CraigTolliver

SAN FRANCISCO (CBS.MW) — How’s this as an indicator for what type of year it’s been for U.S. stocks: Mutual funds invested solely in Korea and Russia are vying to be 2001’s top performers and they’re outpacing all U.S. stock funds by a wide margin.

As of Wednesday, the year’s best-performing stock mutual fund is Matthews Korea MAKOX, +0.88% up over 69 percent. Breathing down its neck is Pilgrim Russia LETRX, +0.54% with a year to date gain of 67 percent. See related story .

The average U.S. diversified equity fund is down nearly 11 percent for the period, according to mutual fund analyst Lipper.

Managers in both funds argue the investing environments in these two countries have radically changed and fundamentals are bright — regardless of what may be happening in U.S. markets, good or bad.

Wild volatility swings have plagued both funds in recent years, however, and past glory days were followed by thunderous losses.

In the case of Matthews Korea, positions in electronics and chipmakers boosted the fund to the top of performance charts during the go-go tech years of ’98 and ’99, up 96 percent and 108 percent, respectively, according to Morningstar.

The following year saw losses of 53 percent. As of Wednesday, the fund is up less than 1 percent annualized over the last five years due to double-digit losses in 1996 and 1997.

But managers Paul Matthews and Mark Headley are more excited than ever in Korea, citing bargain-basement valuations and strong reforms benefiting the financials sector and leading to stronger global investment in the country.

Paul Matthews has been actively investing in the Asian markets since 1982 and founded Matthews International Capital Management in 1991, where he and Headley run six no-load mutual funds devoted exclusively to investing in Asia.

Why has performance been so strong in Korea this year? What’s changed?

Matthews: I think at the beginning of the year people were quite concerned that Korea was very exposed to any slow down in global economies because of its relatively high rate of export growth, historically.

This year, surprisingly, the Korean consumer has stepped up and provided some balance to the slowing external environment.

The second thing, although a lot of people have been critical of the pace of reforms, particularly in the case of bank restructurings in Asia generally and Japan in particular, it’s apparent that a number of things have changed in the Korean banking system.

The most visible evidence of that was the merger between two of the larger domestic banks, Kookmin Bank KB, +5.17% and Housing Bank, long-rumored but people were very skeptical till it was finally consummated.

The rebound has really been pretty heavily concentrated in a combination of the leading exporters like Samsung Electronics but has included domestic financial institutions, both banks and non-banks, and of course some of the major telecom companies, particularly those that are leaders in the wireless sector where Korea continues to be, after Japan, one of the world’s leaders.