Remaining style-agnostic and hunting for opportunities in every market, despite general negative sentiment, is the most efficient way to deliver stellar long-term returns, according to James Milne (pictured). 
The manager, who runs the CRUX European and CRUX European Situations funds alongside FE Alpha Manager Richard Pease, has adopted a staunch bottom-up stock selection process for a number of years, including when he was managing equities at Henderson.
This methodology often divides the crowd – while some investors prefer to focus only on company fundamentals and individual stocks, others believe it’s important to focus on overarching macroeconomic themes in order to minimise vulnerability to global headwinds.
Markets have experienced heightened volatility over the last year or so as a result of nervousness surrounding China’s slowdown, plummeting commodity prices and a lack of faith in central banks’ abilities to fend off reaching an unfavourable point in the economic cycle.
As a result of investors selling out of assets during times of unrest and buying back in when the macroeconomic situation appears brighter over the immediate term, markets across the globe have been choppy and sideways since the start of 2015, as shown in the graph below.
Performance of indices since 2015
Source: FE Analytics
However, a number of investors believe that herd mentality swaying market behaviour is often more harmful than the global headwinds themselves.
In an article published earlier this year, THC Partners’ Cato Stonex told FE Trustnet that crowd psychology has been the biggest factor over the last year in terms of causing market volatility, warning that bearishness often results in self-fulfilling prophecy.
“I think there’s a little funk in capital markets, and capital markets and investors are all about uncertainty. We had a taper tantrum two or so years ago when there was first talk of raising interest rates, and obviously the Fed raised rates in December and people are not quite sure how to see that,” he said in February.
“It’s psychological. People really hate to be on their own. They like to do what everybody else is doing, and so crowd psychology is a big thing in markets.”
Not only does Milne say that focusing on bottom-up fundamentals can block out this short-term market noise, he points out that investors place less limits on themselves and therefore have a better likelihood of finding attractively-valued opportunities.
Despite the fact that the MSCI Europe ex UK index is one of the only major markets to be on a loss year-to-date, the manager says that there are plenty of individual stocks in the region which have attractive fundamentals and have been overlooked by investors.
Performance of indices in 2016
Source: FE Analytics
“Most people probably think that there isn’t much growth in Europe, regulation is high, labour is inflexible but it’s a good place for holidays. But actually it’s amazing how you can be very excited about owning certain stocks in Europe even if the European economy is not looking great,” he said.
“There are quite a lot of reasons for that – the first one is that the companies are generally global. There’s a lot of exposure to North America, with stocks like [Dutch publishing company] Wolter Kluwer, for instance, gaining half of their sales from the US.”
“There are loads of companies where, if you were to have a picture of the world, the whole thing is covered. In a way, as long as the global economy is growing, then obviously there’s growth coming through for these companies.”
An area the manager is particularly positive towards – which he is accessing through European stocks – is emerging markets, which he says many investors with a top-down view are likely to veto.
“You might think, ‘have you not been reading the headlines this year?’ But for example, we invest in a company in the European fund called Huhtamaki – if you ever have a Costa coffee cup they’re always made by this company,” he continued.
“Brazil was in a strong recession, but Huhtamaki grew by about 5 per cent in Brazil in a really bad quarter because obviously there is demand for coffee shops, even in a recession. It’s sort of piggy-backing on the thought that more people go to coffee shops everywhere in the world now.”
“That’s an example where in emerging markets, just because there’s a recession on, it doesn’t mean that there aren’t areas of structural growth.”
Another factor that Milne says is good to look for is bolt-on acquisitions, as he points out that this can add an excess 5 to 10 per cent of growth to a stock each year.
Other bottom-up factors that he says can indicate attractive opportunities include finding companies with a high dividend yield despite sound underlying fundamentals, potential turnaround stories and looking for firms that make seemingly insignificant yet irreplaceable products such as lock company Assa Abloy or Swiss flavourings manufacturer Givaudan.
“This is why we can be excited about companies in Europe even if the region isn’t doing that well,” he explained. “In general, a good economy always helps, but it’s not like we’re always making a bet, for instance, that ‘this company used to sell a million bricks per year in 2006 and it now sells half a million bricks, but it will probably go back to a million one day so it’s a buy’.”
“What tends to happen is that brick company that got half the sales is always valued as if it’s making 700,000 bricks – that would be the normal valuation and it might never get there.”
“As Richard [Pease] says it’s always about time passing rather than timing because it’s very difficult to work out whether you should buy a stock within a week or last week.”
“To some extent the market is very efficient in the short term, but what it isn’t very good at doing is looking at the long term and indicating which stocks have the good qualities to look at - the good management, the good business, the structural growth, so that’s where the big arbitrage we’re using is working through the long-term.”
Since Milne joined the CRUX team as co-manager on both funds in 2015, he has outperformed his peer group composite by 3.87 percentage points with a total return of 2.74 per cent.
Performance of Milne vs composite since CRUX
Source: FE Analytics
CRUX European has a clean ongoing charges figure of 0.88 per cent and CRUX European Special Situations has a clean ongoing charges figure of 0.84 per cent.
