Foreign stocks the unnoticed success of '04

By Todd Mason
Knight Ridder News Service

International stocks are outperforming U.S. stocks after a long, disappointing stretch — so long some experts and investors began questioning the value of owning foreign stocks.

"The sun has been shining on foreign equities for a while now even though people haven't realized it," said Hans van den Berg, manager of the 1838 International Equity mutual fund in King of Prussia, Pa.

Van den Berg's mutual fund — whose largest stakes are in Japanese, British and German stocks — has beaten the Standard & Poor's 500 index handily since 2002, earning an average annual return of 7.1 percent through October versus 1.2 percent for the S&P, according to Morningstar Inc.

The Morgan Stanley Europe Australasia and Far East index — a broad measure of international stocks — was up 10.7 percent this year through Nov. 12, while the Standard & Poor's 500 index rose 6.5 percent. The Morgan Stanley index tracks stocks in 21 developed countries outside of North America.

Even so, investors have been slow to pick up on improving fortunes abroad. Of $208 billion flowing into stock mutual funds so far this year, $36 billion, or 17.3 percent, went to funds investing in foreign stocks, according to Lipper Inc.

Investors are missing a chance to reduce risk in their portfolios, said Ted Smith, a senior vice president in the wealth management group at Delaware Investments in Philadelphia.

"Investors should diversify precisely because they don't know whether U.S. or foreign stocks will outperform," he said.

There was no question which group did better in the great bull market of the late 1990s. The average annual total return of the S&P 500 towered over that of Morgan Stanley index.

What's more, foreign stocks fell harder than domestic stocks in the initial months of the bear market in 2000.

Some stock market theorists are de-emphasizing geography, said Kevin Johnson, a principal at Aronson Johnson Ortiz LP, a Philadelphia institutional money manager. "They are looking at what the company does for a living, rather than where it does it," he said.

Foreign-fund managers do not dispute growing economic globalization. But they say they now have an ally that will keep them outperforming: the U.S. dollar.

The dollar has fallen 26 percent since 2001, according to a Federal Reserve Board index tracking it against a basket of major world currencies.

That is good for American investors: Capital gains — profits from share price increases — and dividends earned in foreign currencies get an extra boost when the dollar is weakening because euros and yen are worth more when they are converted back into dollars.