Active EM funds on track for best run since 2017, India lags peers

South Korea and China drive emerging market fund gains, while India's weak equity performance weighs on returns; analysts say re-rating could be near

Actively managed global emerging market (GEM) funds are having their best run in eight years. With average returns of around 26 per cent so far in 2025, they are on course for their strongest calendar-year performance since 2017, according to an analysis by Steven Holden of Copley Fund Research, published on Smartkarma.

 

However, fewer than 40 per cent of these funds have outperformed their benchmark, the MSCI Emerging Markets Index, which has risen nearly 28 per cent this year — largely driven by gains in South Korea and China.

 

“Style and regional positioning drove dispersion,” Holden said. “Value managers and South Korea exposure supported gains, while aggressive growth styles and India-heavy allocations weighed on returns. High active share strategies also trailed.” 

 

India and South Korea — the third- and fourth-largest components of the MSCI Emerging Markets Index — have played outsized roles in determining fund performance. 

Returns have been positively correlated with higher exposure to South Korea, where top-performing funds such as Macquarie Emerging Markets and Orbis Emerging Markets hold notably large positions. Conversely, funds with sizeable Indian holdings — such as First Sentier Global Emerging Markets Sustainability and the previously high-flying GQG Partners Emerging Markets Equity — have underperformed this year. 

On average, value managers through 2025 have been overweight in South Korea and underweight in India, while aggressive growth funds have taken the opposite stance, contributing to their relative lag, according to Copley Fund Research.

 

In dollar terms, Kospi, the benchmark index of South Korea, is up 67 per cent, while India’s Nifty 50 has risen less than 7 per cent. Meanwhile, Chinese and Hong Kong stocks have delivered gains of 20 per cent and 30 per cent, respectively.

 

Despite recent mixed results, long-term data continues to favour active management in emerging markets. Over the past 22 calendar years, active GEM funds have outperformed the MSCI Emerging Markets ETF (EEM) in 14 of them on average.

 

India’s recent underperformance has prompted several global funds to pare back exposure.

 

Christopher Wood, global head of equity strategy at Jefferies, wrote in his latest GREED & fear note that the brokerage has reduced India’s weighting in its Asia-Pacific (excluding Japan) portfolio by two percentage points to 15.2 per cent, while increasing Taiwan’s allocation by an equivalent amount.

 

India’s weight in the MSCI Emerging Markets Index fell to 15.22 per cent at the end of September — the lowest in nearly two years and down sharply from the July 2024 peak of 20 per cent, when it had come within 4.5 percentage points of China, the benchmark heavyweight.

 

In a recent note, Morgan Stanley observed that India’s relative weight in global emerging market funds is among the weakest on record. The brokerage noted that Indian equities have been derated compared with long bonds, emerging market peers, and gold, but added that a rerating could be on the horizon, as valuations have yet to reflect improving macroeconomic fundamentals and an impending corporate earnings recovery.

 

An analysis by Nomura in July showed that, among 45 large emerging market funds, relative allocations to India declined by 100 basis points month-on-month, with 41 of them trimming exposure. This makes India the most underweight market in emerging market portfolios, with allocations standing 2.9 percentage points below its MSCI Emerging Markets Index weight.