Russia, Poland Are Big Bets for This Fund Manager

The press is portraying Russia's new president, Dmitry Medvedev, as a puppet of now-Prime Minister Vladimir Putin. But for all the reheated Cold War rhetoric, the market does not seem to mind.

"You often hear that the market hates uncertainty, so politics aside, from an investing standpoint the continuity is good," says Vlad Milev, co-manager of the $525 million Metzler/Payden European Emerging Markets fundMPYMX.

Milev's fund has been a steady performer, returning an average of 40% annually over the past five years. Year-to-date, the fund is down close to 12% as investors globally rein in their riskiest bets.

The fund holds 7% of its assets in oil and natural gas giant Gazprom, which is the company where Medvedev previously served as chairman. Another 5% of the fund is in Russian energy powerhouse Lukoil.

Just because Russia's new boss is a former oil man doesn't mean it's a positive for all drillers. It's likely that international oil producers like BPBP and Royal Dutch Shell will continue to feel the Kremlin's cold shoulder and be frozen out of prime drilling opportunities.

"The government's been pretty consistent in their approach about making energy a strategic sector," says Milev. "Their policy is to bring more production under domestic control and less under foreign ownership. Knowing that, you just have to know where to position yourself so you are not hurt."

Outside of Russia, the fund is positioned heavily in Polish stocks because of the country's positive macroeconomic story and liquid market.

"You have a lot of good companies to choose from in Poland and the valuations are attractive," says Milev. "The consumer sector continues to grow, as does construction and infrastructure." The fund's largest Polish positions are PKO Bank Polski, Bank Pekao and Telekomunikacja Polska, which make up close to 10% of the fund's assets.

Austria, traditionally a gateway country for investors looking to invest in Eastern Europe, is also a prime source of talent for the fund. Milev's top pick is real estate manager Immoeast, which owns valuable properties in Romania and the Czech Republic.

"Immoeast is a company that allows you to get involved in class A office space in Eastern Europe relatively safely," says Milev. "It's important to keep in mind that this is still a volatile area of the world."

It could get choppier if the U.S. economic outlook doesn't improve. Milev believes that the foreign -- and especially developing -- markets still take their cues from Uncle Sam, despite all the talk about a global "decoupling."

"The reality is that we are no longer driven by the strong fundamentals of the countries we've invested in," says Milev. "We are being driven by events and headlines out of the U.S. Until things clean up here and global investors are confident that no major bad surprises are in store for them, investors may avoid our asset class."