An international fund - what the well-balanced portfolio carries

Stroll the aisles of any American department store. Stacked high on either side: toys made in Taiwan, the latest gadgetry from Japan, specialty foods a la France. Step outside and chances are you'll wait curbside for a break in the Volvos, Hondas, and Mercedes streaming by.

If you've ever thought there ought to be a way to pocket some of those profits going overseas, international mutual funds might be worth considering.

International funds by definition invest no money in United States-based firms. These are not to be confused with global funds, which place at least 25 percent of the fund in overseas securities and the rest in US companies.

An international fund, almost every fund manager will tell you, is not the first or only investment you should make. Such a fund is for diversification, they say.

When your US stocks languish, foreign markets (and international funds) tend to rally. That's the theory and generally the practice. But it's not an easy strategy for shareholders and fund managers to abide by when the home market is skyrocketing and their foreign fund is grounded.

''When the US market bottomed in August 1982 and then took off, I remember vividly how the shareholders complained,'' says Nicholas Bratt, manager of Scudder International Fund of Scudder, Stevens & Clark, New York. ''I had to constantly remind them that the fund's purpose is diversification away from the US market. But in 1983, when US markets didn't do as well, international markets did do well.''

Performance, of course, is relative. For the last ten years the best foreign-fund record has been compiled by the Scudder International Fund, which posted a 242 percent gain in net asset value. This compares favorably with a 161 percent average increase in the Standard & Poor's 500 but not so rosily with the Lipper Analytical Service's mutual fund industry average of 388 percent.

And the last five years have not been particularly buoyant for international funds. The culprit, say fund managers, is that fiscally muscle-bound all-American greenback.

''For the last three years, every other currency has been going down (relative to the dollar),'' says Mr. Bratt with a tinge of anguish in his voice.

Adds Gavin R. Dobson, Kemper International Fund vice-president: ''If the dollar wasn't a factor, in local currency terms we'd (be) up 17 percent this year.'' Instead, the Chicago-based Kemper foreign fund is down about 2.5 percent in 1984. The Scudder fund has only eked out about a 1 percent gain so far this year.

The dollar is pivotal to a foreign-funds success. The economic recovery has moved beyond the United States, and earnings for foreign firms have improved significantly in the last 18 months. Many of the overseas stock markets are at or near all-time highs. But those gains are eaten up when exchanged for dollars. When the dollar strengthens, it takes more deutsche marks and yen to equal one dollar. ''It's been like sailing into a headwind,'' comments Mr. Bratt.

Nonetheless, fund managers and economists reason that the dollar can't stay muscle-bound forever. ''I'm ablsolutely convinced we'll see the yen and deutsche mark rise in value against the dollar, says Mr. Bratt. He adds that in the last two years he has become ''very humble'' when it comes to predicting the dollar's strength.

Fund managers are encouraged by the consistency of the economic recovery outside the US - as compared with the GNP gyrations experienced within the US. ''The US economy is showing signs of slowing down. Overseas, economic activity is on a more prosperous trend. . . . And they don't have to contend with the distortions of huge trade or budget deficits,'' says Bratt.

It seems a heavy dose of Japanese stocks is basic to almost every fund. Chiefly because the Tokyo exchange is second in capitialization only to the New York Stock Exchange but also because of Japan's economic strength. Among foreign funds, Lipper reports the Merrill Lynch Pacific Fund has the best performance record over the last five years.

With nearly 70 percent of the fund in Japan, ''This is almost purely a Japanese fund,'' says manager Steve Silverman. The fund's near-term prospects? Currency and market reasoning point the way: ''I've been convinced the yen will strengthen, and so far I've been proven wrong,'' Mr. Silverman says ruefully. ''But often, when the yen strengthens, people rush into the Japanese stock market and it goes up.''

The rest of the Merrill Lynch's Pacific Fund is composed of Australia (20 percent), Hong Kong (6 percent), Singapore (.5 percent), with the remainder in cash.

A number of fund managers contacted have become bullish on Hong Kong since the September agreement between the United Kingdom and China over the colony's future. ''The Hong Kong market was battered by the political uncertainties. Stocks were selling at low multiples,'' says Michelle Newreuter, secretary-treasurer of the G. T. Pacific Fund handled by G. T. Capital Management, San Francisco.

Scudder International Fund, which Lipper bestows with the second most profitable five-year record among foreign funds, is remarkable for its relatively small Japanese component. With investments in 19 countries, ''We're probably more widely diversified than ever before,'' says Mr. Bratt.

Why the reduction in Japanese holdings (to 24 percent of the portfolio)? ''It's a matter of valuation. The stocks are simply too expensive,'' he says. Sound familiar?

With the Japanese market close to a record high, foreign fund managers sound a lot like US investment mangers. ''We've seen earnings disappointments - especially in the technolgy sector. We're looking at quality stocks,'' says Ms. Newreuter at G. T. Pacific.

At Kemper International, the fund has ''moved away from the foreign favorites - Japan's Honda, Pioneer, and so on - into domestic consumer stocks that will benefit from increased consumer spending,'' says manager Gavin Dobson. Purchases of supermarket and advertising stocks in Japan and France are based on the assumption that falling oil prices will be the ''equivalent of a massive tax cut'' for these countries.

If you decide to shop for an international fund, consider whether the funds are ''load'' funds (bought through a dealer who charges a commisson fee) or ''no-load'' (bought directly from the fund with no extra fee). Six of the 11 international funds surveyed by Lipper are load funds. (See chart.)

And if your portfolio doesn't include international funds, be forewarned, someone such as Michelle Newreuter at GT Pacific is apt to say: ''If you're only investing in the US, you're playing with half a deck.''