World equity funds rise above the rest

Mutual funds investors in foreign stocks have chalked up handsome gains this year.

And while no one can predict the future, many fund managers continue to cast their eyes beyond America's borders in hopes of finding better-than-average gains in the months ahead.

One key question: How will the US dollar fare in the future? If it continues to sink against major currencies, foreign funds could post outsized gains.

For the moment, they're on a tear.

"They outperformed United States funds," notes Thomas Roseen, an analyst with Lipper, a New York firm that ranks the performance of funds.

In the third quarter, the 2,010 world-equity funds tracked by Lipper (with $425 billion of assets under management) were up 9.3 percent. That's more than twice the return of 4.4 percent for the US diversified equity funds managing $2.3 trillion in money. But foreign-fund investors didn't outperform so dramatically over the course of the year. They notched a 20.5 percent gain versus 18.1 percent for domestic investors.

Among fund managers, interest in foreign stocks continues to look strong. A survey of a dozen or so global-fund managers by Morning-star, a Chicago firm that tracks mutual funds, found that many of them were allocating more money abroad. Global funds invest both in the US and in foreign countries.

"They are not abandoning domestic stocks in droves," says Morningstar analyst Dan Culloton. "But there is a concern that the low-hanging fruit in the US has been plucked." They see more value in some foreign shares.

With $125 billion under management in global funds, a shift toward foreign stocks by fund managers can influence prices in smaller foreign stock markets.

Lipper splits its world-equity category into 12 types of funds. Among them, gold funds did best in the past quarter - a 24.9 percent gain. Funds invested in Japan or China both got returns of a bit above 21 percent. Investors in Latin American funds averaged 11.2 percent.

One advantage of owning funds that invest abroad is diversity. Stock markets in other countries don't always track the US stock market.

William Rocco, a Morningstar analyst in Ashland, Ore., suggests that 10 to 20 percent of assets invested abroad is "a reasonable goal, depending on individual circumstances." But, he adds, in calculating that percentage, investors should check to see if their US funds have foreign stocks, including many listed on the New York Stock Exchange.

Analysts also suggest that investors should keep an eye on international economic and financial news.

In recent months, for instance, investors in Europe and Japan have benefited from a decline in the value of the dollar relative to the euro and yen. The shift added to the dollar value of their investments, on top of any market gains.

Economists now see signs of economic revival in Europe and Japan. Merrill Lynch strategist Tom Sowanick told investors in a conference call last week that last month's meeting of the world's major industrial nations, the Group of Seven, in Dubai was a "watershed event." By calling for "more flexibility in exchange rates," these nations are signaling a weaker dollar and a "dramatic shift" of growth toward Asia.

Stephen Roach, an economist at Morgan Stanley, another Wall Street investment bank, sees "global rebalancing" ahead. A weaker dollar will help boost the value of investments abroad.