Foreign stocks prop up many U.S. mutual fund portfolios

— -- International funds gave your portfolio a boost in the first half of the year, thanks to red-hot overseas markets and the declining value of the U.S. dollar.

The average international large-cap core fund gained 6.3% this year through June, vs. 4.8% for its U.S. counterpart. ("Core" means that the fund looks for stocks that sell at a reasonable price, relative to future earnings.)

The MSCI Europe, Australasia and Far East index rose 2.9% in the first half vs. 3.2% for the Standard & Poor's 500-stock index. But foreign stocks got a boost from the currency markets: Measured in U.S. dollars, the EAFE index gained 5.6%.

U.S. investors gain when the dollar falls against other currencies. For example, suppose you bought 100 euros last year for $150, or $1.50 apiece. Now suppose the dollar falls in value: It takes $1.65 to buy a euro. If you were to exchange your 100 euros for dollars, you'd get $165 and pocket a $15 gain.

When the dollar strengthens, U.S. investors in foreign markets lose ground. The currency effect wrecked returns from international funds during last year's bear market, as foreign markets collapsed and investors worldwide rushed to the safety of the U.S. dollar.

But then as the credit crunch began to ease in the first quarter, foreign markets, particularly in the Far East, soared:

•Singapore's market gained 43.1%.

•Hong Kong jumped 32.6%.

•Australia rose 23.2%.

Emerging markets, which are new or smaller overseas markets, had the biggest runs. The average emerging markets fund gained 33.4% in the first half. Markets in India, Indonesia and Brazil all rocketed more than 50%.

Big gains like these come with outsized risks: Last year, all three plunged more than 50%.

Will the rally in foreign stocks continue? Standard & Poor's thinks that developed overseas markets, such as the United Kingdom and Japan, will largely drift sideways.

Emerging markets could continue to outperform U.S. and international markets, but countries such as Russia and Brazil depend largely on exports — an area that's not likely to continue to grow unless worldwide economic growth picks up.