Cancel That Trip Abroad?

International funds have returned an average annual 19% return over the past three years vs. about half that for their U.S.-based counterparts. And investors aren't looking to return stateside any time soon. Three out of every four dollars invested in mutual funds this year, or $123.5 billion, went into those investing overseas. That's on the heels of another $500 billion earmarked for the category since 2003.

Those fund flows may be a cause for concern. "It's a red flag," says Jason Hsu, a principal at Research Affiliates. "People are chasing performance. They always have and they always will."

The typical investor is notorious for showing up late to the party. Just ask those who got burned by the Nifty Fifty in the 1970s or the run-up in tech stocks 30 years later. We aren't saying a similar situation is brewing here. But whenever that much money flows in the same direction — and goes after the same stocks — there is reason to pause.

Think of it this way: Last year we told you to move out of small-company stocks and put some of that money in big blue chips. Small caps had enjoyed a five-year run. It was time to take profits. Same scenario with international. After a three-year ride this is a perfect time to take a hard look at your exposure to the world outside the U.S. and decide if it's time to redeploy your money in a different area. "I think we'll see some of the international returns moderate here soon," says David Hinnenkamp of KDV Financial Services in St. Cloud, Minn. "At this point you should start to consider rebalancing if you are overexposed."

Before you make that call, though, here's a little perspective. International mutual funds have done well because of the weak U.S. dollar, sweeping changes in economic policies in countries like Japan, India and China and a healthy dose of transparency that has lured investors from all points on the globe. The Morgan Stanley EAFE index, a widely used benchmark that tracks stocks in Europe, Australasia and the Far East, is up an average annual 21% over the last three years. The Topix 150, which represents Japan's stock market, has doubled since it hit bottom in 2003. "These markets have developed a lot over the last 10 years," says William Kennedy, manager of Fidelity's International Discovery fund (FIGRX). "You can't find a cellphone these days that is made in the U.S."

Those strides, however, still can't erase the risks involved with placing big bets overseas. Geopolitical concerns are always on the horizon, especially since North Korea announced last week that it had tested a nuclear device. And although these markets are thousands of miles away, they're inextricably tied to your investment portfolio. Earlier this year jittery investors became nervous that rising interest rates here in the U.S. would crimp the spending habits of consumers who purchased goods imported from Asia. They bailed on Japanese and Asian emerging-market stocks. The Topix lost 17% in May and June. (It has since regained almost half that loss.)

So given all that, what's the best strategy? Hinnenkamp suggests the typical portfolio should have about 15% to 20% in international funds, depending on a person's age and their risk tolerance. If you are overweight, maybe because of a country or sector exchange-traded fund, he suggests paring back.

If you're still bullish on foreign markets, now may be the time to pony up for active management. An international manager who is allowed to stretch his legs can scour the globe for deals. You can avoid having to worry about what country to be in, currency fluctuations or political turmoil. He'll also make bets that will hopefully give you better results than you could get from an index fund or an ETF like the iShares MSCI EAFE Index (EFA).

We have several favorites. Bill Fries's Thornburg International Value (TGVAX) has beaten its benchmark by 3% over the last five years. Fidelity Diversified International ( ) is in the top 6% of its peer group over the last 10 years, but is closed to new investors. Below we spotlight two well-respected international money managers who are finding opportunities in different parts of the world. They are seasoned vets with disciplined strategies that have time tested track records that put them in the top 20% of their peer group. They may be investing all over the globe, but the roadmap they provide can give you a good indication of whether you should be in Spain, Singapore or Seattle. Hint: Stick to Europe.

Fidelity's Kennedy buys a majority of the constituents that make up the EAFE index and then he complements those core positions with cheap midcap and large-cap companies. He's long favored Asia —-he used to run the company's Pacific Basin fund (FPBFX) — but earlier this year he trimmed some of those positions when the big pull back occurred. Recently, he's been finding some of his best ideas in Europe, a traditional feeding ground for international managers but a region that was lost in the shadows of Asia's red-hot performance. He's been purchasing large-company stocks like BP (BP), drug maker Novartis (NVS) and financial-services company UBS (UBS). His portfolio has an estimated long-term earnings growth rate of 13% vs. just 8% for the S&P 500. "The reality is that for a long time most of the money was focused on the U.S. There were no significant flows into Europe," says Kennedy. "A lot of these companies are underanalyzed."

If you don't want to leave the U.S. entirely behind consider Polaris Global Value (PGVFX), a global portfolio that has 36% of the fund anchored in the U.S. The rest is deployed in regions like Europe and Asia and emerging markets like South Africa and Mexico. Recently, manager Bernard Horn has hedged his emerging-market positions, which lost 6% during the pullback, by moving into more stable Japanese companies like Meiji Dairies. But like Kennedy, he, too, has been scooping up the shares of companies located in Europe. He likes Finland's KCI Konecranes, a maker of large cranes for the world's ports, because the company revenue base is diversified well outside its home country. Horn's portfolio also includes more familiar names like UnitedHealth Group (UNH) and Verizon Communications (VZ). He's returned an average 19% over the last five years.