How Valeant's epic stock meltdown could chill your retirement
Valeant Pharmaceuticals' (VRX) plunging stock price and its accounting problems may have captured the brief attention of America's workers. But the drugmaker's woes could hit some harder than they realize: in their retirement funds.
Dozens of companies -- including Walt Disney (DIS) -- have offered an investment fund called the Sequoia Fund in their workers' retirement plans, according to The Wall Street Journal. Sequoia, however, may have exposed many of those employees to Valeant's troubles because at one point it had placed almost one-third of its assets in the drugmaker's stock.
Sequoia was one of the most popular investment options in Disney's $5.8 billion investment plan, according to The Journal. It's not hard to see why, at least before Valeant's troubles began: Sequoia is known for its ties to the famed investor Warren Buffett, and its top holdings include Buffett's Berkshire Hathaway (BRK.A).
Because Sequoia has been closed to new investors since 2013, tapping the fund through a retirement plan was one way employees could enjoy the type of hard-to-find access funds like Sequoia have. Some might be ruing that decision now.
Valeant's stock is down more than 80 percent in the past year, and that has also taken a toll on Sequoia's returns. The fund is down more than 25 percent in the past year. The S&P 500 index, by comparison, has declined about 3 percent in the same period.
Sequoia's concentrated holdings in Valeant have also led to legal problems. Shareholders sued the fund earlier this year, alleging that the managers' large position in the drugmaker "represented the antithesis of the Fund's purported value-oriented investment strategy."
Morningstar said last week that it was reviewing Sequoia's gold rating because of its 19 percent stake in Valeant at the end of the year.
"The damage has been so severe because the Valeant position was 28.7% of assets in June 2015 before the share price started falling last August," Morningstar analyst Kevin McDevitt wrote last week, explaining the decision to review the rating.
On Wednesday, Sequoia Fund said its longtime leader, co-manager Bob Goldfarb, will step down from his role and be replaced by co-manager David Poppe.
"While we have beaten the market over the past decade, through the end of 2015, our investment in Valeant has diminished a record that we have built over two generations and in which we take great pride," the company said in a shareholder letter. "We are a loyal, dedicated and intensely driven group, and to the extent that we have lost any of our investors' confidence, we are determined to win it back.
More than 50 401(k) plans hold Sequoia, according to Brightscope, which cited 2014 data from the Department of Labor. The biggest plans include Disney, which held more than $500 million in the fund as of 2014, and the Berkshire Hathaway subsidiary National Indemnity Co., which had more than $100 million invested in Sequoia out of its total $236 million in assets, according to Brightscope.
In its end-of-year letter, Sequoia said it believes "a concentrated portfolio of businesses that has been intensively researched and carefully purchased will generate higher returns with less risk over time than a diverse basket of stocks chosen with less care."
The problem with that strategy is when one of those concentrated positions hits tough times, the whole fund -- and its investors -- will suffer.
Sequoia has been selling Valeant shares, earlier this month getting rid of 1.5 million of them.