. Earnings may be reverting to some norm in the wake of the Wall Street-funded technology boom in capital expenditures. We believe that stocks as a group are generously valued at about 28 times current earnings, even when low interest rates are considered. We are confident that our economy is basically sound and that the current slowdown will end, but unlike the Wall Street strategists on CNBC we haven't the slightest idea when that will occur. We are also confident that we will find some attractive stocks to buy with our substantial cash reserve but at the present moment we are finding little of interest. We will be patient and wait until we find stocks we believe will offer above average returns. Meanwhile we expect our present holdings to provide us with a decent return over the next five years. It is a time to look forward and not backward, and plan carefully for the future. If you think you will need money in the next few years for tuition, to buy a home or just as a reserve for the unforeseen, we suggest you maintain that amount in U.S. Treasuries with a maturity of perhaps two to four years. It's the mature thing to do.

Sincerely,

Carley Cunniff
Executive Vice President		 Richard T. Cunniff
Vice Chairman
Robert D. Goldfarb
President		 William J. Ruane
Chairman
August 17, 2001

SEQUOIA FUND, INC.
Schedule of Investments
June 30, 2001 (Unaudited)

COMMON STOCKS (77.24%)

Shares

 Cost Value
(Note 1)
BANK HOLDING COMPANIES (13.28%)
8,710,393 Fifth Third Bancorp $87,194,981 $523,059,100
243,300 Mercantile Bankshares Corporation 2,547,217 9,520,329
89,742,198 532,579,429
CHEMICAL PRODUCTS (0.46%)
1,030,700 MacDermid Inc 26,961,830 18,552,600
DIVERSIFIED COMPANIES (34.03%)
19,661 Berkshire Hathaway Inc. Class A* 157,992,830 1,364,473,400
ELECTRONIC PRODUCTS (1.01%)
1,355,000 Molex Inc. Class A 38,929,333 40,406,100
HOME FURNISHINGS (1.96%)
2,414,000 Ethan Allen Interiors, Inc.† 61,511,689 78,455,000
INSURANCE (8.20%)
2,430,500 Progressive Corporation 81,538,669 328,579,295
LAUNDRY SERVICES (0.48%)
414,400 Cintas Corporation 11,070,348 19,166,000
MANUFACTURING (3.80%)
3,087,350 Dover Corporation 109,217,300 116,238,728
500,000 Harley Davidson, Inc. 3,282,441 23,540,000
193,300 Illinois Tool Works 10,197,580 12,235,890
122,697,321 152,014,618
PERSONAL CREDIT (2.55%)
1,532,200 Household International, Inc. 19,301,397 102,197,740
PROCESS CONTROL INSTRUMENTS (0.37%)
263,700 Danaher Corporation 9,877,812 14,767,200
RACETRACKS (1.06%)
1,015,300 International Speedway Corp. Class A 32,739,003 42,642,600
RETAILING (6.27%)
7,893,800 TJX Companies, Inc. 170,148,431 251,575,406
Miscellaneous Securities (3.77%) 134,498,318 151,175,163
TOTAL COMMON STOCKS 957,009,179 3,096,584,551

Principal
Amount
U.S. GOVERNMENT OBLIGATIONS (22.76%)
$ 89,500,000 U.S. Treasury Bills due 7/12/01 through 8/16/01 89,155,737 89,155,737
625,500,000 U.S. Treasury Notes, 6 1/8% due 12/31/01 624,414,761 633,123,281
187,500,000 U.S. Treasury Notes, 6 3/8% due 01/31/02 187,267,834 190,341,797
TOTAL U.S. GOVERNMENT OBLIGATIONS 900,838,332 912,620,815
TOTAL INVESTMENTS (100%)†† $1,857,847,511 $4,009,205,366
†† The cost for federal income tax purposes is identical.
* Non-income producing.
† Refer to Note 6.

The accompanying notes form an integral part of these Financial Statements

SEQUOIA FUND, INC.
Statement of Assets and Liabilities
June 30, 2001 (Unaudited)

ASSETS:
     Investments in securities, at value (cost $1,857,847,511) (Note 1) $4,009,205,366
     Cash on deposit with custodian 1,130,067
     Receivable for investment securities sold 4,598,421
     Receivable for capital stock sold 493,190
     Dividends and interest receivable 26,463,095
     Other assets 28,164
           Total assets 4,041,918,303
LIABILITIES:
     Payable for capital stock repurchased 115,211
     Accrued investment advisory fee 3,293,535
     Accrued other expenses 124,671
           Total liabilities 3,533,417
Net assets applicable to 32,588,698 shares of capital stock outstanding (Note 4) $4,038,384,886
Net asset value, offering price and redemption price per share $123.92

The accompanying notes form an integral part of these Financial Statements.

SEQUOIA FUND, INC.
Statement of Operations
Six Months Ended June 30, 2001 (Unaudited)

INVESTMENT INCOME:
     Income:
          Dividends:
               Unaffiliated companies $6,786,898
               Affiliated companies (Note 6) 193,120
          Interest 29,522,492
          Other Income 13,895
                    Total income 36,516,405
     Expenses:
          Investment advisory fee (Note 2) 19,347,670
          Legal and auditing fees 74,551
          Stockholder servicing agent fees 190,239
          Custodian fees 40,000
          Directors fees and expenses (Note 5) 87,037
          Other 99,503
                    Total expenses 19,839,000
     Less expenses reimbursed by Investment Adviser (Note 2) 417,000
                    Net expenses 19,422,000
                    Net investment income 17,094,405
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
     Realized gain on investments:
          Unaffiliated companies 40,812,389
                    Net realized gain on investments 40,812,389
     Net increase in unrealized appreciation on:
          Investments 76,894,701
                    Net realized and unrealized gain on investments 117,707,090
Increase in net assets from operations $134,801,495

The accompanying notes form an integral part of these Financial Statements.

SEQUOIA FUND, INC.
Statements of Changes in Net Assets

Six Months
Ended
6/30/01
(Unaudited)		  

Year
Ended
12/31/00
INCREASE IN NET ASSETS:
     From operations:
          Net investment income $17,094,405 $44,997,211
          Net realized gain 40,812,389 942,243,845
          Net increase (decrease) in unrealized appreciation 76,894,701 (315,156,819)
               Net increase in net assets from operations 134,801,495 672,084,237
     Distributions to shareholders from:
          Net investment income (484,103) (45,137,144)
          Net realized gains (74,376,108) (761,659,017)
          Capital share transactions (Note 4) 34,564,718 181,707,472
               Total increase 94,506,002 46,995,548
NET ASSETS:
     Beginning of period 3,943,878,884 3,896,883,336
     End of period $4,038,384,886 $3,943,878,884
NET ASSETS CONSIST OF:
     Capital (par value and paid in surplus) $1,832,425,461 $1,794,951,606
     Undistributed net investment income 16,649,762 39,460
     Undistributed net realized gains (Note 3) 37,951,808 74,424,664
     Unrealized appreciation 2,151,357,855 2,074,463,154
          Total Net Assets $4,038,384,886 $3,943,878,884

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. 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 accounting principles generally accepted in the United States 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. 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, 2001 and the Investment Adviser reimbursed the Fund $417,000.

For the six months ended June 30, 2001, there were no amounts accrued to interested persons, including officers and directors, other than advisory fees of $19,347,670 and brokerage commissions of $53,740 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, 2001.

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, 2001 were $175,328,462 and $138,149,322, respectively. Included in proceeds of sales is $3,446,770 representing the value of securities disposed of in payment of redemptions in-kind, resulting in realized gains of $2,909,137. As a result of the redemptions in-kind, net realized gains differ for financial statements and tax purposes. These realized gains have been reclassified from undistributed realized gains to paid in surplus in the accompanying financial statements.

At June 30, 2001 the aggregate gross unrealized appreciation and depreciation of securities were $2,159,767,085 and $8,409,230, respectively.

NOTE 4—CAPITAL STOCK:

At June 30, 2001 there were 100,000,000 shares of $.10 par value capital stock authorized. Transactions in capital stock for the six months ended June 30, 2001 and the year ended December 31, 2000 were as follows:

2001 2000
Shares Amount Shares Amount
Shares sold 495,382 $ 59,124,719 715,998 $ 90,211,693
Shares issued to stockholders on reinvestment of:
     Net investment income 2,861 342,056 184,579 22,203,418
     Net realized gains on investments 548,304 65,549,783 5,443,920 654,982,903
1,046,547 125,016,558 6,344,497 767,398,014
Shares repurchased 761,161 90,451,840 4,659,821 585,690,542
Net Increase 285,386 $ 34,564,718 1,684,676 $181,707,472

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, 2001 was $87,037.

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, 2001 aggregated $78,455,000 and $61,511,689, respectively. The summary of transactions for each affiliate during the period of their affiliation for the six months ended June 30, 2001 is provided below:

Affiliate

 Purchases Sales Realized
Gain		 Dividend
Income
Shares Cost Shares Cost
Ethan Allen Interiors, Inc. — — — — — $193,120

NOTE 7—The interim financial statements have not been examined by the Fund's independent accountants and accordingly they do not express an opinion thereon.

NOTE 8— FINANCIAL HIGHLIGHTS:

Six
Months
Ended
June 30,		 Year Ended December 31,
2001 2000 1999 1998 1997 1996
Per Share Operating Performance (for a
     share outstanding throughout the
     period)
Net asset value, beginning of period $122.09 $127.27 $160.70 $125.63 $88.44 $78.13
Income from investment operations:
Net investment income 0.52 1.66 0.84 0.39 0.08 0.38

Net realized and unrealized gains
     (losses) on investments

 3.63 23.33 (26.83) 43.07 38.10 16.41
          Total from investment operations 4.15 24.99 (25.99) 43.46 38.18 16.79
Less distributions:
Dividends from net investment income (0.02) (1.66) (0.85) (0.37) (0.08) (0.38)
Distributions from net realized gains (2.30) (28.51) (6.59) (8.02) (0.91) (6.10)
          Total distributions (2.32) (30.17) (7.44) (8.39) (0.99) (6.48)
Net asset value, end of period $123.92 $122.09 $127.27 $160.70 $125.63 $88.44
Total Return 3.5%† 20.1%

-16.5%

 35.3% 43.2% 21.7%
Ratios/Supplemental data
Net assets, end of period (in millions) $4,038.4 $3,943.9 $3,896.9 $5,001.9 $3,672.6 $2,581.0
Ratio to average net assets:
     Expenses 1.0%* 1.0% 1.0% 1.0% 1.0% 1.0%
     Net investment income 0.9%* 1.2% 0.6% 0.3% 0.1% 0.4%
Portfolio turnover rate 9%* 36% 12% 21% 8% 23%
† Not annualized
* Annualized

SEQUOIA FUND, INC.
767 Fifth Avenue, Suite 4701
New York, New York 10153-4798
Website: www.sequoiafund.com

DIRECTORS

William J. Ruane
Richard T. Cunniff
Robert D. Goldfarb
Carol L. Cunniff
Vinod Ahooja
Francis P. Matthews
C. William Neuhauser
Robert L. Swiggett
Roger Lowenstein

OFFICERS

William J. Ruane — Chairman of the Board
Richard T. Cunniff   — Vice Chairman
Robert D. Goldfarb — President
Carol L. Cunniff — Executive 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
MF Custody Administration Department
100 Church Street,10th 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
One Battery Park Plaza
New York, New York 10004

 

This report has been prepared for the information of shareholders of Sequoia Fund, Inc.