Don't Fear These Stocks

International stocks, particularly those in emerging markets, have thumped the S&P 500 over the past five years. Accordingly, investors last year withdrew a grand total of $46 billion from domestic funds and placed $139 billion into international funds.

But although the allocation gap is closing, American investors still hold three times as many assets in domestic stock funds as they do in international funds -- even though the combined international gross domestic product is three times that of the United States!

Before you give all of those xenophobic investors a stern wag of the finger, realize that their logic has merit. For one, the diversification benefits of investing abroad have generally decreased as global markets have converged in recent years. Moreover, there are added risks to consider, including political, currency, and economic risks, not to mention different accounting standards.

Friends in high places
And these folks aren't alone in their skepticism about the international markets. Vanguard founder John Bogle, one of the most respected names in the investing world, has long discouraged individual investors from dipping into the overseas markets for many of the aforementioned reasons. In a 2003 interview, for example, Bogle had this to say:

I believe the average investor does not need international. … In the long run, it's reasonable to assume that international returns are likely to be similar to U.S. returns once you wash out the dollar. The problem with international is that 25% of all revenues and profits of all U.S. companies are international. So I don't think you're diversifying further.

A tip of the cap
If you find yourself nodding in agreement with Bogle, you'll be glad to know there are plenty of U.S. multinationals that do much of their business overseas.

In fact, with $4 billion in assets, the Fidelity Export and Multinational Fund (FEXPX) is a large-cap growth fund specifically designed to harness this trend. It has generated market-beating 13% annualized returns over the past five years by investing in U.S. companies that are expected to benefit from selling their goods and services in foreign countries. Top holdings include:

*Data provided by Capital IQ, a division of Standard & Poor's; fund holdings as of March 31.

Knowledge is power
I don't want to stand in disagreement with Bogle, an investing legend whom I deeply respect. He's correct that U.S. investors can get a taste of international growth through U.S. blue chips, but there's a bigger growth potential to be had in hand-picking "pure" foreign plays. When I look at companies such as Australia's BHP Billiton (NYSE: BHP), I see a business that generates just 7% of its revenues in North America but that has returned nearly 510% over the past five years. Motley Fool Global Gains pick HDFC Bank (NYSE: HDB), which does 100% of its business in India, rose by more than 640% during that same period.

Moreover, because foreign companies that do very little business in the United States have less exposure to the vicissitudes of the U.S. economy, they can provide you greater diversification benefits.

Parlez-vous Anglais?
Of course, these companies can be more difficult to understand than U.S.-based businesses are, since they operate in economies, political environments, and cultures that we may not be familiar with here in the States. It would be naive, after all, to buy HDFC Bank without first understanding the Indian political and economic scene as well as the financial habits of India's growing middle class.

That's why the Global Gains team, led by Bill Mann, researches not only the financial health and growth opportunities of the stocks they recommend but also the potential political and economic risks. As you look for new investments, don't fear foreign stocks -- even with these added measures of due diligence.

If you'd like a shortcut, you can get free access to all of our stock picks and research at Global Gains, free of charge for 30 days. There's no obligation to subscribe.

Fool contributor Todd Wenning always covertly tests the water before jumping in. He does not own shares of any company mentioned. When you have to blame it on something, The Fool's disclosure policy advises you to blame it on the rain.