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Baring EMEA Absolute Return Fund on track for 20%+ returns

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The Baring EMEA Absolute Return Fund is on track towards delivering target net returns in the region of 20%+ per year, with annualised v

The Baring EMEA Absolute Return Fund is on track towards delivering target net returns in the region of 20%+ per year, with annualised volatility of around 15%.

In the three months since its launch in November 2005, the fund has returned 15.69% net in USD terms (S&P Micropal at @ 31st January 2006).

Marina Akopian, Manager of the Baring EMEA Absolute Return Fund sees three main drivers behind the long-term strong performance of the EMEA markets: global liquidity, further progress in domestic reforms and restructuring, and the existence of a ‘supercycle’ in commodities.

‘The pace of economic expansion and the fast changing political and structural environment supports a fundamentally positive growth story for the EMEA markets,’ says Akopian. ‘We are positive on the commodity cycle, and see the possibility of renewed interest in iron ore, copper, aluminium and zinc. This has encouraged us to uncover individual equities which are showing value particularly in the energy and the metals and mining sectors throughout the region.’

Also supportive of the long-term investment case for this region is the level of merger and acquisition activity. Last year interest was focused mainly in the commodities, telecoms, consumer and banking sectors. BAM believes that cash rich corporations, whether Western or regional, are likely to continue to search for access to the resource on offer, the expanding Emerging Markets consumer base and rapid rates of growth that are prevalent in the EMEA region.

Initial Public Offerings in Kazakhstan of copper and gold mining companies attracted interest far beyond the traditional specialists last year and Baring Asset Management believes this is a positive indication of investor interest for 2006. Sustained strength in the oil price has also boosted GDP in the major oil producing nations, providing capital for infrastructure spending. The construction and building materials sectors are expected to be the main beneficiaries, as well as telecoms and banking sectors. Excess capital is likely to find its way into regional equity markets such as Egypt, Morocco, Tunisia and Turkey.

Threats to the long-term growth of the region are limited, according to Baring Asset Management. ‘The only credible threat to the region’s continued strong performance remains external,’ explains Akopian.’Liquidity in the region could be compromised by the possibility that we could enter an increased tightening cycle accompanied by a rise in global risk aversion, but recent economic data coming out of the US suggests there are unlikely to be unwelcome surprises from that direction, at least in the first half of the year.’

On the short side of the book, Akopian is looking to the CE3 region – Poland, Hungary and the Czech Republic. With the notable exception of a relatively small number of stocks, share price valuations in these markets look relatively stretched while politics remain unsupportive in Poland and Hungarian twin deficits are depressing the stock market. Baring Asset Management’s directional hedged equity strategy is an effective way of taking advantage of the volatility to identify clear stock market winners and losers

‘Over the coming weeks we are expecting increased volatility,’ concludes Akopian. ‘The strong performance over the past twelve months is very tempting for profit-taking, at the same time valuations and long-terms story in our markets is still intact. Investors are watching the Fed very closely and the new Chairman’s speech should define at least the short-term direction of the global liquidity and set a mark for the risk appetite in our markets. So we expect to have a higher turnover on both the long and short side of the portfolio, relative to the past three months since inception. In light of this we are taking a view of increasing long exposure to our favourite stocks to take advantage of the short-term weakness in the markets.

‘Liquidity inflows in the EMEA region remain strong and valuations are still attractive. Provided the external factors remain supportive we expect sufficient differentiation between winners and losers to be able to deliver value from both long and short position.’

Baring Asset Management has a long history of managing money in the EMEA region and is one of the largest investors there, managing almost USD 3 billion in a range of Eastern European equity funds, with USD 2 billion in the company’s flagship Baring Eastern Europe Fund alone, as at end December 2005.

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