NEW YORK (CNN/Money) - In the old days, conventional wisdom said you should invest in international stocks to diversify your portfolio. When Wall Street zigged, Frankfurt or London would zag, the thinking went.

Trouble was, international markets in the past three years have more or less followed the U.S. market. In 1999, everything was up. And then in 2000 and 2001, there was global recession. Plenty of people questioned whether you even needed to look abroad anymore. Until now.

While the Dow is at a three-year low and the Nasdaq is in a five-year trough, emerging markets funds are up 12 percent year to date through May 7, according to Morningstar. Funds that invest in Asia, excluding Japan, are up 11.1 percent. And foreign stock funds, which can invest anywhere outside of the United States, are up 1.3 percent – not exactly a bull run, but better than the average U.S. stock fund, which is down 6 percent.

Even sweeter, the companies are trading at rock-bottom valuations, according to managers who invest in those regions. And a weakening dollar has provided another boost -- because managers buy stocks in local currencies and then convert the gains into dollars. So even if a French stock is flat, when a manager sells it he can make money on the currency transaction if the dollar is weaker than the euro.

"All I can say is, it's about time," said Nigel Emmett, a managing director at JP Morgan Fleming Asset Management and manager of JP Morgan Fleming International Equity, International Opportunity and International Tax-Aware International Opportunities funds.

Many companies in Europe and Asia have been steadily becoming more efficient. Management is more focused on profitability and building shareholder value.

At the same time, the stocks look cheap compared with their cousins in the United States. The average price-earnings ratio for an S&P 500 company is around 31 (based on trailing 12-month earnings), compared to 21 or less for companies in countries including the United Kingdom, Spain, Italy, France, Australia and Singapore.

There are plenty of examples of good values abroad, said David Herro, manager of Oakmark International Small Cap and Oakmark International. Take Givaudan, a Swiss-based leader in flavors and fragrances. It sells at a 35 percent price-to-cash flow discount to International Flavors & Fragrances, the U.S. competitor. And Glaxosmithkline, a British drugmaker, is trading at a 40 percent discount to U.S.-based Pfizer, Herro said.

Another favorite stock, Hunter Douglas from the Netherlands, is the world's leader in window treatments but trades at a modest nine times earnings, Herro said.

Oakmark International Small Cap, with $391 million in assets, is up 15.5 percent through May 6. Oakmark International, at $1.3 billion in assets, is up 14.4 percent. International Small Cap has been such a winner that the fund group is closing its doors as of Friday.

Emmett, too, seems amazed at the bargains he's finding. In Italy, he likes banking stock Unicredito Italiano; while in Australia, it's mining company WMC. He also likes French bank BNP Paribas and Spain's Banco Bilbao. In Britain, he's a fan of British Airways.

Even Japan, whose market is deeply depressed, is showing signs of life, Emmett said. He's not advocating a Japan-only portfolio, but said exporters such as Honda that have been forced to compete globally are performing well.

JP Morgan Fleming International Opportunity, with $19 million in assets, is up 1.9 percent this year, while the tax-aware fund, at $9 million in assets, is up 1.8 percent. Both debuted in 2001 and are in the middle of the pack. The third fund isn't tracked by Morningstar.

The dollar hit a 15-year high in 2001 before starting to lose ground earlier this year, according to Ned Davis Research. (Click here to read more about the dollar's slide.)

A weaker dollar won't put your foreign fund at the top of the performance charts. But its strength in recent years has taken its toll. In the past three years, a strong dollar shaved five-to-seven percentage points off the performance of the Europe, Australia and Far East (EAFE) Index, the main benchmark for international equities.

The EAFE lost 16 percent last year in local currency, but 21.2 percent when converted into dollars, according to Morgan Stanley Capital International. In 2000, the EAFE lost 7.1 percent in local currency but gave up nearly twice that amount when converted into dollars, about 13.9 percent.

Even in 1999, a good year for international stocks, a strong dollar delivered a zinger: the EAFE earned 33.8 percent in local currency, but 27.3 percent in dollars.

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If you want to escape the vagaries of the dollar altogether, some funds, such as Tweedy Browne Global Value, reduce volatility by hedging the currency. But while currency hedging can help in the short term, in the long run it boils down to good stock picking, said William Samuel Rocco, an analyst at Morningstar.

The Tweedy Browne fund was first in its category in the past two years but it has remained at the top of the charts in 2002 as the dollar has weakened.