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In international investing, small is beautiful -- at least for the time being.

With mutual-fund managers scouring the globe for a potential Google Inc. of Germany, or a future Pfizer Inc. of India, portfolios that invest in foreign small and midsize stocks have been on a tear. Considering that most foreign-fund categories have been stellar performers, international small stocks still stand out.

These funds boast an average annual return of 39% during the past three years, compared with a 29% return for international funds that focus on large companies, according to fund tracker Morningstar Inc., of Chicago. On a five-year basis, the 59 foreign small-stock funds tracked by Morningstar returned an average 16% a year, better than the 9% from international large-stock funds.

"When a group of funds attracts so much money in new flows that funds are forced to close, that's often a sign that these funds have reached their peak," says Dan Lefkovitz, a Morningstar mutual-fund analyst. "The more money that these managers have to put to work, the more this dilutes their best ideas."

International small and midsize stocks -- companies averaging about $1.8 billion in market value and usually less than $5 billion -- have seen their prices rise so fast that most analysts say they are no longer cheap, and many find them expensive. Because there is less information available about small stocks, they tend to be riskier and more susceptible to unanticipated big moves.

This point was driven home in January, when a scandal erupted over Japanese Internet firm Livedoor Co. that sent its shares reeling. Japanese securities regulators have accused the former president of Livedoor, four other executives and the company itself of falsifying financial reports and violating other laws. The stock's plunge hurt a wide range of small-stock funds, not just those owning Livedoor shares. Many individual Japanese investors who held the Internet company had used borrowed money to invest. They were forced to sell shares in other small companies to make good on their loans. That caused small stocks across Japan to plummet.

"Anyone involved in the Japanese market was affected in some way by Livedoor," says Justin Thomson, a portfolio manager of Baltimore's T. Rowe Price International Discovery Fund, which invests in small stocks. He says his fund didn't own Livedoor but some of his portfolio's Japanese Internet holdings remain at depressed prices.

Mr. Thomson says the merger-and-acquisition activity that has helped lift the small-stock market in Europe and Japan shows little sign of slowing. Many financial planners think that these funds are good long-term holdings.

"Clearly these funds are riskier in that there's going to be more volatility," says Harold Evensky, a financial adviser at Evensky & Katz Wealth Management, of Coral Gables, Fla., with $500 million under management. "But that's where opportunity comes from."

During longer periods, he says, history shows that smaller stocks post higher profit gains and tend to outperform their bigger counterparts. He suggests investors keep up to a quarter of their international portfolio in small and midsize stocks.

So how do you choose a mutual fund? Because brokerage research, and information in general, is harder to come by for small stocks, Mr. Lefkovitz recommends sticking to large fund-management firms with experienced research teams who won't have to rely on Wall Street to assess these companies.

Small-stock funds tend to charge higher fees than many U.S.-focused or large-company foreign-stock funds, with an average expense ratio of 1.8% of assets under management, according to Morningstar. Mr. Lefkovitz says there are good funds in the category with lower expenses. One he likes is Forward International Small Companies Fund. It has a three-year average annual return of 45% and an expense ratio of 1.5%.

The Forward fund firm has about $1 billion in assets invested in foreign small and midsize stocks. That is right around the level where Mr. Lefkovitz thinks small-stock funds can become unwieldy. If a portfolio manager does a lot of trading, then a smaller portfolio can be tricky, he says, because smaller stocks are usually harder to buy and sell.

Mr. Evensky suggests investors look not only at a portfolio manager's three- or five-year track record but also at the fund's month-to-month performance. Small stocks tend to be volatile, so a couple of good months can increase the results of a small-stock fund for a year or longer. Those quick gains may not be indicative of the manager's abilities during the longer run.

Fund-management firms that have closed foreign small-stock funds to new investors include Vanguard Group, Artisan Funds, American Century Investments and AIM Investments. The fund firms say the moves are aimed at protecting the interests of existing shareholders.

OppenheimerFunds Inc. last month shut the doors on its $1.7 billion International Small Company Fund. "We didn't want to hit the point where we couldn't find enough companies to invest in," says Gavin Dobson, global equity strategist for Oppenheimer in New York.

Mr. Lefkovitz thinks this move may have come too late. He questions whether the fund can execute its original strategy at the current size. Mr. Dobson says his investment approach hasn't changed, though he says the 95 stocks in the fund's portfolio is at the upper end of its typical 75-to-100 stock range.

Mr. Thomson's fund at T. Rowe Price manages $1.7 billion -- and isn't poised to close. The fund firm closed the portfolio to new investors in 2000 when the managers felt that money was coming in too quickly to digest. Back then, it had $1.2 billion. It reopened three years later, after market declines and withdrawals by investors had shrunk it to $350 million.

To accommodate the continuing influx of new investors, Mr. Thomson has made some accommodations. The fund holds more stocks -- it owns 225 companies, up from 148 when it reopened. He expects that figure will rise gradually to about 275. The fund is taking bigger bets on some stocks. The median stock size -- around $1.2 billion -- will expand, he says.

Fidelity took a different tack. After last year closing Fidelity Small Cap International Fund, which has about $2.5 billion in assets, the Boston fund firm a few months later launched Fidelity International Small Cap Opportunities Fund. While the fund relies on many of the same Fidelity analysts as the older one, it has a different manager with different ideas, says John Sweeney, a Fidelity senior vice president of mutual-fund product management. The fund's manager has spent time managing money in Asia and his fund has more stocks from that region.