Looking for the gold fields of eastern Europe

Investors are always looking for the new frontier, where gold nuggets lie around waiting to be picked up by the adventurous and far- sighted while their duller brethren struggle to make a living in markets which have been well-worked over.

The current search for Eldorado has switched to Russia and eastern Europe

Not so long ago it was Latin America that offered generous returns for risk-tolerant investors. Then the Mexican market collapsed. Last year the spotlight switched to Eastern Asia and the talk was all of new tigers like Thailand, Malaysia, Indonesia and the Philippines forcing their way on to world markets with cheap hi-tech goods. That too ended in tears. But hope springs eternal and investors are now asking if Russia and eastern Europe will generate maximum returns for minimum risk.

Communism had many faults but it did at least ensure that Russia, Poland, Hungary and the Czech Republic have literate, skilled and urban labour forces, and while Russia has massive natural resources the eastern European countries have the promise of early entry to the European Community.

The transition to capitalism has been fairly hairy, with high inflation, rising unemployment and falling output, unpaid wages, piecemeal privatisations and uncertainty over who has legal title to many assets. Things are still quite chaotic but some sort of order does seem to be emerging. Inflation is coming down, public sector deficits are coming under control and output is recovering.

Stock market values are still tiny in relation to the annual output of the economies and even though most markets are dear in relation to company profits, they are cheap relative to the assets which back them.

But not everything is simple or easy. While the Moscow and Budapest markets have been soaring in the past year, average market prices in Warsaw, Prague and Bratislava are exactly where they were three years ago. Setbacks can be sudden, sharp and out of all proportion to the fundamentals. Something quite minor and apparently irrelevant can trigger heavy selling.

Political, social, legal and economic risks are far greater than at home. There is a large criminal element among the nouveaux riches entrepreneurs especially in Russia, who think nothing of using fraud and extortion rather than technological and managerial expertise.

Buying shares in individual companies is a mug's game, but the first trust accessible to small investors was launched this week by Save & Prosper. The minimum investment is pounds 2,000 or pounds 35 a month. It will invest initially in up to seven separate markets across the region with a maximum of 30 per cent in Russia.

Even Save & Prosper recommends it should be only 5 per cent of your investment portfolio. The nominal dividend yield on the initial portfolio will be a derisory 0.4 per cent, and charges are not cheap.

At any one time you would have to pay 5.5 per cent more to buy units than the price you would get for reselling, and there is an annual charge of 1.5 per cent a year plus expenses, initially a touch over 0.25 per cent. But there is always the hope that these markets will come good in a big way, and rewards as well as charges will be substantially greater, far greater, than the more sedate western markets could deliver.