SINCE THE ECONOMIES of the world's different regions tend to boom and bust in cycles that offset
each other, international stocks can provide excellent diversification for a portfolio heavy on U.S. equities.
And a fund with a good manager is often the best way to go, because research is scarce and foreign
companies are notoriously hard for individual investors to track on their own.
Foreign-stock funds allow you exposure to overseas markets at varying levels of risk. Some are fairly
tame. Others can make your hair stand on end. Consider the experience of the summer of 1998, when
the Asian economies fell like dominoes and plundered stocks in the region. Funds like Pioneer Emerging Markets and Ivy Developing Nations, with heavy exposure to Asia, got hammered. Even when foreign economies are doing reasonably well, currency fluctuations can have a negative effect on stock prices.
Of course, economic and currency risk can also swing very strongly in a positive direction. So, as
always, diversification is the key to managing risk. Funds investing overseas fall into four basic
categories: global, international, emerging market and country specific. The wider the reach of the fund,
the less risky it is likely to be.
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Global Funds
Global funds are the most diverse of the four categories. But don't be fooled by their
cosmopolitan-sounding name. They're able to invest in any region of the world, including the U.S., so
they don't actually offer as much diversification as a good international fund. A prime example: Idex
Global, which is 26% invested in the U.S., 11% in Britain, 8% in France, 6% in Japan and 6% in
Germany. Global funds tend to be the safest foreign-stock investments, but that's because they
typically lean on better-known U.S. stocks.
International Funds
These funds invest most of their assets outside the U.S. Depending on the countries selected for
investment, international funds can range from relatively safe to more risky. Fidelity Diversified
International, for instance, has its assets spread over 44 different countries, many of which are in
Europe. Oakmark International Small Cap, on the other hand, has significant exposure to some of the
most volatile regions in the world: Thailand, South Korea, Hong Kong and Turkey. The best thing to do
is to choose a fund with the best balance, or make damn sure the manager has done a good job of
moving in and out of regions profitably.
Country-Specific Funds
These funds invest in one country or region of the world. That kind of concentration makes them
particularly volatile. If you pick the right country -- Britain in 1998, for example -- the returns can be
substantial. But pick the wrong one, and watch out. Only the most sophisticated investors should
venture into this territory.
Emerging-Market Funds
Emerging-market funds are the most volatile. They invest in undeveloped regions of the world, which
have enormous growth potential, but also pose significant risks -- political upheaval, corruption and
currency collapse, to name just a few. Don't go near these funds with anything but money you are
willing to lose.