An inflation shield?

American investors saw stock prices surge last year, peak this winter, and retreat a little this month.

As a result, some anxious investors may be considering alternative investments to the domestic stock market. One intriguing possibility: international stocks.

Most of these funds enjoyed large gains in share prices over the past year. And if the decline in the value of the dollar against other currencies continues, they could benefit again this year. That's one reason why some financial advisers suggest investors move a chunk, but not all, of their portfolio into stocks over-seas.

"Anything that has that big a run-up has an opportunity to turn down again," warns William Roseen, an analyst with Lipper, a mutual fund research firm in New York.

After seeing last year's splendid performance of foreign investments, American investors put more money into international mutual funds in January than in any other month since the peak of the stock market bubble four years ago. That amounted to $11 billion in four "world equity" fund categories - emerging market, global equity (which usually includes the US as well as foreign markets), international equity, and regional equity funds. That brought the total net assets in such funds to $540 billion, calculates the Investment Company Institute in Washington, D.C., which represents the mutual fund industry.

Like their US counterparts, most stock markets around the globe rebounded after losses over the past three years. That rebound made portfolio managers of many funds invested in these markets look smart. Eaton Vance Greater India, for example, returned a whopping 122 percent last year, among the best of all funds investing globally.

On average, the hundreds of funds investing abroad outdid similar domestic offerings. For example: A typical foreign fund investing in large companies made 33 percent for its shareholders last year, compared with 26 percent for a similar fund invested in the US. Funds invested in small foreign companies did even better - close to 60 percent.

And a weakening dollar gave many mutual funds that invest in, say Europe, Canada, and Japan, extra kick.

So far, the streak has continued into 2004. Small-cap international funds, those investing in smaller companies, returned 5.9 percent through March 10. Shares of international funds that include bigger firms, rose 2.9 percent, calculates Lipper.

A risk for new international investors is that the big gains may have already happened. Investors will be fortunate to get a 5 percent annual return over the next five years, says Tim Guinness, manager of Guinness Atkinson Global Innovators Fund, a large-cap growth fund in London.

Nonetheless, some analysts hold that investors should consider putting a portion of their portfolio into mutual funds investing abroad. Maybe 10 percent, says Mr. Roseen.

Here's why:

Diversification: Though many foreign markets tag along with the ups and downs of the American markets - or even vice versa on occasion - there is often enough difference in performance over time from the US market to provide extra stability to an investment portfolio.

"Best not to have all the eggs in the same basket," says Thomas Tibbles of Forward Hansberger International Growth Fund in Toronto.

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