John T. Connor Jr.'s Third Millennium Russia Fund has gone from ranking among the best-performing stock mutual funds during the first quarter to one of the worst in the second.

"It has been crushing," said Connor, 63, who worked for the Commerce Department in Moscow during the 1970s and now heads New York-based Third Millennium Investment Advisors LLC.

The fund, which has $45 million in assets, climbed 32 percent in the first three months of this year, matching the advance of the benchmark Russian Trading System index and placing fifth of more than 16,000 funds tracked by Bloomberg. The fund was profiled in these pages last month, at the end of the first quarter.

Since the end of March, the fund has slumped 19 percent to 16,092nd in a survey of 16,134 funds, led by drops in companies such as nickel and palladium producer MMC Norilsk Nickel. The ING Russia Fund, which has about $225 million of assets, has fared even worse, falling 21 percent. Shares of the $182 million Templeton Russia & Eastern European Fund, led by Mark Mobius, declined 25 percent.

Concern about rising interest rates in the United States and slowing economic growth in China have hurt the Russian market since the country's benchmark RTS index peaked on April 12. Connor said he's taking advantage of the market slide to buy shares of companies including titanium producer Verkhnaya Salda Metallurgical Production Association.

Some of Connor's investors are less bullish about Russia's prospects. They pulled about $1.5 million from his fund in April.

"People do say, 'This isn't for me anymore and I'm getting out,' " he said in an interview. "Too often, retail investors buy high and sell low. They panic. I try to hold their hands over the phone and say, 'You've got to think in terms of a couple of years, and it's going to work out for you.' "

Connor's fund is part of World Funds Inc. in Richmond. The World Funds have combined assets of about $450 million.

Connor, a graduate of Harvard Law School who lived in Russia from 1973 to 1976, started his fund on Oct. 1, 1998, after investors fled Russian stocks when the country defaulted on $40 billion of debt. The RTS index plummeted 85 percent that year and Russia devalued the ruble.

Since the end of 1998, the RTS index has risen 15-fold, while the Standard & Poor's 500-stock index has declined 2.7 percent, including reinvested dividends. Connor's fund climbed at an annual rate of 42 percent in the past five years.

The RTS index probably won't match last year's 58 percent advance, Connor said. Still, he said, it's possible Russian stocks will rise as much as 40 percent in 2004. The stock index is up 5.8 percent this year, after rallying during the past two days.

Russia's economy grew at an annual rate of 8 percent in the first quarter amid demand for raw materials produced by companies such as OAO Lukoil, the country's biggest oil producer, and EvrazHolding, the biggest steelmaker. The government predicts 6.4 percent growth for the year.

The economy and stock market may get a boost from President Vladimir Putin's efforts to reduce the number of government workers, cut bureaucracy and loosen government control of some businesses, Connor said.

Putin has cut corporate and personal income taxes since he was elected president in 2000. He also legalized the sale of land and made it easier for companies to invest.

Russian stocks are inexpensive on a price-to-earnings basis, Connor said. Shares of companies in the RTS trade at 8.1 times this year's profit estimates, compared with an average multiple of 21 for companies in the S&P 500.

Oil and gas stocks account for about one-third of the fund's investments, Connor said. The shares are benefiting from a surge in crude oil that lifted prices to a 13-year high of $40 a barrel.

Shares of Lukoil have climbed 17 percent this year. Lukoil has a price-to-earnings ratio of 12 and trades at seven times next year's profit forecast. Exxon Mobil Corp., by contrast, trades at 16 times earnings.

Connor's biggest holding as of March 31 was OAO Gazprom, the world's biggest natural-gas producer. He also holds shares of Transneft, Russia's crude-oil pipeline monopoly.

Connor said he sold most of his shares of OAO Yukos Oil Co. in the past month. The government alleged that the country's second-largest oil company illegally obtained tax breaks in 2000. Last year, former chief executive Mikhail Khodorkovsky was jailed on fraud charges, and the stock slumped 12 percent last week as hearings started in the tax-fraud case.

Connor has been investing in companies that benefit from rising demand from China. He holds shares of MMC Norilsk, the world's largest nickel and palladium producer.

"It's a huge exporter to the Chinese automobile industry for stainless steel and nickel," Connor said. Shares of Norilsk have more than doubled in the past 12 months.

Connor said China's effort to cool its economy isn't dissuading him. "We don't see demand from China for steel and nickel and other commodities slowing that much," he said.

As for Russia, the number of publicly traded companies may double to 400 in the next five years, making the market more attractive to investors, Connor said.

"There's a wealth of potentially investable companies that aren't visible that are coming public, industry after industry," he said.