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Mutual Funds

Targeting Value in Eastern Europe

Right Stocks in Region Grow Quickly, Accolade Manager Says

By Danielle Kost
Bloomberg News
Sunday, April 24, 2005; Page F04

Julian Mayo, whose Eastern European stock holdings have helped his mutual fund outperform all of his U.S. peers since 2000, bought shares of Turkish companies for the first time on optimism the country will join the European Union.

Mayo added shares such as Turkiye Garanti Bankasi AS, the country's third-biggest investor-owned bank, to the U.S. Global Investors Accolade Funds Eastern European Fund in the past four months. The Istanbul-based lender now ranks as the 10th-largest investment in the $650 million mutual fund.

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The possible entry into the E.U., which may be at least a decade away, "cements our view that Turkey is a much-improved economy," Mayo, 43, said in an interview from his office at Charlemagne Capital Ltd. in London. Its economy grew 8.9 percent last year, more than any of the E.U.'s 25 member countries.

Mayo's mutual fund gained at an annual rate of 24 percent in the past five years, ranking first of 38 U.S.-based emerging markets funds tracked by Bloomberg. The fund rose 21 percent in the past 12 months, including reinvested dividends, beating the 17 percent advance of the MSCI Emerging Markets Europe Index.

Istanbul's stock market reached a record in February, two months after E.U. leaders agreed to begin membership talks with Turkey, vowing to promote Turkish economic growth and build a bridge to the wider Muslim world. The Istanbul Stock Exchange National 100 Index climbed 25 percent in the past year.

Turkey has 70 million people and economic output per capita that is 28 percent of the E.U. average. The nation is counting on the entry process to boost investors' confidence and to help reduce unemployment and financing costs on $220 billion in debt.

Mayo must have at least 80 percent of his fund's assets in shares of Eastern European companies. On Jan. 31, he had about 32 percent in Russia, 14 percent in Hungary and 14 percent in Turkey. His biggest holding was OAO Mobile TeleSystems, a Russian provider of telecommunications services, at the end of March, accounting for 9.2 percent of the fund's assets.

Funds with limited investment options and small regional focuses can be "extremely volatile," said Dan Lefkovitz, an analyst at Morningstar Inc., the fund research firm in Chicago.

"We're pretty skeptical of any fund that cuts its universe too narrowly," Lefkovitz said. "As these countries prepare to adopt the euro, they could keep going up, but we think there are better ways of getting international exposure."

Lefkovitz recommends investors seek broader, more diversified international funds. Mayo's fund is particularly risky because so much of its assets are in individual stocks such as Mobile TeleSystems, he said.

"If that stock happens to tank, it's going to take the whole fund down," he said.

Mayo said Eastern Europe still has attractive investments. The companies in his fund have a price-to-earnings ratio of 14.6, less than the 40.1 of companies on the MSCI Emerging Markets Index and the 19.1 for companies on the Standard & Poor's 500-stock index.

"We consider the whole region well priced," Mayo said.

Poland, Hungary, the Czech Republic, Slovakia, Slovenia and three Baltic nations joined the E.U. on May 1, along with Cyprus and Malta. The European Bank for Reconstruction and Development forecast in November that the new states' economies were growing twice as fast as those of older members such as Germany and France.

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