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The Hedgeweek Interview: Björn Englund, founder and fund manager, Godvig Capital Management: Managing the risks of investing in Iraq

Björn Englund explains why, despite the continuing stream of gruesome headlines, Iraq is a land of attractive investment opportunities.

HW: What is the background to your company and funds?

BE: Godvig Capital Management was founded in 2003 by myself and is employee-owned. We manage two regulated investment funds, with total assets under management of USD55m, and we also advise on various alternative investment mandates.

The Babylon Fund was launched in September 2006. As the fund manager, I bring 12 years of experience of fund management and front-office positions, as well as experience working with the United Nations in Iraq.

HW: Who are your service providers?

BE: KPMG, Maples & Calder, ATU Fund Administrators (BVI) and VP Bank

HW: What is the profile of your current and targeted client base?

BE: Our investor base comprises funds of funds, pension funds, very high net worth individuals and family offices

HW: What is the investment process of the fund?

BE: It is mainly top-down driven, mixed with portfolio diversification characteristics and fundamental analysis.

HW: How do you generate ideas for the fund?

BE: We search for securities within Iraq and globally with a high level of revenues, existing or expected, generated from their Iraqi operations. In addition, our local presence in Baghdad allows us to draw on a network of contacts that has been established for more than two decades.

HW: What is your approach to managing risk?

BE: At present, risk is synonymous not so much with Sortino, Sharpe and Jensen as with al-Sadr, Maliki and Bush. Thus of the overall risks, we emphasis operational and legal risks. To manage risk in these areas, for local operations - we have a Baghdad office - we diversify our management functions geographically, and for legal matters we use state of the art service providers.

In terms of portfolio risk, typically we have 20 to 30 long positions, diversified over asset classes, sectors and geography. We favour listed and relatively large, and thus liquid, securities, and we do not use leverage.

HW: Has your performance been as per budget and expectations?

BE: We launched only a few months ago, and back-testing exercises in Iraq is neither rational nor relevant - nor pretty, since the market has fallen more than 75 per cent in two and a half years.

HW: Do you expect your performance or style to change going forward?

BE: Yes, I expect to concentrate the portfolio holdings even more toward Iraq itself as the market develops and market liquidity deepens. Our open-ended nature put limits on low-liquidity investments.

HW: What opportunities are you looking at right now?

BE: Outside Iraq, we are looking at oil exploration companies with signed deals with Iraqi authorities, telecommunications and construction companies. Inside Iraq, we are focusing on the financial sector, tourism and hotels, and local construction companies.

HW: What events do you expect to see in your sector in the year ahead?

BE: The market drivers for 2007 in Iraq may include 15 per cent real economic growth, progress on legal issues such as a national oil law and devolution of powers, and a sustained high level of oil prices.

Despite the current security situation, we expect many of these factors to come into play along with others such as a tripling of assts under management in the banking sector, a recovery of the Iraqi dinar, the computerisation of the stock exchange, real spending of the large capital investment allocation in the budget, and new aid contribution packages and/or debt relief.

HW: How will these developments impact on your own portfolio?

BE: We will rise with the market. My aim is to capitalise on that growth.

HW: What differentiates you from other managers in your sector?

BE: We do not have any competitors in Iraq. Apart from reconstruction, only a few sector specialist institutions do joint venture and private equity investments, not fund management. We look forward to and welcome competition - especially as we don't want to end up holding between 5 and 10 per cent of the entire Iraqi stock market.

HW: Do you have any plans for other product launches in the near future?

BE: We are planning for a less liquid, longer-term fund concentrated around major bets on our best equity picks within Iraq itself.

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