As gloomy as things appear, however, international managers say there are still good reasons to continue allocating a portion of a portfolio to international investments. They note that valuations have gotten so low that it is possible, with good bottom-up analytics, to purchase good companies at cheap prices.

"Given the amount of pessimism, almost every equity you look at is cheap," says David Samra, co-manager of the Artisan International Value and Global Value funds. "You can buy some of the best companies in the world at very attractive multiples."

The opportunities extend to the global fixed-income market, where the spreads between government and high-grade corporate bonds have reached attractive levels, particularly in Europe, says Kristin Ceva, managing principal and head of global fixed income at Payden & Rygel.

"You can make a decent return, maybe 6%, with fairly limited downside, by being in high-grade corporates given where the spread levels have blown out to," she says.

Veteran international investors also point out that, as in better times, international provides an expanded universe of stocks that are cheaper than similar U.S. stocks. Diversification will continue to be a benefit once the extreme volatility of the market subsides and pricing valuations are based more on fundamentals than on fear and panic, they say.

Nicholas Kaiser, manager of the Sextant International Fund, notes that signs of a recovery may have already appeared in the form of a gain in the Shanghai index this year-20% as of early March. China's stimulus program seems to have injected new life into that country's economy, he says.

Indeed, some say once the current crisis has passed, global markets and economies will be stronger-that the world is, in essence, paying for a three- to four-year period in which the money supply got out of control, prompting frenzied and unrealistic growth throughout the world.
The seemingly limitless money supply fueled torrid growth in the emerging markets and the developed nations that financed them, leading to soaring international returns from 2003 to 2007. U.S. investors poured hot money into the international market, fueling valuation further. As the trend gained momentum, the international share of U.S. portfolios ballooned up to 50% in some cases.

The idea of investing in international for diversity and risk-adjusted returns was smothered by the desire for high returns, says Rupal Bhansali, manager of the Mainstay International Equity Fund. "Somewhere along the way, the world forgot about the holy grail," she says. "Clearly, it became a chase for returns without regard for the risk being taken."

Bhansali feels that if investors concentrate once again on fundamental analysis, the international market can provide opportunities even amid the current crisis. For example, she's taking a close look at companies in Japan, which suffered its own meltdown a decade ago. "A lot of Japanese companies have spent the last ten years deleveraging their balance sheets," she says.

Bhansali is also finding pockets of strength throughout the developed world, including Europe and Asia. One of her fund's top holdings is the Swiss pharmaceutical and diagnostics company Roche Holding AG, which has a line of lifesaving drugs that resist pricing pressure and which doesn't face any key patent expirations over the next couple of years.

International money managers say that, aside from expanded opportunities, taking an international view on investments provides deeper perspective. More specifically, professional investors say they've seen credit meltdowns like the current one on a smaller scale throughout the world-in Latin America in the early 1980s and in Asia from 1997 to 1998, for example. "What is unusual about this one is that it's global in nature," Bhansali says.

Before the meltdown, some international money managers had already been bracing for a collapse as they saw unprecedented levels of credit fuel the growth of the global economy. "If you go back and look at our annual letter to investors a couple of years ago, I talk about the fact that if it were easy to fix problems by printing money, everyone would be doing it," says Paul Hechmer, manager of the Nuveen Tradewinds International Value Fund. "We tried to emphasize to our clients that the next bear market would be more broad-based than the last bear market."

Hechmer says that until the end of 2007, his fund sold off its exposure to the finance sector, sold off overleveraged companies and sold companies with inflated valuations due to acquisition and merger expectations. The fund also bulked up on defensive companies with little debt.

Now Hechmer is positioning his fund to defend against either inflation or deflation. He feels one of the two will win out "massively" as the global crisis plays itself out. He put 20% of the portfolio into gold, which he says provides a good instability hedge no matter which way the economy goes.

As for the other 80% of his portfolio, Hechmer is split down the middle. "Unfortunately, the names you want in your portfolio for one are not the names you want for the other," he says.

To guard against deflation, he is buying defensive companies with good balance sheets. Many of these companies, he notes, are from Japan. For the inflation hedge, he is looking for companies with fixed hard assets.

As a value manager, Hechmer feels this is a good time to look for bargains. "It's probably more so now than at any other time in the last 20 years," he says. "It's certainly not the time to be pulling money out of the market."

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