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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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