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Online Extra: "Not All Emerging Markets Are Alike"


As investment director of Charlemagne Capital, an emerging-markets investment specialist, Julian Mayo serves as the sub-adviser and portfolio manager of the $57 million U.S. Global Investors Eastern Europe Fund. Mayo has years of experience following Asian companies, and he knows how to apply that expertise to pick stocks in Eastern Europe. The fund, which is A-rated in the 19th Annual BusinessWeek Scoreboard, gained an annualized 21.5% for the past five years through December 31, 2002.

Reporter Kate Hazelwood recently caught up with Mayo from his office in London. Here are edited excerpts of their conversation:

Q: Why emerging markets?

A: It's literally in our blood. Charlemagne's head of portfolio management Stefan B?ttcher, who's German, was a pioneer investor in Eastern Europe, managing the Flemings East Europe Fund from its inception. My background is 12 years as an Asian manager, eight of them in Hong Kong and four in other parts of Asia. Not all emerging markets are alike by any means, though.

Q: What are the Asian and Eastern European parallels?

A: These aren't the most liquid markets in the world. It's easy to get into emerging markets, but when the music stops, you end up holding something illiquid and can't get out of these things for love or money.

What's happening in Eastern Europe today can be seen as a bit of a throwback to Asia's boom in the 1990s -- the fourth-quarter craziness of 1993, the Malaysian microcap booms, and the like, with people chasing the last bit of performance, followed by two years of clearing up the wreckage. Some of the emerging-markets investors who haven't been around as long will have some egg on their faces.

Q: What holdings characterize your portfolio?

A: We're attracted by fundamental-value situations. I wouldn't want to say we would be characterized by style into just big or medium, but we regard small-caps as special situations and stay away from micro-caps. The markets have been strong for some time in Eastern Europe, and we still see a lot of value in the region. There are a lot of attractively valued stocks in the portfolio -- they've made money for our clients.

Q: Any examples?

A: Noristel Nickel. This is a company [on which] we've made a very significant profit in the fund, and it's one of the largest positions in the fund. Even though the shares have cheapened a bit as of late, it [remains] a big beneficiary of the commodities boom, which is in turn a big beneficiary of the Chinese boom for raw materials.

This goes to our holistic approach -- you have to look at an emerging market within the context of how any event around the world could affect it. We had a target price we wanted, and we've continually revised that in line with the improving fundamentals in the stock. So we believe the stock remains undervalued.

Another is Sberbank, Russia's leading savings bank. It remains cheap from a valuation perspective, but the case for the company is twofold: It holds three-fourths of the savings of the banks of the Russian economy and stands to benefit from the potential increase in lending in Russia.

[This] is the case with many European Union countries where there's underlending, since the consumer-loan market is in its infancy there, as is the residential mortgage market. Most developed economies' personal bank borrowings are well over 100% of income, and in the case of Russia it's only 15% at the moment -- so the balance sheet could easily expand eightfold. Also, since the recent Moody's upgrade [of Russia's sovereign rating] to investment grade, there's a double benefit, a perfect storm.

Q: How was 2003 performance?

A: The net asset value was up by 53%. It has been consistent, and we've looked for a bottom-up stock-picking approach that's highlighted a few areas of value. We're a bottom-up house with a top-down market overlay that's helped us to avoid some pitfalls -- the obvious one being Hungary.

That's a market we've either had an underweight or zero-weight exposure to. We made a decision in late spring/early summer. We were concerned about the fiscal situation -- the first thing to move there was the currency, and there has been continuing volatility. If we think there's significant risk of a political event or a currency event, we'll exit entirely. Taking our positions out of the market has proven to have been a good decision.


Steve Ballmer, Power Forward
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