Many financial advisors hoping that international diversification would help take some of the sting out of the plunge in the U.S. market probably have been disappointed lately by straggling performance of markets overseas. Last year, the Morgan Stanley Capital International Europe, Australasia and Far East Index (MSCI EAFE), a broad index of international equities, fell 14.2%, significantly worse than the Standard & Poor's 500 Index. During the first quarter of this year, it dropped another 13.7%.

For the better part of the last decade, foreign equities have underperformed domestic stocks on both the way up and the way down.

Any way you slice it, international equities have disappointed investors for most of the last decade. The gap between domestic and foreign stocks became particularly pronounced in the second half of the '90s when the U.S. bull market shifted into overdrive. From January 1995 through April 2001, the Standard & Poor's 500 Index returned 17.8% on an annualized basis, more than triple the 5.7% return of MSCI EAFE. The EAFE was hobbled by the beleaguered Japanese stock market, which still represents a huge weighting in the index. European equities for the most part outperformed the EAFE, but they still trailed U.S. stocks badly.

To find out how foreign-fund managers are weathering the storm and what may lie ahead for investors, we spoke to well-known managers of three international mutual funds.

Advisors and investors who hate losing as much as they like winning find that this fund strikes a nice balance between the two ends of the spectrum. After lagging its more growth-oriented foreign-stock peers in 1998 and 1999, the New York-based Tweedy, Browne Global Value Fund is doing what it has done best since its 1993 inception-remembering that in uncertain markets, consistency and downside protection score more points than short-term, blockbuster returns.

"Doing well on a relative basis is nice," says Christopher Browne, referring to the performance of his Tweedy, Browne Global Value Fund so far this year. "But no one gets rich on a relative basis."

In 2000, as sinking technology and telecommunications holdings caused the MSCI EAFE to plunge, the tech-light Tweedy Browne Global Value Fund eked out a gain of more than 12%. This year, a tough one for both U.S. and foreign markets, the fund was down 2.3% in the first quarter. While that's not about to make anyone rich, as Chris Browne himself would probably point out, it is only a fraction as punishing as the drop for the MSCI EAFE over the same period.

The managers try to build in downside protection by looking for stocks that sell at two-thirds or less of what they pinpoint as their intrinsic private value. "Each company has its own measure of intrinsic value," Browne says. "And the things we look for in each case are different. A pharmaceutical company is going to have a higher valuation in the marketplace than a metal-bender industrial."

The valuation process, he says, in a disarmingly simple analogy that may be designed to dissuade outsiders from probing too deeply, is akin to buying a house. "When you look for a house in a particular neighborhood, you consider what other, similar houses have sold for," he says. "Then, you evaluate whether it's a good deal by comparison. And the valuation parameters in each neighborhood are going to be different."

Many of the stocks the fund purchases are priced at the kind of inexpensive levels that acquirers find attractive, and last year they scooped up a few fund holdings. But Browne insists that acquisitions are a side benefit, not the main goal, of selecting stocks.

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