Metzler/Payden’s Milev: Less developed parts of Europe still good bets

It would be a mistake to assume that the economic woes facing Greece are reasons to avoid investing in some of the less developed parts of Europe, according to Vladimir Milev, manager of the Metzler/Payden European Emerging Markets Fund Ticker:(MPYMX).
“Given all the noise that is coming out of Europe right now, the Eastern European region is surprisingly healthy,” he said.
Although Mr. Milev said that there is a “little contagion” spreading to Eastern Europe, it isn’t the same set of concerns related to swelling budget deficits and debt-servicing challenges that some developed European nations face.
“That surprises a lot of people who expect emerging Europe to be in worse shape than the developed countries,” he said.
The $200 million fund, a product of Metzler/Payden LLC, gained more than 101% last year, largely by more than doubling its allocation to Russia, to 60% of the fund.
The fund’s Russian exposure has since dropped down to about 35%, but this is the kind of ride that investors should expect.
In 2008, the fund declined by 66% in what Mr. Milev described as a frustrating and illogical period for emerging markets.
“From our perspective, as a fundamental investor, there was no reason to sell our positions,” he said. “Most of the time, an emerging-markets sell-off is because of a problem that originated in the emerging markets, but 2008 was different because it developed outside of the emerging markets.”
During the five-year period prior to 2008, the fund’s annual returns ranged from a low of 28.5% in 2007 to a high of 53.2% in 2004.
“For the past five or six years, we’ve been investing in the process of catch-up by Eastern Europe of Western Europe, and that hasn’t changed,” Mr. Milev said.
His outlook for emerging Europe remains bright, but guarded.
At the start of the year, Mr. Milev’s 2010 economic growth forecast for most emerging European countries was between 3% and 4%, while consensus analysts’ estimates were below 2%.
“Now, the consensus estimate is converging in our direction, because the story that has driven the region is the convergence with Western Europe,” Mr. Milev said.
He concedes that over the medium to longer term there will be uncertainty as to whether emerging Europe can avoid being pulled down by further troubles in the developed markets.
“Some economies will be more linked to Western Europe through trade,” Mr. Milev said, listing the Czech Republic, Hungary and Slovakia as examples.
“But Poland is not as dependent on a Western European recovery,” he said. “If you’re concerned about Western Europe right now, Poland would be a good place to hide.”

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