Grab your backpack and beret, we're heading across the pond!

European funds have been having an impressive run, with the average fund returning 37.58% in 2003, compared to the average U.S. diversified equity fund return of 32.44%, according to Lipper.

But conquering the Continent isn't as easy as moving plastic troops across the Risk board. Investors who don't have the time or inclination to research European funds might consider owning globally diversified foreign funds. Most foreign funds contain approximately 60% in European stocks, an exposure more than sufficient for the majority of investors, according to Morningstar.

"Europe-focused funds don't give you a lot of diversification for your buck," says Morningstar analyst Emily Hall. "And regional funds tend to be expensive." Morningstar's average expense ratio for European funds is a heady 1.86% compared to the domestic equity fund average of 1.51%.

Aside from the higher prices, stock overlap is a major concern for Hall. And it's not just a problem in which investors find a Finnish-based company like

Nokia

(NOK) - Get Report

in both their foreign stock fund and their tech fund. Occasionally, European names sneak their way into so-called domestic stock funds, and a good number of them also trade as ADRs.

"If a U.S.-based fund has the freedom to venture overseas they may own a lot of well-known European names like

GlaxoSmithKline

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or

British Petroleum

(BP) - Get Report

," says Hall. "So adding a Europe-focused fund will not add to your diversification, but will add to your fund expenses."

Hall's two fund picks in the European category are

(VEURX) - Get Report

Vanguard's European Stock Index and

(TEMIX) - Get Report

Mutual European fund.

Mutual European fund's portfolio manager, David Winters, mines for value stocks across all market capitalizations. Winters is also unafraid to hold cash -- currently 18.7% according to Morningstar -- or a U.S. stock or two, like

White Mountains Insurance

(WTM) - Get Report

and

Berkshire Hathaway

(BRKB)

.

"There are very few deep fundamental value investors in Europe which gives us an advantage," says Winters. "And right now the multiples are cheaper in Europe than they are in the U.S."

The Mutual European fund is cheaper than the majority of its competitors with a 1.40% expense ratio, but it does not approach the 0.32% offered by Hall's other recommendation, Vanguard's European Stock Index fund.

Vanguard's European Stock Index fund basically does what it sets out to do, and that's match its benchmark, the MSCI Europe Index. The fund barely beat the index in 2003, returning 38.7% after expenses compared to the index's 38.54%.

Euro Vs. Dollar

One headwind that halted Mutual European's growth was its decision to hedge currency risk as the dollar dropped 20% against the euro in 2003. Funds that avoided currency futures contracts, like Vanguard's European Stock Index, were able to goose their returns with currency gains.

Lipper analyst Tom Roseen says the depreciating dollar might dampen Europe's economic turnaround, with the high value of the euro particularly pinching French and German automakers and machinery exporters. Roseen, however, says the positives outweigh the negatives for Europe as long as the common European currency does not appreciate another 5%.

"Europe still has independent demand," says Roseen. "So while America is a very cost-conscious nation, Europeans tend to be more loyal even during large price changes."

Roseen sees good opportunities in Europe, but probably not a return close to last year's 37.58% average. He is expecting an 8% to 10% return in 2004 for European funds, perhaps more if the dollar cooperates.

Old Vs. New Europe

Robert Straus and Derek Rollingson, European fund managers at ICON, are too busy reading financial statements to obsess over exchange rates. The pair's bottom-up, value-driven style does not allow for currency hedging, which they view as "a wash in the long run."

"The dollar is one among many variables," says Straus. "But broad economic conditions and the fact that prices are still depressed below intrinsic values provide more compelling evidence for a continuation of this bull market."

Straus and Rollingson track 600 European companies from ICON's offices in Colorado, looking for equities that fit their "modified Benjamin Graham model." They do not travel to meet with a company's management and don't discriminate with respect to capitalization. The fund managers recently chose not to distinguish between countries either, preferring to "go where the value leads us."

Straus says Europe's blurring borders, along with the strengthening European Central Bank, are partly behind ICON's decision to transform the

(ICSEX)

ICON South Europe Region fund into the ICON Europe fund and turn the

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ICON North Europe Region fund into the ICON International Equity fund. Both changes will occur by the end of January.

ICON merged its north and south European funds because of increased economic unity in Western Europe. Considering the Continent's fractious past, it's difficult to argue with harmony between Western European nations. But a lot of investors are looking away from "old Europe" and toward Eastern Europe, where equity returns have been anything but staid.

The

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U.S. Global Investors Eastern Europe fund, for example, was up 61.4% last year according to Morningstar. And this was after returning 34.7% in 2002 and 19.4% in 2001, which were hardly glory years for the U.S. or European markets.

"We are starting 2004 at a higher base, but still see value due to higher commodity prices and a higher growth outlook for Russia," says Julian Mayo, Investment Director at U.K.-based Charlemagne Capital Limited, which manages the Eastern Europe fund for U.S. Global Investors.

Commodities and Russian stocks have certainly been favorites of the fund, which currently contains less than 25 companies. Four of the fund's top five holdings are based in Russia, which makes travel easier for the portfolio managers when they go on their quarterly company visits.

The fund's No. 1 holding, Russia-based

MMC Norilsk Nickel

, is close to 9% of the fund's holdings. The company is the largest nickel producer in Europe and has benefited from nickel prices rising from $10,000 to $15,000 per ton. Mayo predicts the price of the stock will rise to $100 from its current level of $75.

It's not just appreciating commodity prices that compels Mayo to pan for prospects in Russia. Mayo likes the political outlook as well.

"The political risk in Russia is low for an emerging market," says Mayo. "President Putin's power is stable and the country is a democracy. It doesn't get any better than that."