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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
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Get Four
|  | APRIL 1, 2004
Betting on Europe's Emerging Markets Soeren Rytoft, a top strategist for Metzler/Payden Funds, points out that the expanded EU will outstrip the U.S. in GDP and population As many equity markets across the globe swooned in March, Eastern Europe weathered the turbulence fairly well, says Soeren Rytoft, the lead strategist for European and international equity portfolios for Los Angeles-based Metzler/Payden Funds. Rytoft, who was born in Copenhagen and came to the U.S. in 2002, says some of the emerging markets in Eastern Europe, particularly Russia, have been performing better than the U.S. and mainland Europe thanks to surging oil and commodities prices. Through Feb. 29, the Metzler/Payden European Emerging Markets Fund rose 11.2% year-to-date, and surged 67.9% in the last 12 months. BusinessWeek Online's Karyn McCormack recently spoke with Rytoft about his investing approach. Edited excerpts from their conversation follow: Q: How have the European markets been performing vs. the U.S.? A: The European markets performed very well last year -- better than the U.S. Performances were helped not only by good equity performance but also by the strong performance of the euro vs. the dollar. The euro appreciated something like 17% vs. the dollar during 2003. Q: How have the markets fared so far this year? A: We had a downturn in the market starting in mid-March. First, we got some job reports from the U.S. that sparked a bit of concern about the recovery of global economies. And then we had the bombing in Madrid. Investors started looking more for defensive investments, such as fixed income or more defensive equity sectors. The markets found a bottom on Mar. 24 and have started to climb back in the last three days. European markets had been doing better than the U.S. since the beginning of the year, but the returns are not as high now. One positive exception is the Eastern European emerging markets. Our European emerging markets fund didn't see any downturn. The reason is very high prices for high and raw materials. Q: Which countries do you favor most? A: The emerging markets in Europe. It's no more than 14 years ago since borders opened to Eastern Europe with the Berlin Wall coming down. It's a very exciting time for these countries. Q: You oversee five European equity funds. Tell me about the Metzler/Payden European Emerging Markets Fund and why it's doing very well. A: I would take the lead from what I just said about emerging markets, and stick with that. First of all, on May 1, you have 10 new countries entering the European Union. The major ones are Poland, Hungary, Czech Republic, and Slovak Republic -- and those four countries are all members of the European emerging markets. Of course, the status of those countries will change from emerging-market to developed-market countries. It's the best condition that you can get. There's a convergence play of Eastern Europe trading at a very high discount to Western European markets -- we really see opportunities going in and buying some of these countries. Q: Why should Europe be important for U.S. investors? A: First of all, the task is telling U.S. investors about diversification. Admit that you have to do diversification in your portfolio to achieve the best performance over time. So if you do diversification, Europe as a region could definitely be among the ones that you should choose. You have several other ones -- Asia, Japan, Latin America -- to choose from, but Europe could be one of the more interesting ones, based on several facts. Q: What are those facts? A: First of all, you have the same quality as you buy in the U.S. If you look at U.S. stocks and European stocks, they have the same quality. It's very known names. We own known the car manufacturers, like BMW and Mercedes (DCX ), or the luxury groups like Vuitton (LVMUY ). Also, if you look at Europe as a region, Euroland, which is the part of Europe that uses the euro as the currency, is the same size in gross domestic product as the U.S., and it's the same size in population. Now, with the extension of 10 new countries, we're going to see that the European Union is by far, larger than the U.S. It's definitely one of the only developed regions of this size that you can invest in. That's why I believe that Europe is a very important region to diversify into over time. Also, in the economic cycle, you have seen some very good growth numbers in the U.S., and they are coming up in Europe now. So Europe seems a little bit behind, and that leaves some scope for getting additional performance in Europe.
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