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Putin the boot in

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


categorisation.


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


asset class.


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&#39s 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&#39s


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


chips.


It seems that foreign investors are likely to increase their Russian


weighting now that Putin&#39s 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&#39s 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


Europe.


Turkey&#39s attractions as an investment case have inc reased. Further to the


EU&#39s 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


liquidity flows.


Its current account deficit has showed a marked improvement and the market


is likely to attract increased inflows if macroeconomic data shows steady


improvement.


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&#39 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&#39s 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.

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