Fund selection is a crucial aspect of the investment advice process but
the bald facts of relative performance are only part of the story.
A fund manager may be taking more risk in the portfolio than is apparent
from a cursory inspection or the fund may not actually be invested in the
market sector chosen by the investor, highlighting the inaccuracy of fund
At the same time, statistical analysis will not show to what extent the
manager is in control of the portfolio or, for example, how much of the
performance was due to favourable currency movement.
When you are working on asset allocation, an analysis of country
allocation within fund sectors provides a useful guide to fund flows.
It is also an indicator when choosing a regional fund if you want to be
specific about which countries your clients are exposed to and in what
proportion. Naturally, the make-up of portfolios differs but this is not
always apparent from a cursory inspection of the funds available. But do
not be discouraged – there are information sources available to help
advisers cut down on the work they need to do in order to ensure clients
are in the right funds at the right time.
Eastern Europe is an example of an investment sector where one needs to
tread carefully. Investment attention is once again turning east, spurred
in part by the perceived benefits of political stability in Russia and
economic resurgence generally.
While telecoms and other growth sectors were slammed in the recent global
market meltdown, there has been almost no impact on emerging markets as an
Russia has reappeared on the investment horizon earlier than many had
expected, due mainly to a significant reduction in political risk.
Sustained oil price strength has led to enormous domestic liquidity.
For the time being, foreign investors are focusing almost exclusively upon
the blue-chip oil and gas companies. Newly-elected president Vladimir Putin
has the chance to kick Russia's stuttering transformation into gear but
there are some big issues to deal with.
Fund managers who specialise in the region feel it is critical for the new
president to tackle the problem of a lack of corporate governance in order
for sustained progress to be made in the normalisation of the economy.
Russian bulls argue that the market was oversold and that the country's
improving underlying fundamentals were not taken into account. They suggest
that oil and gas – and mining companies, in particular – are likely to
report bumper profits as they reap the benefit of dollar revenues and
rouble costs, as well as sustained global commodity price strength. There
has been some evidence of managers widening their focus on oil and gas blue
It seems that foreign investors are likely to increase their Russian
weighting now that Putin's agenda for the country is being clarified.
Our four favoured funds for investors seeking some Russian spice in their
portfolio include two from the Fleming stable – the open-ended Fleming
Frontier Russia fund and the closed-ended Fleming Russia securities fund.
The third is the Clariden equity Russia fund, managed by Andreas Keller in
Zurich, and Foreign & Colonial's Russian investment company Sicav.
All have produced solid returns and are positioned to benefit should
Russia fulfil some of its promise. For investors looking for a more
diversified portfolio taking in Eastern Europe, including countries like
Turkey and Greece, we recommend Baring Eastern Europe and Fleming emerging
Turkey's attractions as an investment case have inc reased. Further to the
EU's acceptance of Turkey as a future member and the announcement of an
International Monetary Fund package, interest rates plummeted and resulted
in a surge in demand for equities as fixed-income yields fell. From here,
it is unclear what further upside there is as the market would seem to be
at fair value.
As with Greece last year, liquidity remains a key factor and may well
drive the market considerably higher still as domestic investors continue
to move out of fixed-income instruments. The market has fallen back in the
first quarter as optim ism over the pace of reform has waned.
Poland has also benefited from improved global conditions and greater
Its current account deficit has showed a marked improvement and the market
is likely to attract increased inflows if macroeconomic data shows steady
The main concern is that higher industrial production has been driven
primarily by domestic demand, which may well result in interest-rate hikes
in order to dampen consumer spending.
Hungary, as a more open economy than Poland, is also appearing
increasingly on investors' radar screens as the next EU convergence play.
Its improving macroeconomic situation has also served to attract investors.
It appears likely that a significant portion of new inflows into the
region will be allocated to this market.
The smaller markets remained off the investment horizon for the most part
during the great bull run of 1999 but are now finding more favour as
sentiment rotates. It appears that a number of funds are still receiving
strong inflows and the Czech Republic has been a clear beneficiary as
managers continue to shift to a more neutral stance.
Demand in the market focused on telecom stocks such as SPT Telecom
following the government's announcement that liberalisa tion in the telecom
sector would be delayed for two years.
Managers have also continued to revisit smaller markets such as Estonia
and Croatia although this remains on a stock by stock basis, with only a
handful of stocks offering sufficient liquidity.