Posted on: Thursday, May 22, 2003

Foreign stock funds gain appeal

By Sandra Block
USA Today

A weaker dollar will boost the price of your favorite Chianti, and a hotel room in Paris may cost more this summer.

But what does it mean for your investment portfolio?

As is usually the case, it depends. Some U.S. manufacturing companies benefit from a falling dollar because it makes U.S. products cheaper abroad, increasing demand. But a long-term decline in the dollar could also derail foreign investment, which would slow the U.S. stock market's recovery.

In the past year, the dollar has weakened sharply against both the euro and the Japanese yen. The euro in particular has been trading around four-year highs against the dollar. In late New York trading yesterday, the euro was quoted at $1.1678, down from $1.1738 late Tuesday.

International funds, which performed even worse than U.S. funds during the bear market, stand to benefit from the dollar's decline. Mutual funds have to price their foreign holdings in dollars every day, and those assets become more valuable when the dollar declines.

Some foreign funds have already posted big increases.

Fidelity Canada is up 16.7 percent this year, according to fund tracker Lipper. Driehaus European Opportunity is up 16.1 percent.

But financial planners advise against loading up on international funds, particularly those that concentrate on a specific region. The dollar's decline could "reverse itself very quickly as other governments try to weaken their own currencies," says Grant Rawdin, a financial planner for Wescott Financial in Philadelphia.

Still, many planners believe international funds can play a minor role in a diversified investment portfolio. Ray Ferrara, a financial planner at ProVise Management in Clearwater, Fla., says his clients typically invest 10 percent to 15 percent of their savings in international funds.

If you're interested in shopping abroad, be sure to consider variety. While some regional funds, such as Europe funds, have done well in recent weeks, a broadly diversified fund offers less risk at a lower cost, says Emily Hall, a fund analyst for Morningstar.