Mutual funds specializing in foreign stocks had a banner year in 2004, and experts predict U.S. domestic fund portfolio managers' appetite for international investments to grow right along with investors', The New York Times reports.

Overseas investing became the new hot-dot after average international stock funds rose 18% last year and emerging markets funds' average returns exceeded 25% during the same period.

As a result, some U.S. domestic fund managers are increasing their exposure to international funds. For example, Jeffrey L. Knight, senior manager of Putman Investments' Asset Allocation Bond Fund, said some foreign assets are deeply discounted and resolved to increase the portfolio's overseas holdings. Further, Morningstar found that the average U.S. technology fund had 24% exposure to international stocks.

In fact, some domestic portfolio managers are slow to tell investors about their gradual migration into overseas investments. In the case of Mutual Beacon, a value-driven domestic fund, nearly one-third of its assets have shifted into foreign assets, according to Morningstar. The same goes for Janus Orion, which is being marketed as a domestic growth stock fund.

Looking back on 2004, foreign stocks accounted for roughly 5.6% of the average domestic stock fund's holdings. In addition, the top-performing domestic stock funds positioned an average 7.3% of their portfolios in foreign assets.

In hindsight, it is hard to blame the domestic fund managers. Investors rewarded the stellar foreign returns last year by pouring roughly $2 billion into international stock funds between the beginning of the year and Jan. 19. At the same time, investors withdrew $2.6 billion from domestic stock funds.

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