Active management is gaining ground in EM (roundtable 'Emerging Market Equities' – part 1)

June 15, 2026

      

Chair: Harry Geels, Auréus Participants: Ben Buckler, Baillie Gifford James Cook, Federated Hermes Wim-Hein Pals, Robeco René van der Zeeuw, onafhankelijk bestuurder

         

What exactly do we mean by ‘emerging markets’? Are we also talking about frontier markets and small-caps, for example?

James Cook: ‘For us, the focus is primarily on core emerging markets. So not so much frontier markets, but an all-cap approach, including small-caps. We don’t want to define the universe too narrowly, because then you miss out on opportunities within the asset class.’

Ben Buckler: ‘In our view, the benchmark is fairly concentrated, whereas the opportunity set is actually much broader. If you focus solely on the index, you run the risk of missing out on interesting companies and markets that fall outside it. That can also mean having exposure to frontier-like markets or companies that aren’t in the index, but are certainly attractive.’

Wim-Hein Pals: ‘For us, the MSCI Emerging Markets is certainly the foundation, as that index is the frame of reference for most investors. At the same time, we also have scope for a limited allocation to frontier markets, such as Vietnam. That is particularly interesting, because such a market may be promoted to an emerging market, and that is often accompanied by an inflow of capital and extra returns.’

Cook: ‘As contrarian investors, we are not benchmark-driven in any case. So if we see opportunities outside the index, for example in Vietnam or even in developed markets with a large proportion of their turnover in emerging markets, then we take advantage of them. Ultimately, it’s about where the value lies.’

René van der Zeeuw: ‘From an institutional perspective, I would still focus primarily on the definition of the MSCI Emerging Markets. Frontier markets simply present many additional challenges. Think of tradability, establishing property rights and actually repatriating your capital. For investors, these are serious obstacles, with Vietnam as a possible exception.’

Pals: ‘To sum it up, we’re actually talking about the MSCI Emerging Markets including small-caps, alongside selective exposure to frontier markets such as Vietnam, where it makes sense.’

Van der Zeeuw: ‘And as far as I’m concerned, small-caps are simply part of that. They form part of the entire universe.’

We often hear that institutional investors are underweight in emerging markets. Is that correct? And when they do invest, do they usually do so hedged or unhedged?

Cook: ‘Historically, institutional investors have often been underweight. That does vary by region, though. In Latin America, for example, we’re actually seeing more demand for Asia. But in a broader sense, it remains the case that investors want to diversify their allocation outside the US. At the same time, there’s still some caution, despite sentiment having become a bit more positive recently.’

Buckler: ‘If you look at the figures, it’s quite clear. Around two-thirds of global investors are underweight in emerging markets relative to the MSCI ACWI weighting, which stands at around 11%. The asset class has also given investors plenty of reasons to remain underweight over the past fifteen years. But the debate is shifting: it is no longer about why you should invest, but rather how sustainable the recovery is.’

Van der Zeeuw: ‘I recognise that. Certainly with Dutch pension funds, you can see that they are still a long way from a neutral weighting. The most positive thing you can say is that they are once again considering a return to that neutral position. But they are still a long way off.’

Pals: ‘Our analyses also show that emerging markets are underrepresented among institutional, retail and wholesale investors. But last year we saw a turnaround. For the first time in a long while, it was painful not to have exposure, because emerging markets were outperforming. That was also the case at the start of this year. However, the recent escalation in the Middle East is now causing uncertainty once again. If this conflict persists, it could have a negative impact on the asset class.’

Van der Zeeuw: ‘There are other reasons for this underweighting too. Think of geopolitical factors, such as Russia and China, and reputational risks. Many investors simply found it easier to avoid emerging markets. But if performance picks up, that could change quickly.’
 

It is only since 2024 that we have seen earnings growth in emerging markets exceed that in developed markets, and this looks set to continue in the coming years.

 
Pals: ‘As far as hedging is concerned, it’s quite simple: most investors invest unhedged. It is difficult and costly to hedge currencies in emerging markets, so in practice this hardly ever happens.’

Emerging markets are often seen as inefficient. Is this therefore a market par excellence for active management, or is there also a role for passive investing?

Pals: ‘This is an asset class par excellence for active management. There are many countries and companies in the index that you actually want to avoid, because they are illiquid or fundamentally less attractive. For example, we are not invested at all in a number of benchmark countries, such as the Philippines, Malaysia, Colombia, Egypt, Qatar and Kuwait. That freedom of choice is crucial. Over the long term, this has also enabled us to generate structural alpha, partly through country allocation and partly through stock selection.’

Buckler: ‘I agree. It’s not just about generating alpha, but also about reducing risks. In a passive strategy, you are automatically exposed to markets or companies that your clients might not want to be involved in at all. Active management gives you the ability to manage those risks and consciously avoid certain parts of the market.’

Cook: ‘Furthermore, sentiment plays a major role in emerging markets. Some markets may be viewed as uninvestable for a long time, such as China recently. That creates opportunities for active investors. The spread in returns is wide, and that offers scope to add value through bottom-up selection, certainly if you are prepared to invest against the tide.’

Van der Zeeuw: ‘There is certainly a role for passive investing, mainly because of the low costs and simplicity. But you do have to accept what you’re buying. That also means exposure to governance risks and less efficient parts of the market. If you look at the results, you see that the best active managers in emerging markets add solid value over the long term. For investors with a long-term horizon, active management is therefore, in my view, the better choice.’
 

Harry Geels Harry Geels is Deputy Editor-in-Chief of Financial Investigator. He also works at Auréus as a Senior Investment Adviser. At Auréus, Geels is jointly responsible for the research into and selection of investment funds. He is also a part-time lecturer at the Actuarial Institute. Geels obtained his Master’s degree in Financial Economics from VU Amsterdam in 1994. He writes columns for Financial Investigator in a personal capacity.

  

Ben Buckler Ben Buckler is an Investment Specialist in Baillie Gifford’s emerging markets equity team. He joined the firm in 2001 as an Investment Manager, moved to China in 2008, and spent six years as Executive Director of Asian Equities at UBS in Hong Kong. Since his return in 2018, he has focused on client relations for Baillie Gifford’s emerging markets team. He holds a Master’s degree in Geography and an MBA (Oxford).

  

James Cook James Cook is Head of Investment Directors & Specialists at Federated Hermes. In this role, he leads the team of investment specialists supporting equity, fixed income and multi-asset products, and also serves as Investment Director for emerging markets strategies. Previously, he was Product Director for emerging markets equities at Fidelity Worldwide Investments. He studied Economics at Royal Holloway, University of London.

  

Wim-Hein Pals Wim-Hein Pals is head of the Robeco Emerging Markets Equity team, which he co-founded in 1994. He is Lead Portfolio Manager of the Global Emerging Markets Core strategy. Previously, he was Portfolio Manager for Emerging European and African equities and Portfolio Manager for Emerging Asian equities. Pals began his career in the investment industry at Robeco in 1990.

 

René van der Zeeuw René van der Zeeuw is an independent board and investment adviser to pension funds and asset managers. He began his career in 1988 at Robeco and co-founded the emerging markets team in 1994. From 2008 to 2023, he worked at APG Asset Management, where he built up the emerging markets equities team and was later responsible for Global Fundamental Equities. From 2015 to 2020, he served as a director of the APG staff pension fund.

 

Read the full article in Financial Investigator magazine