Funds That Bank on Foreign Stocks Keep Struggling.

IT'S been a year to forget at U.S. mutual funds specializing in stocks of foreign origin.

For the sixth year in the last seven, the average international fund, which buys stocks anywhere but the U.S., has failed to keep pace with the average fund concentrating on domestic stocks.

The contest hasn't even been close. The Bloomberg average of 625 international funds dropped 19 percent through the first 11 months of 2000, compared with an 8.8 percent loss for U.S. growth funds. No carryover at all from 1999, when the international funds rallied 51 percent.

In the 10 years through Sept. 30, according to Morningstar Inc., domestic stock funds rose at a 17.8 percent annual rate while international ones returned 10.5 percent. Over the past five years, domestic funds, up 18 percent a year, more than doubled international funds' 8.9 percent annual gain.

As long as U.S. stocks were booming, worldly wise investors could take the lagging performance of international funds in stride. If you wanted to stay diversified, they reasoned, you had to accept less from some of your holdings than from others.

In the words of investment consultant and author Peter L. Bernstein, "If you like everything you own, you're not diversified."

It's not so easy on the patience, though, when the U.S. stock market runs into a bad year here in 2000 and international funds, instead of cushioning the blow, get hit even worse than the domestic ones.

The two giants among the globetrotting funds, which have attracted scads of money in recent times, haven't been much help on the public relations front, either. The $40 billion Janus Worldwide Fund, up 64 percent last year, has dropped 16 percent in 2000, and Capital Research & Management's $34 billion EuroPacific Growth Fund, up 57 percent in 1999, is down 18 percent this year.

"Investing in international stocks used to be a pretty compelling thing to do," said David Antonelli, director of international research at MFS Investment Management in Boston, which owns about $15 billion worth of international stocks among its $150 billion in mutual funds and other assets. "In the 1990s, many people have become disillusioned."

But they haven't yet given up. According to Financial Research Corp., a Boston research and consulting firm, investors put $44 billion more into international and global funds than they took out in the first 10 months of this year. (Global funds, Janus Worldwide among them, can mix U.S. stocks in with the rest). That helped push assets of these funds to $579 billion, by FRC's tally, from $502 billion a year earlier.

Bargain hunting, eh? Yes, says Antonelli, the typical European or Japanese stock now trades at 13 to 14 times the underlying company's cash flow, compared with 18 times in the U.S.

"You can really buy international 20 percent to 30 percent cheaper than you can buy the U.S.," Antonelli said at a yearend meeting of MFS managers with reporters. "We are quite bullish on the international markets relative to the U.S."

But then, that's a familiar refrain.

Neil Bathon, FRC's president, said investment in international funds has been spurred by financial advisers pushing diversified "asset allocation" plans for their clients. A typical allocation prototype calls for, say, 20 cents of each stock market dollar to go into international funds.

Figuring from FRC's data, international and global funds now command a 15 percent share of total stock fund assets. But international won't keep its place in the models indefinitely if it continues to post disappointing performance. 'That's hanging out there in the air," Bathon says.

There's also no guarantee that asset-allocators will always draw a clear line between domestic and international stocks. As investors think globally more and more, it stands to reason, the less important the distinction may become between companies based in this country or that, or stocks traded in that market or this.

I don't dispute the idea that some international stocks may be bargains right now simply because the hot money has spent the past several years m the U.S. market. On a purely contrarian basis, international funds may be due for a bounce.

I also wonder, though, what kind of future lies ahead for international funds as a separate category of investment. Many funds labeled as domestic now routinely buy European or Asian stocks.

International funds will have to start delivering better soon on their dual promise of good returns and shock-absorber protection against the ups and downs of the U.S. market. Otherwise, who's going to want them, and for what?

Chet Currier is a columnist for Bloomberg News.

Beware of Online Hak Posing as Information

Here's a gift idea that the personal-computer users on your holiday list might welcome: a sludge filter.

This device would screen out all the misinformation, disinformation and other distractions presented on the Internet under the rubric "personal finance."

Unfortunately, the product hasn't yet been invented. It would have come in handy for visitors to America Online Inc.'s personal finance page the other morning when they encountered the headline "Mortgage Rates: Bad News If Bush Wins."

The last thing I wished for at that moment was more politics. The "Breaking News" sign had been lit up on the cable-TV news networks for two weeks without end.

Even so, the words nagged at me. If he emerged victorious from the swamps of Florida, what havoc was the diabolical George W. supposedly going to inflict on the American dream of homeownership? A click of the mouse took me to a new teaser, which read, "Fixed Rates Rise. Will a Bush victory mean bad news for homebuyers? Maybe so."

So now it was "maybe," turning down the volume on the alarm several decibels.

I later picked up the trail on the www.bankrate.com site. "Market players are worried that Bush will end or sharply cutback the Treasury Department's recent debt curtailment program," it said. "That could potentially send yields on Treasury securities and rates on home loans higher over the next several months."

Now "maybe" had become "could potentially." The menace was getting milder with every step. Sure, I could follow the argument that the tax cuts Bush proposed in the campaign might shrink the federal budget surplus, increasing the supply of Treasury bonds and scaring bond traders. You hear that in all the bond market buzz these days.

But it is just that, market buzz, a hypothesis very much open to argument. If connect-the-dots analysis of this sort had reliable predictive value, trading bonds would be an easy road to riches. Until it does, translating market conjecture into "personal finance news" is a mighty big stretch.