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Great Expectations: What Popular Foreign Funds May Be In For

Investors have flocked to international funds, but have they made good choices?

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Just five years ago, some may have questioned the utility of international funds. After all, U.S. stock funds were soaring to the top of the performance charts in the late 1990s. Then when markets came tumbling down in 2000, international offerings didn't provide all that much ballast. In the relative calm of the past few years, though, many international funds have proved their value, and investors have noticed.

Recent fund flow data, provided by Financial Research Corporation, or FRC, show that investors have been loading up on international funds. As of the end of September 2006, FRC estimates that "International/Global" funds now compose fully 20% of mutual fund assets. Although global funds include U.S. stocks and investors certainly have investments other than mutual funds in their portfolios, it indicates that foreign investments have become a bigger piece of investor portfolios than they have been.

The increase is simple mathematics. First, international funds have performed quite well compared with U.S. stock funds. Over the past one- and three-year periods, every foreign-stock category (with the exception of Japan-stock) has outdone every diversified U.S. stock grouping. Second, investors have been buying foreign offerings in recent years. For 2006 through September, the three largest foreign categories, foreign large-value, foreign large-blend, and foreign large-growth, together took in nearly $70 billion--close to 40% of total year-to-date flows into all mutual funds.

Bridget B. Hughes does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.