* Kurdistan attractive, seen as high-growth area

* Country set for stabilisation, despite election impasse

* First saw Iraq as a UN peace keeper

By Cecilia Valente

LONDON, June 24 (Reuters) - Things are looking up for politician-turned-fund manager Bjorn Englund -- he doesn't need bodyguards anymore when researching for his Iraq-focused fund.

Englund, the Swedish manager of the $30 million Babylon Fund and founder of boutique Godvig, is one of the handful of investors who see glittering prospects behind the gruesome Iraqi headlines in the aftermath of war and the impasse that followed inconclusive elections in March. [ID:nLDE65L161]

"I see a good future in Iraq and I see us being there in the long term," he said, with the caveat that the nascent democracy is not for the faint hearted nor for those in a hurry to make a quick return on their investment.

He might have given up his bodyguards in 2006, but there are still pitfalls to negotiate.

"Even if the fundamentals are heading the right way it may not translate as stock market performance. Nothing might happen for a long, long time and then everything will happen at the same time," he said.

The Babylon fund, which mainly comprises stocks listed on the Iraq Stock exchange, has returned 18.6 percent in the five years since it was set up, a year after the Baghdad bourse was re-opened following the 2003 U.S.-led invasion.

Investing was not on Englund's mind when he saw Iraq for the first time, as a UN peace keeper after the first Gulf War. The experience struck a chord with the student who was taking a break from university to see the world.

"When you see a country on its knees, you take a personal interest, you give it a bit of your heart," Englund said.

He has shied away from learning the language, but at least has some experience of the political lexicon in a country struggling to establish democracy. His own political career with the Swedish Liberal Party lasted 10 years from the mid-1980s.

His incentive, he said, was to help change the world and uphold "market values", which also spurred his interest in former communist countries, some of which were close to Sweden.

It took a spell in frontier country-focused fund management on behalf of his employer, Unibank -- one of the four banks that formed financial group Nordea (NDA.ST: Quote) -- to prepare Englund for his Iraqi comeback, this time as a fund manager. [ID:nLDE65018Q]

BANKING ON OIL

The fund has a quarterly redemption policy, which makes Englund keen on the more liquid Iraqi stocks, some of which use International Financial Reporting Standards (IFRS), making valuations easier.

The Iraqi bourse's major constituents are banks, some of which are backed by international investors. Englund is underweight the sector to keep his portfolio broadly diversified.

He prefers internationally-backed banks, such as Dar El Salaam, the investment bank in which HSBC (HSBA.L: Quote) has taken a major stake as part of plans to gain access to the Iraqi market.

The fund also invests in the Commercial Bank of Iraq, owned by Middle Eastern group Ahli United Bank (BKME.KW: Quote).

However, the country, which has the third largest oil reserve in the world, remains an "oil story." Englund's exposure to the sector consists of foreign companies, such as DNO International (DNO.OL: Quote) and WesternZagros (WZR.V: Quote), and it is likely to remain the case for some time to come as Iraqi companies are still nationalised and Englund sees their privatisation as "years down the line."

Oil accounts for 23 percent of the fund's investments, financials 45 percent, while the rest is in hotels, telecoms and technology stocks.

"SEXY KURDISTAN"

The oil theme will dominate his next journey to Iraq, scheduled for September, although Englund is not going to Baghdad or Basra but rather to Erbil, the capital of the semi-autonomous Kurdistan region.  

"Iraq is an oil story, but the Kurdish region is even more of an oil story," he said. Kurdistan, which during Saddam Hussein's regime saw the execution, murder and disappearance of hundreds of thousands of Kurds, has shown an entrepreneurial drive, which has led Englund to make one of his very few private equity investments -- the recently launched Erbil Stock Exchange.

"Kurdistan is the sexiest story in the whole of Iraq," he said.

"They have a much more Western mindset, they invited international oil drilling companies much faster and more efficiently than the rest of Iraq.

"My feeling is that the growth rate in Kurdistan is much higher than in the rest of Iraq," he said.

INVESTOR PROFILE-Englund eyes returns in war-ravaged Iraq -  Source