What are emerging market funds?

Let’s start with some basics. Emerging market (EM) funds are investment vehicles that provide access to the equities or bonds of developing countries. The managers of these portfolios will select holdings from sectors and countries within these markets that they believe will help achieve their funds’ aims.

While the definition of ‘emerging’ varies between indices, the lists usually includes China, Taiwan, Korea, Brazil, India, Egypt, and Poland. Would-be investors are drawn to the possibility of enjoying better returns from exposure to rapid growth, innovative companies and favourable demographics. However, they also entail greater geopolitical risks, corporate governance issues, currency fluctuations, and less readily-available analysis of individual companies.

Why consider emerging markets now? Macro context in 2025

There’s been more than £10 billion of net inflows into emerging market funds from UK investors over the past year, according to Investment Association data*.

So, what is the draw for investors who have already committed funds to emerging markets? What are their reasons for getting involved? Well, the most obvious draw is their growth potential. Advanced economies are forecast to grow about 1.5% in 2025-26, with the United States slowing to 2%, according to the International Monetary Fund**. By contrast, emerging markets and developing economies are projected to grow by 4% over the same period. This illustrates their potential.

Interestingly, there’s been greater enthusiasm for emerging-market strategies excluding China over the past few years, according to an analysis by Ninety One. It cited eVestment data showing assets under management in these strategies and exchange-traded funds grew from $6.3 billion at the start of 2022 to more than $40 billion by the end of June 2025***.

Ninety One also noted that an emerging-market ex-China mandate allows investors to decide on their China exposure separately from the rest of their emerging-market investments. “This can be useful for those who are cautious about China’s outlook, concerned about concentration risk, or want the flexibility to manage their China exposure independently,” it explained.

Pros of emerging market funds

• Better growth prospects than developed areas
• Access to innovative companies flying under the radar
• Exposure to generally younger populations and rising middle classes
• Diversification benefits to existing assets

Cons of emerging market funds

• Less analyst coverage of sectors and companies
• More political instability
• Geopolitical risks
• Potential currency problems

How we choose at FundCalibre

FundCalibre’s expert team analyses more than 3,000 funds and trusts before whittling them down to a preferred list of just 200 across various sectors. It uses a four-step process.

The first is using our AlphaQuest quantitative screening tool to identify funds that are likely to continue delivering alpha over the next 12 months. During the second stage we conduct face-to-face interviews with selected managers to understand their investment process and how their style can give them an edge.

The third stage is drilling down into their portfolio to check it’s consistent with their philosophy and that they have a solid team behind them. Finally, the research will be subject to peer group review within the FundCalibre team. Only those funds that pass this level of scrutiny will receive the Elite Rating.

This process helps UK investors find the most suitable emerging markets funds for their needs as such a rating is given out to no more than 10% in any one sector.

Active vs passive in EM

Another decision for those considering EM funds is choosing between active and passive fund management. Active funds are managed by managers who can choose which countries, sectors, and companies to hold in their portfolios. Their goal is to outperform the market. Passive funds, meanwhile, simply replicate the performance of a particular emerging market index by replicating its composition. Both have their pros and cons. However, at FundCalibre we strongly advocate active management, as skilled managers can avoid sectors or countries that look expensive, and instead seek out under-represented areas and companies that could become next year’s winners rather than relying on last year’s.

Understanding the big EM indices

There are several emerging market indices. One of the most widely used is the MSCI Emerging Markets index. This is market-cap weighted and covers 24 countries. Another popular option is the FTSE Emerging index. The two differ in construction. For example, MSCI classifies South Korea as an emerging market, whereas FTSE sees it as developed. It’s important that you get to grips with both of these indices – or any alternatives – to ensure you know their composition. This is particularly the case if you’re looking for a passive fund which would simply track an index.

Ex-China vs all-country EM: which suits you?

China dominates the emerging markets, accounting for almost 30% of the MSCI Emerging Markets index. As a result, your view on China’s outlook will heavily influence whether you want exposure. Conflicting views have led to a sharp increase in assets under management in emerging market-excluding-China strategies over the past few years. Some investors opt to regard China and emerging markets as two distinct investments, rather than choosing a fund that’s effectively a China-focused fund in all but name.

Key factors to compare before you invest

We’ve covered a lot of ground in this article so here is a quick checklist of what you need to consider before deciding whether to invest.

• Decide whether you want exposure to China
• Understand the strategy of potential funds
• Analyse manager performance
• Consider the currency risks
• Double-check you’re comfortable with volatility

Best emerging market funds

What do we believe are the best emerging market funds? The positive news is that we’ve found plenty of such portfolios worth considering.

Let’s start with M&G Global Emerging Markets. This is an unconstrained fund managed by Michael Bourke that’s driven by bottom-up stock selection. We like this fund’s contrarian approach, which enables it to spot opportunities across emerging markets that rival portfolios may have missed.

An alternative is Templeton Emerging Markets Investment Trust. Launched in 1989, Templeton Emerging Markets Investment Trust has built an excellent track record of investing in emerging economies by focusing on high-quality businesses with strong balance sheets, good cash flow generation and attractive valuations.

Our final suggestion is FSSA Global Emerging Markets Focus. This fund invests in 40-45 large and medium-sized companies across emerging markets. Its lead manager, Rasmus Nemmoe, has an absolute return mindset, meaning he seeks quality companies that can demonstrate sustained, predictable long-term growth.

Where EM fits in a diversified portfolio

The best emerging market funds can provide much needed diversification for the average investor’s portfolio and increase the likelihood of better-than-expected returns. While there are no set rules as to how much EM exposure is suitable, it’s generally accepted that an allocation of 0-20% is probably the threshold. Very cautious investors are unlikely to have anything in these areas, whereas a balanced approach would allocate 5-10%, and an adventurous stance would have up to 20%.

Emerging market funds can form part of a core-satellite approach. This is when the bulk of assets are held in a broader, global portfolio, and smaller allocations in other areas. Of course, a final decision will depend on an investor’s goals, attitude to risk, opinion on the prospects for these markets, and any existing holdings.

For example, anyone with a global fund may already have exposure to emerging areas, so it’s important to check before making a new purchase.

Practical steps to invest (ISA/SIPP/platform)

Once you’ve found the best emerging market funds, it’s time to decide which tax-efficient wrapper is the most suitable to hold them in.

The right option for you will depend on a combination of your personal circumstances, investment goals and existing savings. For example, Individual Savings Accounts are wrappers that shield your savings and investments from income and capital gains tax. Currently, every UK adult can invest up to £20,000 each tax year in these products, which have become increasingly flexible over the years.

An alternative for those looking to the longer term is a pension. Contributions receive income tax relief, and SIPPs (Self-Invested Personal Pensions) now offer more choice and flexibility.  However, restrictions apply to contributions and withdrawals, so it’s worth deciding which approach best meets your needs.

FAQs about emerging markets

*Source: Investment Association, September 2025

**Source: IMF, October 2025

***Source: NinetyOne, October 2025