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P&R Exec Bullish on Emerging Markets: Fixed-Income Manager Gets On the Ground' to Uncover Opportunity


At a time when even hedge fund managers are settling in for a prolonged period of sporadic, unpredictable growth, Kristin Ceva, senior vice president and director of emerging markets fixed income strategies at Payden & Rygel remains a maverick.

Ceva maintains that emerging markets will continue to deliver steady growth, primarily through government debt. The Los Angeles investment manager, which oversees a total of $54 billion in assets with about $800 million in emerging markets, has also seen its flagship Payden Emerging Markets Bond Fund deliver strong annualized returns of 14.5% since its launch in 1998.

Ceva recently spoke with Money Management Executive Editor Lee Barney about the corners of the globe where she sees the greatest promise.

Money Management Executive: When you begin putting together your portfolios, either for retail or separately managed accounts, where do you start?

Kristin Ceva: Looking at different countries around the world for the most attractive investing opportunities, we primarily focus on sovereign debt markets. But we also get involved in some corporate bonds, as well. Emerging market countries often issue dollar-pay bonds, which are called hard-currency bonds, although we also invest in local currency bonds.

MME: How many emerging markets products does Payden & Rygel offer?

Ceva: On the fixed-income side, we have the Payden Emerging Market Bond Fund, on the equity side we have a Metzler Payden European Emerging Markets Bond Fund. We have a joint venture with Metzler Bank through which we offer Metzler Payden funds.

And then we run separate account, institutional money in a number of different strategies. We use emerging markets in many of our global bond portfolios. We can use emerging markets in what we call our core plus strategies, in which you are using both high yield and emerging markets as your "plus" sectors to your "core" fixed income allocation.

And we also integrate emerging markets in both our low-duration and high-grade accounts, the latter of which are investment grade only, because among emerging market countries, there are many that are investment grade these days.

MME: While the emerging markets sector of the fixed income market has grown tremendously over the past decade, is its momentum dwindling?

Ceva: We would answer that it is not. Certainly, you are not going to see the same type of returns as you would in the past, but in emerging markets, it's not just the dollar-pay debt, because now you are also looking at local markets where you can earn additional yield. We are also looking at corporate rates earning additional yield, and we've also increased equities in our portfolios. Eastern European equities, for instance, have done extremely well.

Because of the improving fundamentals and improvement in economic and political reforms in these convergence plays, we believe ongoing changes in economic institutions will continue to propel emerging markets fixed income.

MME: What about regional unrest?

Ceva: If you look at some of what has sparked trauma or turbulence in emerging markets, it's often been political changes in administration. I think what Payden & Rygel looks at now is fission. We look at the strength of a country's political and economic institutions in order to determine how traumatic political events may become. Strong institutions, like being a member of the EU or NAFTA, or having independent or autonomous central banks, having gone through previous political transitions smoothly, or having gone through the process of privatization - all of these things make it more difficult now for a new administration or change in government to throw things off course or reverse things completely. So, we are not deterred. In fact, I see lots of opportunities still existing in emerging markets.

MME: Why do you like the macroeconomic situation in Russia when capitalism there has clearly failed to take off and many businesses continue to be corrupt?

Ceva: There definitely are reasons to be negative about Russia, but you have to look at Russia a little bit differently on the sovereign side. When I meant investing in government bonds versus the corporate or equity side, there's really a difference between the macro picture and the micro picture. On the macro side, you have continual upgrades from the rating agencies. Right now, Russia is a triple B minus equivalent across the board. It's been continually improving from single B back in 1998, and is expected to continue to improve, so it's an upgrade story.