AS I PROMISED

last

, in the next few columns I'll be looking beyond the Standard & Poor's 500 in search of compelling investing opportunities.

One of the most often overlooked deficiencies of the S&P 500 is that it ignores foreign stocks completely. Fasten your seatbelts as we take a trip abroad.

Back in the early 1990s, before the tech boom, the excitement wasn't over Cisco Systems or the Nasdaq-100 Trust, but rather the prospects of international and emerging-market economies. Nowadays, while many argue that domestic multinationals such as Coca-Cola or McDonald's offer all the foreign exposure an investor might need, I'm an unabashed bull on pure plays outside the U.S. No matter what happens with JDS Uniphase, I'm firmly of the belief that the next big bull market won't be found in American stocks or bonds, precisely the assets most of us still own.

I first began talking about international investing more than a year ago, when I suggested that foreign stocks offered investors an opportunity to diversify into assets less correlated with U.S. equities. The particular investment I mentioned, the iShares MSCI Austria Index Fund, is up 9% since that column was published, and remains one of a number of smart international investments for domestic investors looking to wean themselves from the S&P 500.

But beyond the diversification argument, which came back into fashion when the major indexes began falling, I'm a fan of international stocks on their own merits. Regardless of the shape of the U.S. markets, the fact is that there are thousands of promising investments outside U.S. shores, many of them shockingly underowned and most of them selling at bargain-basement prices and valuations. In addition to a number of high-quality mutual funds, U.S. investors can also plunk down money on foreign stocks via American depositary receipts, or ADRs.

The U.S. economy has benefited greatly from its first-mover advantage. The net effect of being history's most prosperous civilization is that U.S. assets are overowned by Americans and foreigners alike. How overowned? According to Ibbotson Associates, U.S. companies account for more than half of the world's stock-market capitalization. This percentage, I believe, is poised to decline.

World Stock-Market Capitalization (Year-End 2001)
APPLET PLACEHOLDER: archive=Multipie.jar height=268 width=145 Source: Ibbotson Associates

If you're in it for the "

," I'd suggest your best bet isn't American stocks, but rather international ones. Because despite our patriotic preference for holding culturally familiar names, foreign stocks have historically beaten the pants off their domestic counterparts.

In the 1970s and 1980s, international stocks handily outpaced U.S. names, and even during the 1990s, they only trailed by a relatively small margin. And despite the huge gains for U.S. stocks during the 1990s, at no point was the S&P 500 the world's best-performing stock market. Finland, Hong Kong and Portugal are among the overachievers that have recently beaten the U.S.

In recent months, some of the biggest international investing gains have come from emerging markets, many of which I mentioned several months back within the context of closed-end funds. And although many of the funds' discounts to their net asset values (NAVs) have narrowed, the investment prospects for the underlying markets have only brightened. Of the 17 funds I outlined in that column, all but a handful are up more than 20% in just over a year. To that list I'd add a new name the Central European Equity Fund, which still trades at more than 11% below its NAV.

Annual Total Returns in U.S. Dollars
APPLET PLACEHOLDER: archive= height=300 width=445
Source: Ibbotson Associates

But because many emerging-markets funds now trade at a premium to their NAVs, investors interested in emerging markets might want to use ETFs or open-ended mutual funds, both of which I discussed a few months back. Despite their "risky" reputations and their recent stellar returns, from Hungary's Magyar Tavkozlesi Vallalat Rt. to Indonesian Satellite, I believe both emerging-market bonds and stocks remain solid investments today.

Among the more developed economies, I continue to be bullish on Japan. Although the Nikkei 225 has gained about 10% since that column was published, I'm not a seller just yet. In addition to the names I mentioned in December, I'd add Nomura Holdings to the list of promising bargains in the land of the rising sun.

Some other international bargains can be found in Europe. British American Tobacco, maker of Lucky Strike and other hip brands, is an international company ironically traded on the American Stock Exchange. The stock is up about 40% since I first mentioned it, not including the generous 6% dividend. Other European favorites include a pair of Irish banks: the Bank of Ireland and Allied Irish Banks. The latter is up about 20% since I first mentioned it just eight weeks ago.

Some of the best foreign investments right now happen to be in bonds, not stocks. The weakening U.S. dollar has helped boost the returns on foreign-currency-denominated bonds. The Aberdeen Asia-Pacific Income fund, the Aberdeen Commonwealth fund, the Emerging Markets Income fund and the Templeton Global Government Income Trust are among my favorite closed-end funds holding non-U.S. bonds. For investors who prefer open-ended funds, the American Century International Bond fund is a relatively tame choice that should benefit from a continued rise in the newly resurgent euro.

Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund. Hoenig's fund has positions in many of the securities mentioned in this column.