International markets outperformed their U.S. counterparts for the sixth straight year last year, although that performance has been tempered and is expected to slow in 2008.

The sector's attractive relative valuations still support a healthy outlook for international investing, says Bob Smith, the manager of T. Rowe Price's International Stock Fund. Smith is warning, however, against investments in global companies that will be roiled by a U.S. slowdown and fluctuations in the dollar.

"Asia still shows strong growth potential, Europe is in better shape than it has been in the past and emerging market fundamentals remain robust," says Smith. "Looking ahead, international equities should continue to outperform the U.S., and emerging markets should outperform developed markets, albeit at more moderate levels than in recent years."

Of course, fund performance is relative, especially these days when there is little in the investment world that hasn't fallen from grace.

The S&P 500 index was down more than 9% year to date in March, while international blend funds were down 6.19%. The T. Rowe Price International Stock Fund that Smith manages was down some 8.4%. If you take away the currency advantages, European markets didn't perform much better than the U.S., says Smith, who is concentrating on growth stocks and shedding concentrations in names such as AXA and Toyota.

T. Rowe Price managers' main concern is the impact that a U.S. slowdown would have on companies that depend on U.S. companies to buy their goods and services. The United States still accounts for 25% of global GDP and is the primary buyer for many international firms. So if the U.S. slows down, the rest of the world will slow down too, something that is  starting to materialize.

Still, there are undeniable positives in Europe, which is reaping the rewards of steady economic growth, rising employment and strong demand from emerging economies. Inflation is under control and consumer spending remains steady. Japan and Asia aren't faring as well, since spending is down and economic growth is slowing in those regions, resulting in performance that has severely lagged that of other developed countries for two years running.
While T. Rowe Price's Smith tends to steer clear of smaller and mid-cap stocks, another fund manager, Cynthia A. Tusan, believes her fund-the Aston/SGA International Small-Mid Cap Fund-is perfectly positioned to exploit those international market capitalizations. You can't buy a benchmark for this fund, launched last November, which Tusan says is an exciting prospect. "It's hard in this business to offer value-added, and we believe we're doing that."

The fund uses a multifactor quantitative model to look for up to 150 of the most attractive international stocks based on valuation, growth, quality and sentiment. Tusan says her fund uses bottom-up stock selection to identify companies with the potential for high, risk-adjusted returns. Aston's year-to-date return is -7.61%.

"Because what we do is so challenging, there is very little competition in this space, and it lends itself to quantitative analysis," Tusan says. "We believe that the decline is behind us and our investors coming in the door now won't have to suffer that."

One of the international sector stories Tusan's fund likes is shipping and transportation in Asia. Names Tusan is buying include Neptune Orient Lines and Orient Overseas. Both are marine transport companies, based in Singapore and Hong Kong respectively, with vast exposure to Asia's growth in trade and commerce. Tusan also likes Air New Zealand, which she says is a central player in Asian travel, which is on the rise.