Here's a lesson for 2004: Don't forget Poland.

John Kerry learned the hard way, failing to name the U.S. ally during the debates. President Bush called him on it and the rest is history.

Investors who have overlooked Poland and neighboring nations are starting to get the same message. With the dollar continuing to suffer from persistent trade and fiscal deficits, U.S. investors looking for overseas equity exposure might do well to look to Eastern Europe, where fund returns in recent years have been downright stratospheric.

"I call the region the European Asia," says Soeren Rytoft, portfolio manager for the $6 million

Metzler/Payden European Emerging Markets fund

, one of the handful of Eastern European-concentrated funds available. "They have an educated workforce due to communism and low wages compared with Western Europe. It's a potent combination."

Rytoft's fund is up a heady 35% for 2004 after returning 45% last year. The fund primarily buys Eastern European stocks on local bourses, picking up American depositary receipts trading on the New York Stock Exchange only as a last resort. Rytoft doesn't hedge currency risk, so the fund has also benefited from the rapid appreciation of domestic currencies against the dollar.

The manager's Asian comparison is especially fitting, considering the intense media focus on the economic ascension of China and India this past year. In part, the Asian powerhouses seem to have stolen some of the thunder from Eastern Europe's impressive growth. Rytoft estimates regional expansion will slow but still hit 5% to 7% for 2004 and 2005.

There's also a recognition problem, says Rytoft. The high quality of the region is still being discovered by American investors. For instance, many people aren't aware that eight Eastern European countries -- Estonia, Lithuania, Latvia, Hungary, Poland, the Czech Republic, Slovenia and Slovakia -- joined the European Union this past May.

"Joining the E.U. was a major step for these nations' economies," says Rytoft. "It opened the door to trade with the other 15 members and also gave them an investment grade rating. That puts them in the best position to leave the emerging market category and be considered developed."

Individual investors might still be discovering Eastern Europe, but Western European companies are well aware of the opportunities behind what was once the iron curtain.

Dutch brewer

Heineken

, for example, has been developing breweries in Russia and the Czech Republic. And German multinational

Siemens

(SI) - Get Report

has been opening manufacturing plants in Russia.

Not to be left behind, U.S. companies are setting up shop in the former communist bloc, too. In September of this year, Houston-based oil producer

ConocoPhillips

(COP) - Get Report

won the Russian government's privatization auction for a 7.6% stake in Lukoil. ConocoPhillips' $2 billion purchase of the Lukoil stake is the largest amount ever pledged at a privatization auction in post-Soviet history. It's also the largest acquisition in Russia since

BP

(BP) - Get Report

paid $7.7 billion for a stake in its own Russian oil venture.

Russia's vast oil reserves make it an obvious target for Western investment, but energy is not the only sector providing the spark in Eastern Europe. Telecom companies, most notably in the wireless arena, are expanding fast and furiously, a point not going unnoticed by Eastern European fund managers who have loaded up their portfolios with telecom names like the Czech Republic's

Cesky Telecom

, Poland's

Telekomunikacja Polska

and Russia's

Vimpelcom

(VIP)

.

"Eastern Europe had terrible infrastructure for wireline installation. The wait for phones was endless," says Rytoft. "Mobile phones exploded onto the scene because they are cheaper and easier."

Financial services has been another popular sector for fund managers as the banking systems of the developing countries begin to mature. Austrian banks are booming with lending deals now that Vienna has evolved into a hub for Eastern European commerce. A pair of banks,

Hansabank

in Estonia and

Erste Bank

in Austria, comprise close to 10% of the $47 million

(VEEEX)

Eastern European Equity fund. The front-end loaded fund is up a healthy 43% in 2004, coming off a 50% rise last year.

Actually, investing directly in Austria itself has proven to be one of the best moves in 2004. The

iShares MSCI Austria Index

(EWO) - Get Report

exchange-traded fund is up 64% year-to-date after rising 57% in 2003.

Investors in Eastern European funds obviously won't be able to enjoy such out-of-this-world returns forever. And, for the record, they are paying enormous costs to participate in these funds with the average expense ratio close to 3%.

But European strategists say the emerging market risk in Eastern Europe is mitigated by the countries' fear of jeopardizing the benefits they receive from being full-fledged members of greater Europe.

One perk that the E.U.'s newest members will have to wait a few years for is the ability to switch their respective national currencies to the euro. According to E.U. rules, they will be able to adopt the euro only after achieving a "high degree of sustainable economic convergence with the euro area." Convergence criteria include a high degree of price stability, sustainable government finances (in terms of both public deficit and public debt levels), a stable exchange rate and convergence in long-term interest rates.

Rytoft says Hungary, Slovakia and Latvia are the three countries closest to getting their fiscal houses in enough order to qualify for euro adoption.

And what about Poland?

"Poland has too high an inflation rate, which is running about 10% right now, to change currencies," says Rytoft. "But they have one of the most advanced economies in all of Eastern Europe, so they do not require as much foreign investment. They are developing very well on their own."

Lest anyone forget.