Investors who want to diversify their portfolios by investing in international stocks should look at small companies, according to Robert Treich, who heads a team at Pictet International Management that specializes in international stocks with small market capitalizations.

That's because the stocks of large international companies, whether it is Nokia Corp. or Toyota Motor Corp., move more and more in tandem with their U.S. peers. The big companies share the same global marketplace, and increasingly feel the effects of the same ups and downs.

But this lockstep movement doesn't seem to apply to smaller companies, which also are getting a boost outside the U.S. from the rising number of venture-capital firms that are emerging to fund start-up companies, Mr. Treich said.

"Before, if you were a smart person in Europe, you could do one of two things -- go work for Nokia or move to the States," said Mr. Treich, whose London-based team manages roughly $1 billion in small-cap assets for institutional and wealthy individual investors in Europe, Canada and the U.S. "Now you can start your own company in Europe and get funding."

The value of venture-capital investment in Europe hit a record in 2000, and additional funding for small companies should eventually reach Japan, though it will be a long time before the venture-capital culture takes root in Asia, the fund manager said.

Also boosting the appeal of international investing is the expectation that the European economy this year will grow faster than the U.S. economy for the first time in a decade. The euro appears to be stabilizing after last year's steep decline against the dollar, which knocked several points off the performance of European mutual funds for U.S.-based investors.

Mr. Treich's team, part of the asset-management unit of Pictet & Cie., a 200-year-old Swiss private bank, successfully took advantage of the rise in the European small-cap sector the past two years by selecting companies using a bottom-up approach. Pictet doesn't hedge currencies, preferring instead to focus on stock picking.

Pictet International Small Companies Fund, with $26 million in assets, returned 6.6% last year, beating 98% of its peers, according to fund tracker Morningstar Inc. The fund was up 86% in 1999, ranking at the top 9% of its category. So far this year, the fund is down 9.8%, according to Morningstar.

The fund, which generally invests in companies whose capitalization, or market price times shares outstanding, is less than $2 billion, currently has 72% of its assets invested in Europe and 22% in Asia. Another 3% is in cash.

Mr. Treich is bullish on France, and has roughly a quarter of the team's portfolio invested in that country. He thinks France has a "very investor-friendly" small-cap market with a broad range of companies to pick from and ample liquidity. The country's macroeconomic conditions, with high consumer confidence and falling unemployment, also bode well for investors.

One example of Pictet's recent pick in France is Marionnaud Parfumeries, a perfume retailer. The company has aggressively bought smaller retailers and brand owners and created an efficient distribution channel in a traditionally fragmented market. It is now looking to enter Italy with a similar strategy, Mr. Treich said.

Meanwhile, Mr. Treich hopes to bring up the fund's weighting in Germany significantly from the current 11%, but he still sees too much risk there at the moment. "They are too reliant on export growth, and clearly things are slowing down," he said.

Pictet has been cutting its position in the United Kingdom. Mr. Treich feels the valuation of British companies has now become too high, and earnings warnings by some companies have provided a catalyst for unwinding some holdings. "We have trouble finding good things there," he said.

In Asia, Pictet has raised its weighting on Japan slightly to 14%, still lower than its normal allocation. The company's target is the consumer area that represents more than 60% of the economy. Joint Corp., a condominium builder in Tokyo, is one company that became part of the fund's portfolio recently.

While Mr. Treich still doesn't think recovery is imminent in Japan, he is positioned "just in case," so he won't miss out once it starts. "When something significant happens in Japan, it goes very quickly," the manager said.