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Greek default would make 'hardly any difference' to sound shares

Greece defaulting would not suddenly make Unilever a bad firm, say Anthony Cross and Julian Fosh, managers of the Liontrust Special Situations fund.

 
Greek default would make 'hardly any difference' to sound shares

Anthony Cross and Julian Fosh, managers of the Liontrust Special Situations  fund, a pick of Citywire Selection, warn that macroeconomic sentiment should take a back seat to company fundamentals.

Focusing too much on macro is 'dangerous'

Liontrust Special Situations duo Anthony Cross and Julian Fosh have warned that paying too much attention to the macroeconomic backdrop at the expense of treating individual stocks on their own merits can be a 'dangerous' game.

'There are two types of manager: those that believe the macro economy will drive the market up and down and those like us, who look at [stock fundamentals]. Having your judgement on stocks clouded by macro sentiment is very dangerous,' Cross said.

'We think it loses the point about why you buy an entity in the first place. If Greece defaults it does not suddenly make stocks like Renishaw (RSW.L) or Unilever (ULVR.L) bad companies, and on a five-year view, it makes hardly any difference.'

Balanced holdings

The Citywire AAA-rated pair have created what Fosh calls a 'fund for all for all seasons', with the 48-stock fund split roughly evenly between defensive and cyclical growth stocks, meaning those shares whose fortunes are closely tied to the fate of the wider stock market.

Although the pair keep an eye on the macro picture, they do not let it cloud their judgement on which stocks best fit their 'economic advantage ' stock screening criteria.

The process means stocks included have to display at least one of three criteria: intellectual property, strong distribution network or strong recurring revenues.

Performance

The fund was the best performer in the IMA All Companies sector in 2011, returning 7.6% compared with the Hoare Govett Small Cap Excluding Investment Trusts index return of -8.77%.

With two-thirds of the portfolio outperforming in 2011 and a third underperforming, the pair are hoping the 'economic advantage' stock screening process will see some of the more cyclical elements of the portfolio come to the party in 2012.

'We are trying to find stocks with high barriers to entry and long-term sustainable earnings irrespective of the markets,' Cross said.

Missing the peaks

'We have tended to underperform in deep value rallies, so if the banks and other domestic sectors do well we may underperform for a period. We did not cut any of our losers last year which includes quite a few cyclicals like Renishaw,' Cross said.

Other holdings that lagged last year include interdealer brokers Icap (IAP.L) (3% of the portfolio) and Tullett Prebon (TLPR.L) (2%), which, like Renishaw (2.2%), have started the year strongly in the market rally.

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