Warren Buffett once described his investment philosophy by saying: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”
But while it is distressing to watch the value of one of your portfolio holdings fall to zero, what must be even more difficult is watching a company you built up over many decades collapse just a couple of years after you handed over the reins to your successor.
This is the fate that befell the late Lord Weinstock, who took charge of the General Electric Company in 1963, transforming it from a telecommunications firm with a turnover of £135m to a global company with profits of £1bn in 1996.
Lord Weinstock was famous for his control of costs and dislike of corporate profligacy, instilling a puritanical ethic throughout his business – an obituary in The Independent quoted a senior GEC executive who said: “The higher you went, the fewer privileges you had.” As a result, the company had £3bn in cash when he retired in 1996.
Yet while the company was in a healthy position at this point, a series of disastrous acquisitions made by Lord Weinstock’s successor at the height of the dotcom bubble led to a collapse in GEC’s share price and it eventually folded.
James Harries (pictured), manager of the Trojan Global Income fund, said this experience is what shaped the strategy of Lord Weinstock’s next venture: Troy Asset Management.
“For him to see his life’s work go up in smoke that quickly once he relinquished control must have been agonising,” he said.
“And the lesson from this is that if you lose patience, discipline and perspective, it can be very damaging to capital.
“The reason we tell that story is that is the context in which Troy was established. When Lord Weinstock and Sebastian Lyon set it up, the message was very much ‘don’t lose it’.”
As a result, all of Troy’s funds pay little attention to their benchmark and focus instead on preserving capital through holding quality businesses that have strong balance sheets and deliver a high return on equity.
Harries pointed out the benefit of this approach is that even if a business’s share price fluctuates on the stock market, if it inherently compounds capital, “it will compound its way out of trouble”.
And he said it is particularly relevant in an income context.
“When you’re compounding capital and you’re building capital when you’re young, volatility is your friend, because you can buy assets cheaply,” the manager added.
“But when you’re drawing down capital and you’re dependent upon capital, which is irreplaceable, then volatility is your enemy. Obviously, most people investing for income are in that position, so producing an excellent risk-adjusted return – not just the return you generate, but what risk you are taking and what volatility you demonstrate by doing that – really matters.”
The benefits of this approach have been plain to see this year. The Link Dividend Monitor said 45 per cent of UK-listed businesses cancelled or postponed dividends in 2020.
However, just two companies in Harries’ portfolio cut their payouts, and the manager said in both cases the action was taken as a precautionary measure.
“Intercontinental Hotels cancelled its dividend, but we thought it was a very sensible thing to do,” he continued.
“Rather remarkably, even in the teeth of the problems in March, Intercontinental Hotels Group was cashflow positive, which reminds you of what a good business it is.
“It has been a great high-quality global income stock for years and it will be again. As soon as things normalise, then the dividends will come back and it will be a fantastic asset.
“The other one we had was Domino’s Pizza, which suspended its dividend not unreasonably given in many parts of the world, it was actually shut down.
“In the UK, it was allowed to continue to deliver and it turned out people actually quite liked eating pizza in lockdown and it did very well during that time. It reinstated the dividend, albeit slightly worse than before.”
The downside to Troy’s safety-first approach is that during periods when the market surges, its funds tend to underperform.
We are currently in such a period, with positive vaccine news leading to a rally in many of the stocks hit hardest in this year’s crash.
But Harries said it is impossible to predict how long this period will last, meaning the best course of action is to ignore what the rest of the market is up to.
“Fundamentally, what we ultimately believe at Troy is it is a mistake to sell what we think are high quality, well financed, high return-on-capital-employed, long-term and resilient businesses to heed the siren call of buying cheaper businesses, which get slightly less cheap, then move on.
“Because that leads you into investing in what are inherently financially unproductive businesses. And that is just not something we do,” he finished.
Data from FE Analytics shows Trojan Global Income has made 30.6 per cent since launch in November 2016, compared with gains of 52.54 per cent from the MSCI World index and 27.54 per cent from the IA Global Equity Income sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £411m fund has ongoing charges of 0.93 per cent and is yielding 3.01 per cent.