Fidelity urges investors to look abroad

International investing is suddenly a priority again in many financial circles.

"Foreign stocks spell relief," proclaims a recent headline in Business Week. "Finding profit in international intrigue," reads a headline in The Financial Times.

Also joining the call for going international: Fidelity Investments. The largest US mutual-fund company last week announced plans to launch the Fidelity International Small-Cap Fund. It's Fidelity's first new international fund since December 1998 – and possibly the only new international fund announced in the US this year.

International funds own shares exclusively in firms outside the United States. Global funds also include US firms.

The reason for the new fund, quite simply: Foreign stocks are better valued than those of US firms, says Rick Spil-lane, who heads Fidelity's global-investing strategy.

Most investors, including small investors, "should have at least 15 percent or so of their overall investment assets in international stocks," Mr. Spillane says, adding that the best way to do that is through a mutual fund.

So far this year, with a few exceptions, overseas markets have been far from stellar performers.

European stock markets have been particularly hard hit, reflecting the continent's spotty growth, and in the case of Germany, the region's largest economy, some economic contraction.

Latin American markets have been turbulent, in part reflecting financial uncertainties in Brazil and Argentina.

Asian markets have also been mixed. Some Japanese sectors have done well – small caps for example. But overall, Japanese stocks have lagged. Other parts of Asia have looked better.

So, why go international? For starters, although overseas stocks have fallen this year, they have lost less than US stocks in dollar terms, since foreign currencies have risen against the US dollar.

"It takes courage to invest abroad, since global [economic] conditions are weak," says David Cooley, who heads the J & W Seligman International Growth Fund. "But look at the opportunities," he says.

Dutch stocks, for example, are trading at 12 times earnings, with a dividend yield of about 4.5 percent, Mr. Cooley says. Hong Kong companies are trading at 13 times earnings, with a 3.6 percent yield. Europe in general is trading at about 16 times earnings.

The price-to-earnings ratio on American companies in the Standard & Poor's 500, meanwhile, is about 17, with the dividend yield under 2 percent.

The important point, says Cooley, is that international stocks, for all their problems, "have held up a little better" than US stocks during the past months.

Earlier this month, Fidelity sent out a 15-page report to its clients called "The Case for International Investing." It notes that "in seven out of 10 sectors, the best-performing stocks have been those from overseas companies."

Demographic trends "are favorable in Europe," and currency trends "may boost the returns of international stocks," the report says.

Fidelity adds that pension-fund managers have clearly identified the disparity between international and US returns. The 200 largest corporate pension plans have an average of about 16 percent of assets in overseas shares, Fidelity says. But within the giant US 401(k) market, where individuals choose their investments, only about 3 percent of assets are in foreign stocks.

Some observers question whether Fidelity is touting overseas products in an effort to offset the rush of stock redemptions by US investors. But Spillane insists that the company has always had a large international component.

Fidelity's foreign clients, he says, have traditionally put more assets into international stocks than US customers. Fidelity's US customers have some $25 billion in international stocks, while its clients abroad have invested some $100 billion, mainly through their pension programs, Spillane says.

Fidelity currently offers 19 international funds, including the new small-cap fund, which kicked into gear Sept. 24. The fund will rely on analysts in London, Hong Kong, and Tokyo, as well as its headquarters in Boston. It will also invest in some emerging-market stocks.

Spillane says that many Americans believe an investor can ride overseas gains just by investing in US companies with big overseas exposures – companies such as GE, Coca-Cola, or Intel. "But the weight of evidence," Spillane says, "suggests that US firms tend to track US markets, even if they have a substantial overseas exposure."

To truly diversify, Spillane says, a person needs to buy overseas firms.

Spillane concedes that a US invasion of Iraq could produce an immediate short-range negative impact on overseas markets, as happened during the Gulf War.

But assuming that there are no unusual complications, he says, both US and overseas markets should quickly stabilize. Besides, he says, when investing abroad, a person should be looking toward a fairly long-term horizon of three years or more.

Most independent mutual-fund analysts agree. Russ Kinnel, who heads equity analysis for information firm Morningstar, says a person should have a small part of his or her assets, perhaps between 10 and 20 percent, in overseas firms and invest for the long haul.