Two funds to ride the emerging market rally

As investors increasingly look beyond US mega-caps, emerging market equities have enjoyed a resurgence, with funds investing in this area seeing positive flows over the past year.

Following four straight years of underperformance, emerging markets, as represented by the MSCI Emerging Markets index, almost doubled the return of the global developed market MSCI World in 2025, and this strength has continued into 2026.

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Despite this relative success, many asset allocators are still positive and highlight potential value across countries such as Brazil, Indonesia, Malaysia and the Philippines.

A fund that is available on the ii platform and provides overweight exposure to some of the above opportunities is M&G Global Emerging Markets GBP I Acc.

It is run by an experienced manager, Michael Bourke, who invests in under-appreciated companies with the potential to improve or maintain returns on capital over the long term.

In addition, there is a preference for companies with strong corporate governance and a focus on shareholder value creation.

Stocks are broadly grouped into four categories; external change, internal change, quality and asset growth, with a focus on the first three categories that gives the fund its persistent value tilt.

The fund is therefore well managed and has seen success in recent market conditions, outperforming the MSCI Emerging Markets index by more than 7 percentage points in 2025 and performing well in 2026 so far.

However, the biases in the investment approach can result in underperformance at times when market leadership doesn’t favour the approach, such as during 2024, 2020 and 2017.

Riding out uncertain times

So, how can investors protect themselves against such fluctuations in relative returns from active managers?

One option could be to switch between active funds according to the prevailing market conditions.

Unfortunately, this is more difficult than it sounds, and various academic studies have highlighted the difficulties of consistently timing such market moves.

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As a consequence, most professional investors do not attempt to capitalise on such shifts in a meaningful way, instead preferring to stay invested and relying on portfolio diversification to produce consistent returns across different market environments.

A simple way to improve diversification within equity regions is to allocate investments across funds with different investment styles, such as value and growth.

This is a broad way to identify managers that focus on particular types of stock, and by selecting those with different styles we can create efficient portfolios through combining funds that produce excess returns with low or negative correlations. In other words, as one fund’s style falls out of favour, the style of another manager should come into favour, offsetting any weakness in relative returns.

A fund pairing that might work

As an example of what can be achieved with actively managed funds, we can go back to the M&G Global Emerging Markets fund.

To balance the value-biased stocks held in this portfolio we need to identify a manager who has been successful in buying stocks with higher growth profiles and valuations.

One such product is the Polar Capital Emerging Markets Stars I Acc GBP fund, which is available on the ii platform.

This fund is managed by the experienced Jorry Nøddekær and employs a growth-oriented, sustainability-minded investment approach.

To begin, the approach centres on finding industries where there is a supply/demand imbalance that can persist over long periods.

At the stock-specific level, the team is focused on a company’s economic value added (EVA), or its return on invested capital relative to the cost of capital. There is a structured process in place for modelling financials over the next five years and for estimating the weighted average cost of capital, and the approach has seen success over time.

Looking into the details of these two portfolios and comparing the underlying holdings, we see the expected minimal overlap, with just eight common holdings from the 91/59 total number of stocks in the two funds.

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We would assume that combining these two high-quality funds would produce an attractive outcome, and this has been shown to be the case historically. Buying both these global emerging markets funds with a 50:50 weighting produces strong returns, with outperformance of almost 3 percentage points per annum versus the MSCI EM Index since 2019.

Importantly, this performance has shown much more consistency than that available from the individual funds, with the tracking error of the fund blend below that of the individual funds.

This highlights the reduced level of relative risk being taken and translates into improved performance consistency.

On a calendar year basis since 2019, the largest level of underperformance seen from this fund blend was 115 bps in 2024, which compares very favourably with the maximum underperformance of the M&G fund of 1300 bps in 2020, and the 906 bps of underperformance shown by the Polar Capital fund in 2022.

Given the established investment processes used on these funds and the consistency of their implementation, it is reasonable to have high expectations of similar results going forward.