Optimism is not in fashion with so much geopolitical turbulence and fears over sovereign debt but at least one fund manager says the future is bright – in the emerging economies of Eastern Europe.

Renaissance Asset Managers have a number of funds that gain exposure to the equity markets of Eastern Europe, including those of Russia, one of the perhaps less fashionable BRICs. And Karol Chrystowski, portfolio manager for the Renaissance Emerging Europe Fund and Renaissance Emerging Europe Long-Short Fund, is upbeat.

“Where I think I differ from the market is that the market is in the bearish camp,” he told this publication in a recent interview.

“We take a completely different view: the second half of this year will be a strong bull market, especially in the East European market,” he said, adding that a bull phase will extend for at least another two years, if historical experience is a reliable guide.

“Pretty much every bull cycle lasts about four years; we have in the US a bond yield curve that it is exceptionally steep,” he said, noting that this is typically positive for stocks.

“Valuations [in equities] are not stretched at all, one could argue that equities are the cheapest assets one could buy in the world these days,” he said, pointing out that the S&P 500 index of US stocks is trading at roughly 12-13 times expected earnings at present. Finally, constant bearishness is actually very positive as bull markets of highest quality are built on insecurity. Once investors become consensually confident it will be a big warning signal to start taking profits,” he continued.

His funds are new: The long-only portfolio, launched in October last year, holds around $50 million of client money and is available in a UCITS structure; the long-short hedge fund is still in fund-raising mode, with less than $10 million of assets. The fund is registered in Luxembourg and priced in dollars.

Given the shortness of its life so far, performance data on the long-only fund should be treated carefully. Since inception, it has delivered returns of 14.1 per cent, slightly lagging the benchmark of Morgan Stanley Capital International 10/40 Emerging Europe index of equities. There is, however, plenty of time and opportunity for the fund to deliver out-performance.

Renaissance is by no means the only such fund manager operating in this space and providing porfolios for wealthy clients. Probably one of the best known managers of emerging market funds, with deep experience in Eastern Europe, is Mark Mobius, at Templeton. Other firms with such funds are T Rowe Price, FIM; Ashmore and Jupiter Asset Management. Investors who want to track a broad market index rather than buy an actively run portfolio can hold exchange traded funds, such as the iShares MSCI Emerging Markets Eastern Europe Index Fund.

Macro and micro

Renaissance has advanced macro-economic models to address changes in the global economy. The fund uses a mix of top-down macro economic analysis and bottom-up stock specific analysis, said Chrystowski, who has been at Renaissance for just over a year.

“I may find a very interesting company on a stand-alone basis in terms of valuation, management and prospects but if the top-down model says this country is going to enter a nasty period for some reason, we are unlikely to enter the space. The same works the other way around,” he said.

“The picture we like most is when both arrows are pointing in the same direction - we are prepared then to make decisive bets, regardless what regional benchmark says in terms of weights," he said.

“Where I think we are different from our competitors is that we are aware of the benchmark but we use it more to notice what competitors are doing but we have no problem in departing from that benchmark quite substantially,” he continued.

“The benchmark tends, for reasons of liquidity and size, to be skewed towards larger, liquid stocks at the expense of relatively smaller ones. The problem is that the great majority of those mega caps are concentrated around energy and commodities - industries where performance is a reflection of Chinese investment cycle much more than specific stories and opportunities of Eastern Europe,” said Chrystowski.

“We benefit from the fact that we have a small fund,” he said, pointing out that it is easier for a small fund to play in purely Eastern European growth stories than for a fund over $1 billion or more.

How big could the long-only fund become?

“The long-only fund could reach the region of around $1.0 billion; of course, that could change if the market grows a bit in terms of liquidity and capacity,” he replied.