You should have left the country.

And taken all your money with you, preferably to Europe.

That was the simple message of July, a one of a kind month in which only 3450 of the 7,512 mutual funds in operation for the period showed a positive return. On average, funds lost 2.37 percent for the month. If you take a look at the 100 funds that turned in the best performance for the month, all but a handful were "World Bond" funds--- the kind that invest in portfolios of bonds around the world. You would have done best if you had spent July clipping coupons at some comfy place like, say, Lake Starnberg outside of Munich.

But you didn't. Neither did anyone else. Nor is it very useful, in late August, to know where your money should have been in July. So let's see if we can draw a message from the July debacle.

International investing and diversification is finally starting to pay off.

Yes, I know you've been told that international investing, like spinach, broccoli, and cod liver oil, is good for you. But this good idea, like the proverbial good deed, has not gone unpunished. Just as the nations brokers, portfolio gurus, and financial planners were starting to stand on soap boxes to preach the virtue of international investing and wave the now famous curve showing that a mix of international stocks with domestic stocks was less risky than a pure domestic portfolio, the return on international stocks started to deteriorate. ( Don't you just hate it when that happens?)

Some would say "deteriorate" is excessively polite for what really happened.

Shares of Japan oriented funds fell an average of 28.8 percent in 1990, 13.9 percent in 1991, and another 28.8 percent in 1992. Of the 23 funds that specialize in Japan, only 5 were formed before 1990 so most investors in those funds have experienced nothing but misery and loss. Similar, if less stark, stories apply to the rest of international investing. Money sent abroad was sent into dull markets. Worse, this experience has been almost universal: 80 percent of the 1055 funds that invest internationally have been formed in the last five years. Skeptics should consider the comparative performance figures form domestic and international investments.
Fund Type 3 Year Annualized Return 5 Year Annualized Return
International Stock 9.70% 9.40%
Domestic Equity 12.90 12.79
World Wide Bond 6.04 7.89
Domestic Taxable Bonds 4.52 7.94
Source: Morningstar Principia/ July
As you can see, domestic equities trounced international stocks in both time periods. Worldwide bonds, in a dead heat with domestic bonds over the last 5 years, only beat domestic bonds over the last three years because of the disaster of 1994, the worst year in history for the U.S. bond market. Now consider performance in the first seven months of this year:
Fund Type Year To Date Total Return
International Stock 5.32%
Domestic Equity 3.97
World Wide Bond 4.14
Domestic Taxable Bonds -0.11
Source: Morningstar Principia/ July
Now the international funds have started to provide the kind of offsetting performance that has made every "quant" put some international investments in every portfolio. Spinach is tasting better.

So far this year, mutual fund investors have been putting their money where the diversification is--- abroad. Figures from the Investment Company Institute indicate that net new money flowing to international funds is up sharply from last year, even as domestic sectors lag.

One compelling reason: value.

After 1995, the U.S. stock market is one of the priciest in the world according to a regular monthly ranking done by the Leuthold Group in Minneapolis. Taking a composite of five different measures ( P/E rank, Book value rank, Dividend yield rank, Cash Flow ratio rank, and Market capitalization to Gross Domestic Product rank), the Leuthold Group ranks national markets and found that the U.S. market currently ranks 20th in a field of 26--- only the major Pacific markets and Switzerland were more pricey.

Here, starting with a universe of 838 international stock funds, is a list of 5 funds that meet the following criteria: minimum investment under $10,000; no-load; Morningstar rating above average or better; 3 year annualized return greater the average domestic fund; and year to date return greater than 10 percent.
Fund Name Objective YTD 3 Year A/R Telephone
Acorn International Foreign 13.56% 13.66% 800-922-6769
Fontaine Global Growth World 38.38 19.47 800-247-1550
Janus Worldwide World 15.49 20.37 800-525-8983
T. Rowe Price European Stock Europe 10.09 18.16 800-638-5660
Wright EquiFund-Netherlands Europe 20.09 22.21 800-888-9471
Source: Morningstar Principia/ July
Are they certain winners? Absolutely not. But at least between now and November, this is a time to diversify if you haven't already.