Russia's Prosperity Propels European Fund

(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) -- After sinking badly during the credit crisis, Russian markets have been on a tear.

With oil prices climbing and credit markets unfreezing, Russian stocks have risen fourfold since hitting their lows in February 2009. That has provided a big boost for Eastern European Equity(VEEEX), a mutual fund that has 58% of its assets in Russia and the rest in countries such as Poland and Turkey.

Eastern European Equity returned about 9% a year, on average, in the three years through Dec. 31. Such performance, along with mitigated risks, earned it TheStreet's 2011 Best Fund award for the equity emerging market category. Eastern European Equity has gained 8.4% this year. The runner-up was DFA Emerging Markets Small-Cap(DEMSX).

Pascal Curtet: Go for Gazprom, not Exxon Mobil.

Can Eastern European stocks continue climbing? Yes, argues Pascal Curtet, the veteran money manager who oversees the fund from his base in Switzerland. Rising oil prices are helping Russia, and consumers are back in the stores throughout the region. Demand from the growing German economy is boosting sales of commodities and manufactured goods. Curtet expects that Eastern European gross domestic product will grow more than 4% this year. "Industrial production is accelerating, and domestic sales are also recovering," he says.

Despite the strong economic outlook, Russian stocks remain cheap, says Curtet. The price-to-earnings ratio for the Russian market is about 6, less than half that for emerging markets in Asia and Latin America. Investors remain wary of Russian stocks because of concerns about political instability and widespread corruption. The problems are real enough, but the discounts on Russian stocks are excessive, says Curtet.

As an example of a cheap stock, he cites Gazprom(OGZPY), a giant Russian producer of natural gas. The company has a market value of $194 billion, compared with $416 billion for Exxon Mobil(XOM), the largest U.S. energy company. Although the Russian producer commands a smaller price, it has energy reserves that are the equivalent of 10 times the figure for Exxon Mobil, says Curtet.

Recent problems in the Mideast could work to benefit Russian stocks, he says. Since the uprisings began in Tunisia, revenues have risen sharply for Russian producers of oil and gas. That has boosted the entire economy, including banks and consumer companies. If political uncertainty persists, Russian energy companies could gain new clout, serving as stable alternatives to erratic Middle Eastern producers.