Investors can find value overseas

If you've added international funds to your portfolio, you're probably tempted to start a riot, too: Going abroad only added to your losses this year. But don't give up on going abroad: Bargains abound overseas.

The Standard & Poor's 500-stock index fell 11.7% the first three months of 2009. International stocks only compounded your misery: The MSCI Europe, Australasia and Far East index plunged 14.6%.

Why the poor performance? Two reasons:

•First, the credit crunch and banking collapse that hit the United States knocked the gazpacho out of European banks, too. Not only did European banks get caught in the mortgage-backed securities meltdown, they also made many bad loans to Eastern Europe.

•Second, the value of the dollar soared — and, while that's good news for travelers, it's bad news for international investors.

When the dollar rises, the value of foreign securities falls. Suppose you buy 500 euros for $1.30 apiece, or $650, and stuff them in your mattress. After a few months, you dig out your euros and exchange them. While your euros have been padding your mattress, however, the dollar has gained strength: You can now buy a euro for just $1.05. So your 500 euros are now worth $525.

When the dollar gains in value, it simply compounds international investors' misery. For example, the Swiss stock market fell 10.5% the first quarter, when measured in Swiss francs. In U.S. dollars, however, the Swiss market plunged 16.2%.

Some managers say there's value in the ruins, however. David Herro, manager of Oakmark International, has been buying stocks of European consumer discretionary companies — that is, companies that depend on consumers' desires to spend their extra cash.

"Everything got hit, even though the European consumer isn't as stretched as or leveraged as the U.S. consumer is," Herro says.

He's looking at a few European banks, too, such as French bank BNP Paribas. "It's got a huge retail deposit base, and few losses in its investment bank," Herro says. But the stock got clobbered along with other banks with far greater problems, he says.

Japan's stock market fell 17.4% in the first quarter, but much of Asia held up well. Australia, for example, fell 3.3%, while the Chinese market rose 1.3%. Herro says he's finding more values in Japan than he has before. "Everyone has written them off, but there are very good buys there."

Although emerging markets have been clobbered in the past 12 months, they, too, are showing signs of a rebound. South Korea's stock market, for example, jumped 26% last month; India gained 12.1%; and Brazil climbed 10.3%.

One other bit of cheery news for international investors: The value of the dollar has sagged in recent weeks, thanks in part to U.S. bailout efforts. If the dollar continues to decline against other currencies, sending your money abroad could be a trip worth taking.