Foreign Funds Face Uncertain Waters; Oil Prices Are Pivotal; International markets expected to slow after big run-up of last year.(MUTUAL FUNDS)(INVESTMENT TRENDS)

Byline: MURRAY COLEMAN

So far this year, the average foreign mutual fund has outperformed its U.S.-focused counterpart. Whether that trend continues depends largely on the direction of the dollar and such key commodities as oil.

Many of the developed nations around the globe have been hit even harder than the U.S. by the run-ups in commodities.

"Japan is a 100% importer of oil," said Matt Hudson, lead manager at $300 million American Century Global Growth Fund. "That's really hurting their domestic markets right now."

Japan five years ago was the top-weighted market in MSCI's EAFE index. The index tracks developed economies outside the U.S. and Canada. At 22.41% of the index's total assets through September, Japan fell to the benchmark's second biggest country after the U.K.

The country's economy hasn't been much help in getting the market back on top. In late September, the Japanese government reported Q2 gross domestic product growth at 1.3%. Expectations had been for about 2 percentage points greater.

Japanese stocks included in the EAFE, which is weighted by market capitalization to capture about 85% of each developed market, were up 5.14% this year heading into November. That's down from last year's 35.9% gain.