The past year makes a good case that the way to gain exposure to international markets is by investing in a diversified mutual fund. In 1998, the average Latin America fund declined by 38%, diversified emerging-markets funds lost 26%, and Asia funds (that exclude Japan) lost an average of 10%. Meantime, the average foreign stock fund gained 12%, according to data from fund research firm Morningstar Inc.

But some funds, such as Artisan International (ARTIX), where the portfolio manager showed a knack for knowing which regions to invest in at what time, did far better than that. Artisan gained 32% in 1998, thanks mainly to portfolio manager Mark Yockey's emphasis on fast-growing companies in Europe and his avoidance of Japan and emerging markets. Yockey's performance earned him the title of 1998 International Equity Fund Manager of the Year by Morningstar, which sighted his willingness to "move boldly into international markets where he sees strong growth potential," even when those markets aren't widely favored by the portfolio manager pack. The $700 million fund is already up 7% this year -- and has averaged 24% a year for the past three years.

With no sales charge, only a $1,000 minimum investment requirement, and a reasonable 1.45% annual expense charge, Artisan International is a worth considering for investors who want to participate in Europe's economic revival. "Not only has Yockey done a good job at stock selection but he's been very astute about what countries to be in," says Ross Levin, who recommends the fund for clients of his investment advisory firm, Accredited Investors, in Edina, Minn.

Business Week Online Associate Editor Amey Stone caught up with Yockey via his Nokia cell phone (how Euro!) on Jan. 28, just as he was about to fly off to the Continent to visit companies. "I'm going to be eating a lot of spaghetti in the next week," says Yockey, who currently has about 12% of the fund invested in Italy. For 1999, he still believes Europe is the place to be.

Q: You're known for making bold moves into different regions. What regions are you emphasizing now?
A: We're heavily invested all over Europe. We have 12% in Italy, about 9% in Germany, 9% in Switzerland, and 24% in the United Kingdom. Those are the big bets. We also like Canada a lot and have 6% or 7% of the fund invested there. They are deregulating their telecom business, and that's leading to some opportunities.

Q: Do you still have 80% of the fund in Europe?
A: Actually, about 85%. Europe is great because the companies are focusing on profitability, unlike what they've done in the past. The last three or four years have really been a sea change as companies realize that in order to be competitive, they have to get their profit margins up. They weren't generating enough profits to reinvest in the business and grow. There is a lot of deregulation, and privatizations are creating new companies to invest in, which often aren't very well understood. The other big change is that managements are being rewarded for being successful. That's making companies more efficient.

The great thing about Europe is that the companies are going to have a lot better earnings than people realize. People say Europe's economy is only expected to grow 2% in 1999. That misses the point. There are companies that are going to grow 20% and 30%.

Q: The fund seems to emphasize telecom and finance stocks. Why those two groups?
A: We invest where we find the best earnings growth at reasonable valuations. Deregulation and privatization in the communications sector has allowed us to find some very good companies. We own Olivetti [mainly a telecommunications company now]. Nokia (NOK.A) is a big position, as is Ericsson (ERICY), which just reported earnings that were better than expected. In the financial sector, there's going to be a lot more consolidation and more mergers with U.S. firms. One of our favorite financial holdings is Union Bank of Switzerland.

Q: What do you think of the Ford-Volvo deal announced today [Jan. 28]?
A: There are huge advantages to taking out all those layers of overlapping management. I wouldn't want to be a middle-level car executive at Volvo right now. A lot of those jobs can be done by Ford Europe, although initially they'll deny it. The real reason Ford is buying Volvo is for its safety record. That is the golden egg there. We don't own many car companies, since they don't fit into our growth stock emphasis. There are way too many car companies in the world. There are going to be fewer. Somebody will take a stake in Nissan. I personally wouldn't, but somebody will.

Q: What areas of the world are you avoiding?
A: Emerging markets have been tough. We don't have very much there. But prices have gone down a lot, so we're looking. We think we can get exposure oftentimes by buying big companies that would benefit from growth there. Groupe Danone (DA) is one example. It has quite a lot of exposure and will get a big kick when emerging markets come back. But the main reason we own it is because it is restructuring its core food business.

Q: What is your biggest worry on the international scene?
A: The financial system in Japan is still a wreck and Japanese financial companies -- banks primarily and insurance companies -- aren't doing the things they need to do to change their focus. Japan Inc. has to restructure. Until they do, we're not going to invest there. Actually, we own one Japanese cosmetic company, FANCL, which uses no preservatives in its cosmetics and is a fast grower.


Q: What about Brazil's troubled economy and the impact of its currency devaluation on the rest of Latin America?
A: Brazil has had some problems. They have to deal with them, and they are dealing with them. I expect the real to stabilize. It has probably gone down more than needed to. It should rally back 10% to 20%. A lot of investors are worried about the currency totally unraveling, but I don't think Brazil will let that happen.

Q: If a U.S. investor wanted to buy a foreign stock or two, which ones do you recommend now?
A: I already mentioned Nokia and Ericsson. Metronet Communications Corp. (METNF), a Canadian telecom company, is another company we like a lot now. Hopefully we have a portfolio full of good companies. But a person ought to be diversified. Internationally. You don't want to put all your eggs in one basket.



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