(MONEY Magazine) – No question, foreign funds are back. Following years of dismal returns, the average foreign-stock portfolio gained 51% for the 12 months through March 19, outpacing the 33% return for the typical domestic equity fund. Some regions soared even higher--emerging markets funds, which mostly specialize in developing Latin American and Asian countries, rocketed 72% over that period. So you may be wondering: Is it too late to invest in foreign-stock funds?

Not at all. The chief reason to own foreign funds is diversification, not outsize gains. That was true before the 2003 rally, and it's still true now. Foreign stock exchanges don't move in lockstep with U.S. markets. Over the long term, the performance differences should help reduce the overall volatility of your stock portfolio.

But with prices so high, it may be better right now to wade in through a dollar-cost-averaging strategy. (See The Intelligent Investor on page 118.) A lot of the outsize gains for foreign funds are a result of the sharp drop in the U.S. dollar, a trend that could easily reverse. Over long periods, says Jeremy DeGroot, director of fund research at Litman Gregory Asset Management, "you should expect to earn a similar return on foreign funds as you do in U.S. stock funds." And in the short run, many overseas markets are still susceptible to political and economic shocks. Most investors should aim to have 5% to 20% of their equity money in foreign funds, DeGroot says.

Here are four solid foreign-stock funds to round out your portfolio. All have outstanding performance records and reasonable expense ratios. The first two are ideal core holdings--either one may be the only foreign fund you need. The other two choices are for adventurous investors and those with large portfolios looking to diversify further.

Dodge & Cox International Stock

This $1 billion fund draws on the deep experience that the Dodge & Cox team brings to selecting blue-chip value stocks."We've long evaluated investments globally," says co-manager Diana Strandberg. "So this fund essentially grows out of our investing DNA."

Typically, the six managers prefer companies based in developed nations, such as Swiss foods giant Nestlé and Japanese car maker Honda. But the value hunt has at times led to emerging markets. The fund held a 5% stake in Panama's Banco Latinoamericano last year; the team trimmed its holding after the stock soared 300%. More often, once a worthy stock makes its way into the portfolio, it stays there for years. The fund's average turnover rate--the portion of the portfolio that is traded each year--is a modest 11%.

Thornburg International Value

This $800 million portfolio is sold as a value fund, but it's far more eclectic than that. To be sure, lead manager Bill Fries doesn't like to overpay for a stock. And roughly half the portfolio is stashed in classic value fare--stable, reasonably priced blue chips such as U.K. grocery chain Tesco. But the remainder is divided between deep-value plays, such as out-of-favor cyclical companies, and fast-growing stocks that Fries calls emerging franchises. One recent example of the latter: Portugal Telecom, which is involved in a joint venture in Brazil. "The cellular-phone market in Brazil has only reached 25% penetration," says Fries, "so there's plenty of room for growth." Back in 2002 the fund held a hefty 33% of assets in emerging markets. Recently, that stake was trimmed to less than 25%.

T. Rowe Price International Discovery

Lead manager Justin Thomson and his team have a simple, if daring, mandate--find small foreign stocks that have the potential to grow into big ones. One of the few funds to focus on foreign companies with market caps between $250 million and $3 billion, T. Rowe Price International Discovery is diversified among nearly 200 stocks to minimize risk. Lately, more than half the fund's $777 million in assets were held in European stocks, including top holdings MFI Furniture, a British retailer, and Teleca, a Swedish software company. The Price team has lightened up on emerging markets--they are only 14% of assets. "These markets have done very well, and a lot of dumb money has pitched up there," says Thomson. "There's a great economic cycle going on there, driven by China. But right now we see a mid-cycle pause."

SsgA Emerging Markets

Emerging markets are volatile enough, so this fund's managers take a cautious approach. They use computer models to constantly weigh macroeconomic and company-specific factors--everything from currency valuations to earnings momentum. The team still sees big opportunities in developing countries. "This asset class is cheap, selling at just 12 times this year's earnings," says co-manager George Hoguet. "And given continued low interest rates and accelerated economic growth, we believe we are still in a sweet spot." Still, the fund has spread its bets among some 275 stocks, with more than half of assets stashed in Asian markets, chiefly South Korea and Taiwan. --PENELOPE WANG