IF YOU ARE LIKE

most investors, then your portfolio's passport is heavily stamped from stops across the globe. Billions of dollars have flowed into international funds in recent years as these offerings posted sweet returns that almost doubled the tallies of U.S.-centric ones. It's not unusual these days to see a moderate or even a conservative retirement account owning stocks that are based in countries like Japan or Europe, in addition to those in underdeveloped markets like Korea, India and Latin America.

It's the funds that invest in that latter group what Lipper refers to as emerging markets that are candidates for this week's fund screen. We started with a universe of 360 funds and share classes. However, we cut a whopping 313 of them because they charged sales loads. And after accounting for performance and cost benchmarks, only seven remained. That's our shortest list of the year and the one with the largest returns. Over the last five years, this group gained an average annual 43.6%.

There are some strong arguments for putting money in emerging markets. First, it helps diversify a portfolio that might be lopsided with domestic equities. This position also has the potential to juice portfolio returns, since international stocks, at least in some cases, have better growth prospects than shares here in the States. A weak dollar doesn't hurt, either. And, as overseas companies adopt strict accounting standards, publish quarterly and annual reports and open their factory doors to curious investors, past concerns about a lack of transparency have become less of an issue.

Emerging markets, though, aren't free of risk. Many underdeveloped economies are heavily impacted by commodity prices, especially oil. That can lead to extreme volatility when those prices start to swing. And politics always plays a part. Shaky governments that make knee-jerk economic decisions can scare away outside investors or cause the ones who did place a bet to lose everything. "We very much like what is happening in emerging markets," says J.J. Burns, founder of his namesake financial planning firm in Melville, N.Y. "But a lot of the core fundamentals comes down to government policies."

There's also some performance chasing going on here. Investors inevitably follow good returns. (More than $5 billion flowed into these funds in just the first week of October, says EPFR Global, a company that tracks fund flows.) The problem is trying to determine whether they're showing up too late to the party. China funds have gained an average 59% over the last 24 months. One of the biggest debates going on right now is whether those numbers will continue. We doubt it. They might still post decent returns, but don't expect the high-flying days to last forever. (A note: China funds don't show up on this list since Lipper devotes a separate category to them. You can find those funds using our screening tool

We would suggest limiting your emerging market holdings to 5% or less of your entire portfolio. (A more diversified collection of international funds could account for 20% to 30% of your account.) And don't get greedy. Take profits off the table when the funds rise in value. "We sprinkle [emerging-market funds] throughout our various portfolios," says Kenny Landgraf, founder of Kenjol Capital Management in Austin, Texas. He agrees this position needs to be adjusted depending on how the markets are performing. "But it's not something we simply buy and stay allocated to. It's more of a rotational approach."

If you're interested in investing overseas there are a couple of ways to play it. You could purchase what are called American Depository Receipts, or ADRs. These are specially-issued shares of international companies that trade on U.S.-based exchanges. While ADRs are an easy and cheap way to get international exposure, they also tend to only be issued by large multinationals instead of companies in developing nations. These multinationals typically derive some of their revenue from the U.S. That means you've lost that diversification that made international investments attractive in the first place. In addition, some ADRs are thinly traded and could be difficult to sell if things go awry.

There are also exchange-traded funds to consider. The $23 billion iShares MSCI Emerging Markets Index invests in 297 companies in South Korea (15% of the portfolio), Hong Kong (14.6%), Brazil (12.4%), Taiwan (9.3%) and South Africa (7.7%) among others. Top holdings include Samsung, China Mobile, Kookmin Bank and Taiwan Semiconductor Manufacturing. This ETF has returned an average annual 38.3% over the last three years. Vanguard offers a similar fund the Vanguard Emerging Market Stock Index that charges a dirt cheap expense ratio of 0.30%. (The average emerging market fund costs 1.8% a year.)

We think the smartest option, though, is to go with a mutual fund that has a seasoned pro at the helm. One that made our list was T. Rowe Price Emerging Markets Stock fund. It is run by four experienced managers who each have regional expertise in different parts of the world. They prefer to buy companies that have strong earnings growth and a cheap share price. The portfolio has a large percentage of its assets in Brazil (12.7% of the portfolio) and South Korea (12.1%), in addition to Latin America, parts of Europe and Asia. It holds 139 stocks and has a turnover of 49%, low for a fund category that can be volatile. Although the fund got hit hard in August, when markets across the globe were retreating because of subprime concerns and a credit crunch, it has still managed to post a 36.7% return year to date. That should sound good to any investor, regardless of which part of the world he's in.

The Criteria
The emerging-market funds on our list are open to new money and require a minimum investment under $5,000. Their performance track records over the previous three- and five-year periods were in the top 50% of their category. This week, we relaxed our usual 1.5% expense ratio benchmark since we realize it can be more expensive to run an emerging-market fund. We used 1.8% instead, which is the category average, according to Morningstar.