Portfolio Manager Perspectives

Jeff Benjamin

Oil rocketing Russia to top of fund manager's picks

Milev says rise in price of crude boosting country to No. 1 choice among emerging European markets

Apr 8, 2011 @ 2:45 pm

By Jeff Benjamin

The turmoil unfolding across parts of the Middle East has played directly into the hand of portfolio manager Vladimir Milev, manager of the Metzler/Payden European Emerging Markets Fund (MPYMX).

Mr. Milev, who focuses on 10 European emerging markets-countries in managing the $190 million fund, is currently 40% allocated to Russia, the world's largest non-OPEC exporter of oil.

“There has been some recognition that this [European] region is well-positioned for an environment like right now,” he said. “Since the start of the year, we've seen a fair amount of bad news, which has driven oil prices to a substantial rally.”

The portfolio of roughly 75 stocks will likely always be at the mercy of what happens in Russia, which is the largest of the European countries Mr. Milev is tracking.

As recently as 2008, in the midst of the global financial crisis, the fund was more than 60% weighted in Russian stocks.

The current appeal is the result of the steady rise in the price of oil — a rise that has yet to reach the point where it could lead to a slowdown in demand. Such a slowdown is exactly what happened in the United States in 2007 when gasoline prices exceeded $4 per gallon.

“Russia has really been the story over the last couple of months,” Mr. Milev said. “With the elevated oil prices, the big Russian oil majors will make money and the Russian budget looks good.”

Beyond Russia, Mr. Milev's market for stocks drops down to the smaller nations of Poland, Turkey, Hungary and the Czech Republic.

In terms of investing, he will buy on the local exchanges where possible, but investments in these countries is often limited by liquidity and transparency concerns, he said.

“In some of the smaller markets, there are only a couple of stocks that meet our screens,” he said.

In terms of the outlook for emerging markets, which generally have experienced a strong rally over the past few years, Mr. Milev said emerging Europe is still the most attractive region for emerging investments.

“In emerging Europe, there is no visible problem, from a valuation perspective, compared to the emerging markets in Asia or Latin America,” he said. “Emerging Europe is also fair to cheap, versus the historical averages over the past five- and 10-year periods.”

With a price-to-earnings ratio of 8, he said, emerging Europe is below its five-year average of 9.

Emerging markets, overall, are sporting a P/E of 11.5, which is equal to the broader category's five-year average.

But hard numbers mean very little when investors start getting nervous, he said.

“This region is very dependent on risk perception,” he said. “We know that whenever there's a broad risk-aversion trade, emerging Europe is at the top of the list of what to sell, and that drives performance down.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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