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Alex Stanic predicts international markets will remain tricky over the coming months, but insists it is still possible to generate decent returns because there are plenty of undervalued stocks available.

The manager of the £528.5m Newton Global Opportunities fund, who has been at the helm since its launch in July 2005, is focusing his attention on companies that are likely to prosper in such volatile conditions.

“It is a very good environment for active managers and that really suits our stock-picking abilities,” he says. “There is no doubt there are cheap stocks out there but the question is how quickly they will give you positive returns.”

The aim of the fund is to achieve long-term capital growth from a concentrated portfolio of international stocks. Unconstrained by index weightings, sectors or company sizes, it has the flexibility to buy only the highest conviction ideas.

“We are trying to find undervalued stocks, with strong fundamentals that are likely to benefit from our themes,” explains Mr Stanic. “The fund is driven by what we believe are the best investments on a global basis.”

This is one of the principle benefits that a truly international fund has over a domestically-focused portfolio, he points out. It is unlikely to be distorted by the presence of a handful of big companies.

“The opportunity to invest in companies anywhere is tremendously exciting as there is always something interesting to buy,” he explains. “We have the flexibility to find stocks that enter the fund on their own merits and not just because of their size.”

Investment themes, as previously mentioned, play an important role in portfolio construction.

“We use them as a backdrop to how we view the world and they are there to incorporate anything that is relevant as they can point us towards an inflexion point,” he says. “This includes macro-economic data and specific industry trends.”

One active theme is “networked world”. This focuses on the increased use of communications networks, such as mobile phones, in areas of the world that do not have a proper fixed-line network.

“You tend to find there is a better margin opportunity for that mobile phone network provider and less competitive threats,” explains Mr Stanic. “People will spend out on these mobiles because there is not an alternative.”

This is why telecommunications has the largest industry-specific weighting in the portfolio, at 28 per cent. The next largest are financials and basic materials which each account for around 15 per cent.

“We believe telecoms companies will be beneficiaries of this theme as well as being very cheap stocks,” he adds. “The great majority have a good dividend-yield paying ability and do not tend to be overly leveraged.”

One stock benefiting from this theme is Millicom, which provides prepaid cellular telephony services to 20m customers in 16 emerging markets across Latin America, Africa and Asia.

“It has been a fantastic performer and is a classic global stock as it is domiciled in Europe and quoted in the United States, but does not have business in either,” explains Mr Stanic. “It is in markets with low penetration and rapid growth.”

Although his approach to portfolio construction is very much bottom-up, he also keeps one eye on the macro-economic factors around the world.

Being able to tap into the resources at Newton also helps. “We have a team of industrial, career analysts who look at their sectors on a global basis,” he explains. “We work closely with them to root out ideas and they are very important.”

On the sell side, a stock will usually be cut when there is a change in either the investment case or in his expectations for the company.

“Sometimes stocks appreciate incredibly quickly and other times you need greater patience,” explains Mr Stanic. “Also, if a stock becomes too expensive versus our expectations, then that would trigger a pretty active review discussion.”

Turnover varies but has been as high as 100 per cent. “We have no problem selling stocks which have not worked or in which the investment case has changed,” he says. “Typically over half the names stay consistent but we will be active around a position in the stock.”

The biggest change over the past few months has been increasing the exposure to the healthcare sector, which includes both pharmaceuticals and medical technology stocks. As a result, the weighting has increased from 1.5 per cent to 11 per cent.

“This has been driven by a combination of the increasing needs of ageing western populations and the fact emerging markets have been able to consume more healthcare products,” he explains. “Pharmaceuticals had been under a lot of pressure, but valuations have become cheaper and have started to look attractive.”

For example, Roche is now a very substantial holding in the fund, while other positions include Smith & Nephew, which he views as cheap compared to its growth prospects, as well as having a good product range.

Mr Stanic hopes that exposure to such names will help maintain the fund’s track record. “We are very pleased with our performance over the first three years and it has not been driven by any single sector,” he says. “It is a diversified portfolio of global stocks across different geographies and sectors. Our goal is to keep finding those good ideas and keep generating performance for investors.”