Many analysts felt that the bear market of 1998 was caused by economic problems in Russia, Asia, and Latin America. They pointed out that the United States is really part of a global market, and that the fortunes of companies here were linked to events across the ocean.

Nevertheless, investors seeking another avenue for diversification might consider allocating some money in stocks outside the U.S. This column will examine the various types of foreign mutual funds. I will compare their performance with domestic funds, and I will identify those with superior performance records.


I want to begin by noting that many U.S.-based mutual funds do invest in foreign stocks. You may be surprised to find out how large a percentage of your money is abroad–even when you own “domestic” funds. For example, 24.3% of the Fidelity Low-Priced Stock Fund (FLPSX) is in non-U.S. companies. For the Strong Shafer Value Fund (SCHVX) , it is 19.8%. The T. Rowe Price Growth Stock Fund (PRGFX) has 15.5% of its portfolio invested abroad. Therefore, check the prospectus of your current fund–you may already have enough foreign exposure to suit your needs!

Foreign funds come in several different “flavors”. For the purpose of this discussion, I will define “international” as any country other than the U.S. A “global” fund, on the other hand, may invest anywhere–including the U.S. The third category is regional;. e.g., Fidelity Pacific Basin (FPBFX) . The last category is country-specific. An example is Fidelity Japan (FJPNX) .

How have foreign funds performed? According to statistics in The Individual Investor’s Guide to Low-Load Mutual Funds (published by The American Association of Individual Investors), the average annual compound growth rate for international funds for the 5-year period ending 1997 is 10.8%. This compares with 20.2% for the S & P 500 Index and 12.3% for the average of all funds tracked by this publication. Thus, at first glance, it would appear that sending your hard-earned dollars abroad may not be such a great idea. However, you need to remember that the same fund selection guidelines I have discussed previously with respect to U.S. funds also apply abroad. In other words, there are some terrific foreign funds and some very mediocre ones. If you believe that foreign diversification is good for your portfolio, you can find some excellent funds if you do your homework.

Investing abroad does involve some risks in addition to those normally associated with equities in general. For example, currency exchange rates can have a negative or positive impact on earnings reported by foreign countries. Political instability can have a very negative effect. Just ask anyone who bought the Lexington Troika Russia Fund (LETRX) ; through Nov. 27, this fund is down 81.3% for the year! Latin America has also been a very volatile region. For these reasons, you should be prepared to monitor any foreign investments more closely than your domestic holdings. In my experience, these funds move very quickly–both up AND down.

If you are prepared to take the plunge abroad, here are some good funds to consider:

For those interested in Europe, take a look at Scudder Greater Europe Growth (SCGEX) . Of all 44 European funds with at least a 3-yr track record, this fund has the best average annual return (23.1%), according to Morningstar.

In the global or “world” category, Morningstar lists 157 funds which have been in existence three years or longer. One of the top performers is Janus Worldwide (JAWWX) with an average annual 3-yr return of 18.7%.

Morningstar shows 330 foreign funds with 3-yr records. In this category, two candidates are American Century 20th Century International Discovery (TWEGX) and Janus Overseas (JAOSX) . These funds have average annual returns of 17.0% and 16.1% respectively.

Most single-country funds are traded like stocks. They are known as closed-end funds, and my January column will provide background on them–both foreign and domestic. In the meantime, be sure you research any non-U.S. fund carefully before you invest. “Travel” abroad can help you diversify–if you are careful!

Related posts:

1. Some Risks and Realities of Investing
2. Foreign Stocks
3. Develop Strategies to Control Risks
4. Investing in gold and the truths of the risks
5. The Skinny on Mutual Fund Investing
6. Investigating Before Investing
7. With less risk Foreign Bonds
8. All About Personal Investing In America
9. Understand Risks
10. What you must know before investing in a mutual fund