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Payden Fund Scours Emerging Markets

(Editor's note: TheStreet today named 111 mutual funds and exchange traded funds, or ETFs, winners and runners-up in its first annual awards ceremony. A list of the funds and related articles can be found on the awards page.)

NEW YORK (TheStreet) -- Worried that rising interest rates could punish bonds, investors have been dumping some fixed-income funds in recent months. During the first quarter of this year, intermediate-term bond funds had outflows of $4.8 billion, while intermediate-term government funds lost $5.9 billion.

But not all bond funds have lost assets. Among the gainers are emerging market bond funds, which have attracted $2.5 billion. Solid returns have been attracting investors. During the past three years, emerging bond funds have gained 7.7% annually, compared to a return of 5.8% for the Barclays Capital Aggregate Bond Index.

To participate in emerging markets, consider Payden Emerging Markets Bond (PYEMX). In the three years through Dec. 31, the fund returned 9.3% annually. Taking into account lower-than-average risks, the fund won TheStreet's 2011 Best Mutual Fund award in the fixed-income emerging markets category. This year, Payden Emerging Markets Bond is up 1.1%. The runner-up is TCW Emerging Markets Income Fund (TGEIX).

Kristin Ceva: buying big in Brazil and Russia

Payden portfolio manager Kristin Ceva says part of what is drawing investors has been the growing reputation of emerging economies for delivering solid growth. At a time when the U.S. and other developed countries struggle with budget deficits, many countries in Asia and Latin America are on sound financial footing.

The strength of the emerging markets represents a big change from the 1990s, when financial meltdowns plagued Asia and Latin America. "Emerging market debt has matured as an asset class, and that is attracting pensions and other long-term investors who prefer higher-quality investments," says Ceva.

Make no mistake, emerging bonds can still be volatile, lagging the developed world in downturns. To protect shareholders, the Payden manager keeps a close eye on the outlook for the global economy. If clouds appear on the horizon, the fund can take a defensive stance.

Worried about the credit crisis in 2008, Ceva sold shakier bonds, including issues from Argentina, Venezuela and Ukraine. The move limited losses as markets sank. She also shorted emerging market currencies, betting that they would fall against the dollar. The move produced profits when panicked investors dumped emerging currencies and fled to the security of dollar investments. Helped by the successful strategies, Payden outperformed competitors by a wide margin during the downturn.

As the credit markets began steadying in 2009, Payden started buying lower-quality bonds from Ghana and the Dominican Republic. Ceva figured that the second-tier credits had fallen too sharply and were bound to recover as the global economy revived.

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