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Mutual funds are best path outside U.S.

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It's a big, wide world out there. Investing in foreign stocks and mutual funds lets you take a bold step into that world so that you can diversify your personal portfolio in 2003.

Just keep in mind that a lagging economy, the possible fallout from a military action in Iraq and corporate earnings disappointments aren't confined to the United States. Many countries around the world are bobbing around in the same boat that we're in, hauling a few of their own unique problems on board as well.

Each year, some of the world's stock markets handily beat U.S. results. With a myriad of countries, that's bound to happen and doesn't transform any of them into sure things.

Pakistan posted the biggest gain of any stock market last year, up 154 percent due to new political and economic links to the United States and its allies. That country plans to sell ownership stakes in some state-run companies and recently elected a prime minister who promises not to oppose President Pervez Musharraf.

Yet even a casual observer can see risks in Pakistan. So the best way to invest internationally is either through a diversified mutual fund run by an experienced manager or by buying stock of a company that's fundamentally sound — whatever happens in its homeland.

Global stock investors have endured three tough years, and Argentina's troubled stock market tumbled 56 percent last year. The less developed markets turned in the most promising returns. Upcoming entrance of 10 nations into the European Union boosted Eastern European nations such as the Czech Republic and Hungary, their stock markets rising more than 30 percent last year.

The Morgan Stanley Capital International (MSCI) emerging market index declined 6 percent in 2002, less painful than the 16 percent drop of its more general foreign stock index and the 23 percent fall of its U.S. stock index.

"Any Middle Eastern conflict is bad for emerging markets, though some countries would be supported medium term by their oil, gold and other commodities," said Clive Gilmore, London-based portfolio manager of Delaware Emerging Markets Fund, up 6.1 percent over 12 months. "There are always risks, such as the possibility of government debt default in Brazil and the question of whether China will be a winner from global growth."

Emerging markets, formerly a "poor cousin," for two years have outperformed developed markets, Gilmore pointed out.

His fund profited from South Korea's Posco (PKX) steel company and KT Corp. (KTC) telecommunications firm. Other stocks available in the United States as American Depositary Receipts include China's Yanzhou Coal Mining (YZC), Mexico's Cemex (CX) cement maker, Chile's Provida (PVD) pension management and India's Icici Bank (IBN).

"If a war in Iraq lasted a while, there would be a series of bad results," warned Andrew Clark, senior research analyst with Lipper Analytical Services. "Asia, except for Japan, depends on foreign energy sources, so hikes in oil and natural gas would hit extraordinarily hard."

Developing markets of Asia offer the most potential in 2003, followed by the United States and Europe, Clark believes. While the weakening U.S. dollar does offer opportunities for foreign companies, one must be realistic.

"The weakening U.S. dollar will help some foreign companies, but you must decide exactly which currency you're comparing the dollar against," explained David Bowers, global investment strategist with Merrill Lynch. "The dollar weakening against the euro means that Europe's more defensive stocks, such as utilities, food producers and beverage makers, are likely to benefit most."

While emerging market stocks do carry risk, Bowers noted that even among U.S. companies many Nasdaq Stock Market equities have carried substantial risk.

"Investors should take the long-term view that emerging markets should do well, but employ a cautious, gradual approach, too," advised Jacob Rees-Moog, London-based portfolio manager for Eaton Vance Emerging Markets (ETEMX), up 4.59 percent.

His portfolio benefited from South Africa's Harmony Gold Mining (HMY). It holds beer exporter Fomento Economico Mexicano (FMX) and Russia's Mobile TeleSystems (MBT). All are available on U.S. exchanges.

Best-performing emerging market stock funds the past 12 months, according to Morningstar Inc., have been:

Delaware Emerging Markets "A" (DEMAX); $7 million in assets; 5.75 percent "load" (sales charge); $1,000 minimum; 1-800-523-4640; three-year annualized decline 6 percent; up 6.1 percent.

Eaton Vance Emerging Markets "A" (ETEMX); $10 million; 5.75 percent load; $1,000 minimum; 1-800-225-6265; three-year annualized decline 7 percent; up 4.59 percent.

Some economic trends in developed markets are also positive.

"We're encouraged that corporate and household debt levels are a lot less in Europe than the U.S., which means the medium-term economic outlook could be better in Europe," said Charles de Vaulx, portfolio manager of First Eagle Overseas (SGOVX), a diversified foreign stock fund up 14.74 percent over 12 months. "While the U.S. dollar has come down, it remains overvalued with room to weaken more, which benefits our fund."

Top foreign stock funds for the past year have been:

First Eagle Overseas "A" (SGOVX); $1 billion; 5 percent "load" (sales charge) $1,000 minimum; 1-800-334-2143; three-year annualized return 9 percent; up 14.74 percent.

AXA Rosenberg International Small Cap (RISIX); $8 million; no load; $2,500 minimum; 1-800-447-3332; three-year annualized decline 4 percent; up 3.73 percent.

Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.