(FORTUNE Magazine) – Ever since the Berlin Wall came down, people have been talking about the possibility of making big money in Eastern Europe. Now at least some investors are. A little-known mutual fund, Vontobel Eastern European Equity, which was launched early last year, has gained 21% in the first two months of 1997. Over the past 12 months, total return has been a whopping 78%, making it the top performer among all funds of any type.

Fund manager Arpad Pongracz asserts that more good times are ahead. Pongracz, who is based in Zurich and has been managing a Luxembourg-registered Eastern European stock fund since 1994, contends that the markets he covers are still in the early stages of a boom. "What we have today is a window of opportunity for revaluation of stocks like we saw in the emerging markets of Southeast Asia eight years ago," he says, pointing to the increasing flow of assets from institutional investors. "It will last a number of years, and we are only in year two of the process. One day the gain for investors is going to diminish, but I would anticipate extremely high returns for the next three years."

Pongracz's portfolio is spread over just 56 companies, with 86% of his assets in Poland, Russia, and Hungary. But he dips in all over Eastern Europe's emerging markets--the Czech Republic, Slovenia, Lithuania, even Croatia. He's exploring moving into Romania and Ukraine this year.

To limit his risk, Pongracz concentrates on blue-chip companies, such as Unified Energy Systems, the largest utility in Russia, which makes up 4.1% of his portfolio; Scala, a profitable Hungarian software producer, which makes up 4% of the fund; and Pliva, a Croatian pharmaceuticals company, which is a 3% position. (The fund has a $1,000 minimum investment, with a 2% penalty on withdrawals made in less than six months.) Pongracz says he expects the fund's aggregate P/E ratio to reach 11 times earnings this year, up from 7.7 times last year. But this is still shy of the 15 to 17 times earnings--with 30% to 35% earnings growth--that Pongracz believes the market will support.

One of the big risks to investing in the region is the prospect of political upheaval in Russia. "They haven't had capitalist traditions," Pongracz freely admits. "But since President Yeltsin was reelected, we have seen several changes in the legislature that are pointing in the direction of further capital market reforms, and it's giving us additional confidence that the country is headed in the right direction. Right now, we don't believe any change in the political system would destroy the infrastructure or the markets."