Beyond U.S. shores: foreign funds continue to outpace their domestic counterparts.

Investors who have gone offshore have been on-target. For the last five years through the end of 2006, international stock funds have returned 16.28% a year, according to Chicago-based fund tracker Morningstar. This performance is more than double the 7.22% annualized returnss of domestic stock funds, and similar performance holds true for the three-year and one-year results.

Why have foreign stocks led the way this century? "At the start of the period, stock market values were much better outside the United States, and those low valuations attracted investors," says Morningstar Senior Analyst Bill Rocco. "The U.S. dollar generally has been weak recently, which benefits investors in many international funds." Last year, the dollar declined in value by 11% against the euro.

New York financial planner Lew Altfest points out that foreign stocks underperformed domestic equities in the late 1990s, so they had more upside prospects at the decade's end. "In addition to above-average growth in Asia, foreign stocks have been helped by a continuing emphasis on profits in Europe," he adds.

Harold Sharon, director of international equity investments and portfolio manager of Lord Abbett International Core Equity Fund A [LICAX] also cites rising profits. "Economic growth has been slower outside the United States," he says, "out corporate earnings have been growing at a much faster pace Therefore, foreign stocks still trade at a discount, compared with U.S. stocks." Sharon, whose fund has averaged annual returns of more than 17% since it was launched at the end of 2003, says that offshore earnings have been increasing rapidly because of corporate restructuring (cost-cutting, mergers), similar to the process U.S. companies went through in the 1970s and'80s. "That transition took 15 years in the U.S.," he notes, "and it could take that long for foreign companies. We could be five years into a long run of superior performance."

Altfest suggests holding up to one-third of the equity portion of one's portfolio in international stock funds. Such diversification can reduce your overall risk while helping to maintain long-term returns. One strategy is to do your international investing through a fund that holds large-cap stocks, such as Nestle and Toyota, from all over the world. "Large companies have more flexibility to take advantage of changing conditions, so they have more potential to gain from restructuring," says Sharon.

If your portfolio is large enough to hold two or three foreign funds, pick some that complement each other. "You might buy a large-cap foreign fund that holds growth stocks and one that has large-cap value stocks," says Rocco. "Another approach is to start with a large-cap fund specializing in the developed markets of Europe and Asia. Then add a foreign small-cap fund, a fund that focuses on emerging markets, or both."

One such fund is American Funds EuroPacific Gr A [AEPGX], which holds a mix of large-cap growth and value stocks. This fund, in the top 10% of its category, has a 10-year annualized return of 11.23%. In that time, a $10,000 investment would have grown to around $29,000.

Rocco likes Thornburg International Value A [TGVAX], which owns a diverse mix of stocks. The fired is too young for a 10-year record, but its five-year annualized return of 16.49% is among the best for that period.

Altfest says that his clients hold Artisan International Inv [ARTIX] and Harbor International Inv [HIINX] funds. "They go well together," he points out, "because the Artisan fund is growth-oriented while the Harbor fund holds value stocks." The 10-year annualized return for Artisan International Inv is 12.88%, in the top 10% of the large-growth category.

If you want a foreign small-cap fund, you'll find that many are closed to new investors. One still open, as of this writing, is T. Rowe Price International Discovery [PRIDX], where the three-year annualized return is 24.87% and the five-year annualized return is 22.96%. Among emerging markets funds, a top performer has been SSgA Emerging Markets [SSEMX], whose top holdings are from Brazil, Russia, and South Korea. Its five-year annualized return is 25.71%.

TOP LARGE-CAP FOREIGN GROWTH FUNDS

                                                 1-Year       3-Year
                                               Ann. Total   Ann. Total
Fund Name:                            Ticker     Return       Return

Janus Overseas                        JAOSX      37.11%       29.92%
AIM International Growth A            AIIEX      21.93        21.15
RiverSource Intl Aggressive Growth A  AXGAX      19.10        19.71
Excelsior International               UMINX      15.56        19.02
Oppenheimer Intl Growth A             OIGAX      22.76        18.45
Marisco International Opportunities   MIOFX      18.34        18.33
Laudus Intl MarketMasters Inv         SWOIX      18.65        19.70
Forward International Equity          FFINX      25.98        19.55
Columbia Marisco Intl Opp A           MAIN       17.73        18.29

                                                 5-Year      Minimum
                                               Ann. Total    Initial
Fund Name:                            Ticker     Return     Investment

Janus Overseas                        JAOSX      18.28%       $2,500
AIM International Growth A            AIIEX      14.55         1,000
RiverSource Intl Aggressive Growth A  AXGAX      14.47         2,000
Excelsior International               UMINX      13.61           500
Oppenheimer Intl Growth A             OIGAX      13.10         1,000
Marisco International Opportunities   MIOFX      16.77         2,500
Laudus Intl MarketMasters Inv         SWOIX      15.25         2,500
Forward International Equity          FFINX      15.00         4,000
Columbia Marisco Intl Opp A           MAIN       16.52         2,500

                                                Toll-Free
Fund Name:                            Ticker      Number

Janus Overseas                        JAOSX    800-525-0020
AIM International Growth A            AIIEX    800-347-4246
RiverSource Intl Aggressive Growth A  AXGAX    800-862-7919
Excelsior International               UMINX    800-446-1012
Oppenheimer Intl Growth A             OIGAX    800-225-5677
Marisco International Opportunities   MIOFX    888-860-8686
Laudus Intl MarketMasters Inv         SWOIX    800-435-4000
Forward International Equity          FFINX    800-999-6809
Columbia Marisco Intl Opp A           MAIN     800-321-7854

* BASED ON 3-YEAR PERFORMANCE. AS OF JAN. 5, 2007.

SOURCE: MORNINGSTAR INC.