The nine emerging markets funds to invest with no stress

Source: Trustnet

Emerging markets (EM) are typically associated with sharp drawdowns and enhanced volatility. Yet data from FinXL has revealed that nine funds have navigated this treacherous terrain with resilience.

Using the same methodology applied to global, UK and North American equities, Trustnet identified funds with top-decile downside capture ratios against the MSCI Emerging Markets index, filtered for above-average sector returns, and selected those with first-decile Sortino ratios.

The result is a diverse group spanning active stockpickers, passive strategies and small-cap specialists – nine funds that have let investors access emerging markets growth without the sleepless nights.

Active strategies

Redwheel Next Generation Emerging Markets Equity sat in a category of its own. Its downside capture of -7.9% means it has historically gained ground when the broader emerging markets index has fallen – a solitary achievement in such a volatile asset class. Its Sortino ratio of 1.46 is the highest in the entire group and it has been a first-quartile performer in four of the past five years.

Managed by FE fundinfo Alpha Manager James Johnstone, the $2.6bn strategy stood out to Square Mile analysts, who said it “provides access to a differentiated exposure compared to other mainstream EM funds, which may appeal to long-term investors looking to add a niche offering to their core large-cap EM allocation”.

Next up was the Invesco Emerging Markets ex China (UK), which takes a different defensive approach: excluding the region's largest and most volatile market. With a downside capture of 34.7% and Sortino of 0.85, it has shielded investors from China's regulatory crackdowns and economic slowdown.

The strategy paid off particularly well in 2023 and 2022, when it ranked first quartile against its peers, though it slipped to fourth in 2021 and third in 2024 as China rebounded at times.

FE Investments analysts praised Alpha Manager Charles Bond’s skill and consistency in both stock selection and analysing the markets of individual countries (notably in Latin America at the outset of this strategy).

The £2.2bn Robeco QI Emerging Conservative Equities fund applies a quantitative, factor-based approach focused on low-volatility stocks. Its 27.4% downside capture and 0.80 Sortino ratio reflect a systematic tilt towards defensive characteristics.

Two Lazard strategies – Lazard Emerging Markets and Lazard Emerging Markets Equity, which only differ in their legal structure and main currency (the former is UK-based, the  latter Irish) – made the list with downside captures of 56.7% and 58.5% respectively. Both have been first-quartile performers in four of the past five years and rank in the top decile for Sortino ratios.

They are managed by James Donald, Monika Shrestha, Rohit Chopra and Ganesh Ramachandran, who look for companies with high or improving financial profitability with attractive valuations.

Square Mile analysts said this can mean “building exposure to companies, sectors or markets that have been overlooked or ignored”.

“Whilst this is a good discipline to have, this relative value approach can add a higher element of volatility, in what is a volatile asset class.”

The fund achieved a maximum FE fundinfo Crown rating of five and the approval of AJ Bell and Fidelity analysts, who included it in their respective best-buy lists.

Small-cap specialists

Three small-cap focused strategies made the cut – a stark contrast to other regions where smaller companies struggled to combine downside protection with strong risk-adjusted returns.

The iShares MSCI Emerging Markets SmallCap UCITS ETF, SPDR MSCI Emerging Markets Small Cap UCITS ETF and WisdomTree Emerging Markets Small Cap Dividend UCITS ETF all delivered downside capture ratios between 52% and 54%, meaning they typically fell about half as much as the broader emerging markets index during down periods.

All three ranked in the first quartile in 2021, 2022 and 2023 – the years when emerging markets faced the most significant headwinds from rising US interest rates and a stronger dollar. They slipped to the third or fourth quartile in 2024 and 2025 as large-cap technology stocks led the recovery, but their defensive profiles remained intact.

The WisdomTree Emerging Markets Equity Income UCITS ETF rounds out the passive offerings with a 50.3% downside capture and focus on dividend-paying stocks. Like its small-cap peers, it excelled in difficult years but lagged when growth rebounded.