The archipelago was ideally positioned to act as an entrepot for the slave trade between the Guinea Coast and the Americas but, as slavery declined, so the islands slowly slid into poverty and obscurity. Even independence in 1975 failed to raise Cape Verde's profile.Arriving at the international airport on Sal, you could be forgiven for thinking that the islands deserve this obscurity Sal, meaning salt, is a bleak slab of red rock and dust. Yet its major function is to act as a base marker: nothing else on Cape Verde will be this dull.Most visitors immediately take an internal flight to one of the other islands I opted for the largest, 60km-long Santiago. Those shares which still meet the criteria are kept, the rest are sold. Turnover is inevitably high, with 80 per cent of the stock churned each year.The technique has been tested back to 1988, however, and forecasts have successfully identified the shares which have performed best in the following 12 months.If the fund had been operating throughout, it would have produced an annual compound growth of 12.9 per cent net of expenses, compared with 4.2 per cent from the FT-SE Small Cap index as a whole. The upgrades are then split into upper and lower divisions, the top upgrades being eligible for investment. About 100 companies are selected each quarter.The managers buy the shares and hold them for at least 12 months, although a quarter of the portfolio is reviewed every three months.

One, that analysts are generally right about the companies they study and pick up improving profit trends ahead of the market. And two, that among small companies there will be a time-lag before forecasts get into wider circulation and are priced fully into the shares. Using data collected by IBES, which records the quarterly profit forecasts of all analysts covering companies in the FT-SE Small Capital index, the investment managers exclude all loss-making companies before classifying the remaining shares according to whether analysts on average have upgraded or downgraded their forecasts or left them unchanged. So Thornton Investment Management, the Dresdner Bank's London investment arm, is launching Momentum Investment Trust, which will buy the shares of the smaller UK companies which City analysts predict are about to increase their earnings fastest in the next 12 months It is a simple theory, based on two assumptions. Although still at 23 per cent in Hungary and 20 per cent in Poland, inflation is on the way down.Capital inflows from abroad are also expected to continue. As more money is committed into dedicated funds, the destabilising effect of speculative money flows should lessen.For longer-term investors, the potential rewards are reckoned to be high although the path is unlikely to be smooth.. There is nothing like a formula for deciding an investment strategy, especially if it works and outperforms the average. Boris Yeltsin's win is being interpreted as a vote for reform.

Mr Taylor believes the Russian economy, which has halved over the past five years, will start growing strongly from next year.Central European countries, which went communist only after 1945, have switched their attentions from east to west, with two-thirds of exports now going to OECD countries compared with 90 per cent to Warsaw Pact countries in 1990.Currency and inflation risks are being addressed in Central Europe by "crawling peg" devaluations, which gradually devalue the currency against a basket of European currencies and the dollar. Offshore unit trusts are run by Mercury, out of Luxembourg, Schroders out of Guernsey ($10,000 minimum investment) and Hill Samuel out of Guernsey.Track records are inevitably short. But it is worth remembering these markets are still 40 per cent below their levels two-and-a-half years ago.The risk factors of illiquid and volatile markets, political and economic uncertainty and currency fluctuations are lessening as communism recedes, fund managers maintain. The net asset value of Mercury's fund rose 112 per cent in the first six months of this year. Baring Emerging Europe is up strongly this year, but its net asset value is only 15 per cent above launch values in January 1994, while Abtrust's Frontier Markets is up 8 per cent in eight weeks. Mercury admits it made a speculative investment in Star Mining in Russia, which now has a market value of pounds 700,000 against a book value of pounds 1.7m. The key is thorough in-house research and getting in early, says Mercury.So how can adventurous private investors buy into Eastern Europe? Most global emerging markets funds devote only 5 to 10 per cent of assets to the region, although Mercury's Emerging Markets unit trust has close to 25 per cent and Abtrust's Frontier Markets unit trust expects to put about a third of its cash into Eastern Europe, with the balance in the Mediterranean and South AfricaDedicated funds are few and far between and tend to be priced out of reach of small investors.

There are a handful of investment trusts run by Baring, Fleming, Credit Suisse and Pictet as well as the single country Hungarian Investment Company, managed by John Govett. Of more importance are cash flow, market share, margins, quality of management and assets.The apparent cheapness of companies in Russia is seductive. Rostelecom, the fastest growing telecoms company in the world, which produces accounts to International Accounting Standards, is trading on four times this year's earnings. Energy company Megionneftegas is priced at $3.70 per barrel of oil production against the equivalent in the West of $50.But mistakes can still be made. Nigel Yandell, East European fund manager with Hill Samuel, points out that many companies are investing heavily so profitability is low. Price-earnings multiples do not tell an investor whether a company is cheap relative to its history, as it has no free market history, he says. The Czech economy is strong but the stock market is less popular, largely because of the way state companies were privatised by handing out tiny holdings to individual workers.Slovakia also suffers illiquidity, but offers more attractive valuations.