An inflation shield?

Don't get too narrowly focused, experts warn. Single-country mutual funds may perform extraordinarily one year. The Russian stock market was up 57 percent last year, for instance. Hong Kong's benchmark index, the Hang Seng, rose about 50 percent last year. The Hang Seng China Enterprises Index, which tracks 32 Chinese- incorporated companies listed in Hong Kong, rose 152 percent. Thailand's benchmark index more than doubled last year.

But "no one is very good at predicting that sort of thing," says William Rocco, an analyst at Morningstar, a Chicago firm that tracks mutual fund performance.

Mr. Tibbles suggests a more guarded approach of investing in a fund with broad international coverage. Still, Mr. Guinness argues every investor should have a 5 to 10 percent exposure to the rapid-growth economies of East Asia, including China. He helps manage two funds invested in this region, the Guinness Atkinson Asia Focus Fund and the China & Hong Kong Fund.

Dollar devaluation: The US is piling up record deficits in its balance of payments of more than $500 billion a year. That, says Tibbles, can foreshadow a weakening of the dollar. International investors are sheltered somewhat from its fall because they own stocks denominated in foreign currencies. So, if the dollar falls, the dollar value of their foreign stocks goes up.

However, the dollar has already fallen sharply against the currencies of its major trading partners - 12.2 percent last year. And it's not clear whether devaluation will continue at the same pace this year. "Perhaps not at this point of time," says Tibbles. But unless the trade deficit shows signs of shrinking, the dollar may well tumble again, he adds.

Value: In many foreign countries, stocks aren't as high-priced in relation to corporate earnings as in the US. That's reassuring for those investing overseas.

The challenge is that not all economies are growing as fast as the US economy. Europe, for one, is lagging. But Japan's economy does show some life after 12 years of near stagnation. Growth in the fourth quarter of 2003 ran at a 6.4 percent annual rate. The bench market Nikkei Stock average saw a 24.5 percent gain last year. Stocks of small Japanese firms did even better. Investors in Fidelity's Japan Small Company Fund enjoyed almost a 60 percent return in the past 12 months, and that's considered average in comparison with its peer funds, according to Lipper.

Before plunging in, investors should be aware of risks involved in foreign investing, analysts say. One is that it involves foreign-exchange risks. The rise in value fueled by the dollar's decline could turn into losses should the greenback rebound.

Another is that the fees and other costs can be higher than for domestic funds. In 2002, for example, a typical shareowner in a regional fund invested in Latin America, Asia, or Japan paid 2 percent or more of her assets in costs, notes Emily Hall, a Morningstar analyst. "But you don't have to pay through the nose," she adds, if you're careful.

A third risk exposed by the mutual fund scandals is that foreign funds, by setting stale prices for shares, allow traders to make arbitrage profits at the expense of long-term investors. "Late traders" take advantage of financial news after the price has been set to buy or sell quickly.

However, notes Ms. Hall, many well-run international funds, such as those managed by Fidelity and T. Rowe Price, set "fair prices" for their shares to discourage such "timing" practices. Moreover, some funds charge redemption fees on the sales of shares that have been held for only a short time.

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