International intrigue: although downtrodden, foreign funds could be your passport to higher returns in 2002. (Mutual Fund Focus).

Make no mistake: Even in the aftermath of the September 11 attack on the United States, this is no time to shun investing overseas. But you must be careful. The portfolio managers of a lot of international funds were having their share of troubles over the last couple of years, even after the U.S. stock markets began to sputter in 2000.

Investment guides and market gurus say carving out a piece of your portfolio to invest in stocks outside of the United States is a good idea. Doing so helps to counteract drops in domestic stocks, no matter what the cause, and gives you a way to grow assets during years when Wall Street stagnates.

So what has been happening lately? Morningstar, the Chicago firm that warehouses mutual fund data, reports that the Standard & Poor's 500 skidded downward through 2000 and 2001, producing negative returns, and a good many overseas portfolios haven't done much better. In 2000, the S&P 500 slumped to a -9.1% finish. During that same year, Morningstar's grouping of foreign funds--a category of portfolios that invest no more than 10% of their assets in the United States--got clobbered to the tune of a -15.45% return. In the first six months of 2001, the S&P index retreated 6.7%, and foreign funds stumbled some 14.43%, according to Morningstar's calculations.

"A lot of international funds have the same type of large capitalization growth companies you see in U.S. funds," says Bridget Hughes, an analyst with Morningstar. "It only follows that when the U.S. market headed downward that they, too, would follow."

We at BLACK ENTEBPBISE still think overseas investing through mutual funds makes sense. So, before you kiss off diversification--and investing abroad altogether--look through the list of funds we uncovered with the help of Morningstar. They are portfolios that shouldn't leave you feeling homesick, and may offer a cushion when the U.S. markets are having a lousy year.

We went to work on the 860 foreign funds tracked by Morningstar's databases. We looked for funds with the best three-year average annual total return as of July 31, Next, we opted to search for value funds, portfolios anchored on underappreciated or overlooked companies. The reason: Value stock pickers tend to fare well when equity markets are dragging. We weeded out funds that did not produce positive returns for the 12 months from mid-2000 to July 31, 2001, a period when Wall Street was reeling and most international fund peers floundered, too.

Then, to find portfolios that would best balance off the U.S. market during bad years, we turned to an odd statistic, called a fund's "r-squared." Morningstar statisticians pore over a fund's portfolio to determine how much of its returns can be attributed to the benchmark index Morningstar uses; the calculated value of the fund is used to see how closely the fund's performance mirrors it. If a fund has a value of 100, its movements can he explained by the benchmark index. If a fund has a value of 0, there is no correlation between the fund's performance and the benchmark index. Foreign stock funds rely more on economic developments outside of the United States.

To make sure that our list wouldn't lean too heavily on the U.S. market, we scratched off funds with an r-squared of 50 or higher. In the end, we found a group of seaworthy picks that could help you add a bit of international flavor to your portfolio.

You'll note that our list includes a number of funds that invest in small- and midcap stocks. Those two segments of the global stock market include a large number of companies that don't make it to the S&P 500 roster and firms whose results probably won't track the U.S. economy very closely. Oakmark, a Chicago-based money management firm, manages the top two funds on our list. The Oakmark International Small Cap I fund's (OAKEX) results have been volatile over the years--the fund slumped 8.9% in 2000. Still, the Morningstar rating for its cousin, the Oakmark International fund (OAKIX), is four stars. Third place went to an interesting fund: the Tweedy, Browne Global Value fund (TBGVX). To best protect returns, the managers at Tweedy Browne invest by hedging contracts to make sure that fluctuations in the U.S. dollar don't bruise gains made in stock markets overseas.

Top Performing Foreign Stock Funds
(Ranked by 3-Year Total Return)

                                       1-Year     3-Year    5-Year
                                       Total      Total     Total
Fund Name (Ticker)                    Return *   Return *   Return *

STOCK FUNDS

Oakmark Intl Small Cap I (OAKEX)        4.37      16.99       7.31
Oakmark Intl I (OAKIX)                  4.41      12.03      10.14
Tweedy, Browne Global Value (TBGVX)     4.27      10.97      15.96
First Eagle SoGen Overseas A (SGOVX)    4.70       9.53       9.73
Delaware Intl Sm Cap Val A (DABAX)     -2.89       4.65        N/A

                                         Toll-Free     Minimum
                                                       Initial
Fund Name (Ticker)                                    Investment

STOCK FUNDS

Oakmark Intl Small Cap I (OAKEX)        800-625-6275    $1,000
Oakmark Intl I (OAKIX)                  800-625-6275     1,000
Tweedy, Browne Global Value (TBGVX)     800-432-4789     2,500
First Eagle SoGen Overseas A (SGOVX)    800-334-2143     1,000
Delaware Intl Sm Cap Val A (DABAX)      800-523-4640     1,000

As of July 31, 2001

Source: Morningstar Inc.