Emerging-Market Funds Have a Supersized Problem. Here’s How Managers Are Dealing With It

Investing in emerging markets has long been considered an effective way to diversify a US-centric portfolio. But recent developments have called that idea into question. After all, emerging-market stock funds are now stuffed with artificial intelligence plays, just like many of their US-focused counterparts.

As a result, rather than offsetting the risks in the other portions of an investor’s portfolio, emerging-market funds may intensify them.

But shareholders aren’t the only ones affected. The managers of these funds face a related but equally frustrating problem: Their benchmark has become top-heavy not just in one sector, but in three individual stocks.

A New Era

Ten years ago, no stock in the widely followed MSCI Emerging Markets Index had a weighting as high as 3%. How things have changed. On June 30, 2026, three stocks took up more than 6% of assets in the index-tracking iShares MSCI Core Emerging Markets IEMG. The biggest, Taiwan Semiconductor Manufacturing Company TSM, stood at a daunting 13.2%.

Combined, TSMC, Samsung Electronics, and SK Hynix accounted for 27% of the index.

What’s the Problem?

Beating a relatively well-diversified index is hard enough. The task becomes even more fraught when a few top holdings can have an outsize impact on returns.

To avoid getting waylaid by a single company’s misfortune, many funds keep individual stock positions to 5% of assets or less. Matching the big three’s index weightings would therefore require managers to toss aside a key risk-control measure. Even a half-weight in TSMC would still exceed 5%.

It’s perilous merely to match the weightings of an index that has more than one-fourth of its assets in just three stocks. Yet if a fund underweights or avoids one or more of them, it will lag far behind the index and peers if those stocks continue to skyrocket. In an exuberant market, fund shareholders expect to rake in the gains. Failure to do so can endanger a manager’s career.

That said, overweighting the trio in an attempt to beat the index can prove equally hazardous. It requires weightings that would seem downright absurd in more normal times.

Welcome to Our World

Although this challenging scenario is uncharted territory for emerging-market fund managers, it’s old news for large-growth funds. For years, the dominant US technology giants have wreaked havoc on the indexes. On July 31, 2026, iShares Russell 1000 Growth ETF IWF had 14.6% of its assets in Nvidia NVDA, while Alphabet’s GOOGL GOOG two share classes took up 11.7% and Apple AAPL stood at 7.5%. The top five commanded an astounding 44.8% of assets.

The year before, mid-cap-growth managers had a Palantir problem. The defense-tech firm didn’t grow as stupendously as the stocks cited above. But it began 2025 with a 5% weighting in iShares Russell Mid-Cap Growth ETF IWP that soared to nearly 9% over the next five-plus months. Owning it, though, wasn’t an easy decision: Its sky-high valuation—it sported a price/earnings ratio well above 200—was difficult for many managers to swallow.

Yet obvious alternatives were lacking: No other stock had an index weighting above 3%. Whether to own Palantir PLTR, and if so at what level, had a profound impact on mid-growth fund returns.

Further complicating this issue are the SEC’s guidelines for funds officially labeled as diversified, which can limit managers’ ability to hold huge stakes in individual stocks even if they want to.

Go Big or Go Home

Emerging-market managers have responded in a variety of ways.

Ashmore Emerging Markets EMFIX lead manager Dhiren Shah is optimistic. He had 14% of assets in TSMC and nearly 10% in SK Hynix as of June 30, 2026. (All portfolio data is from that date unless otherwise noted.) Only Samsung was underweighted, at 4%.

New lead manager Seun Oyegunle of T. Rowe Price Emerging Markets Stock PRMSX decisively backed all three. That fund had 15% of assets in TSMC and about 10% in each of the others, even though Oyegunle had been trimming the shares almost continually since taking over a year ago to meet outflows.

John Dance of Fidelity Emerging Markets FEMKX went even further. He stashed 21% of assets in TSMC and nearly 9% each in SK Hynix and Samsung. But his colleague Sam Polyak, who works with the same analyst team, reached very different conclusions. At Fidelity Advisor Focused Emerging Markets FIMKX, he overweighted Samsung even more heavily than Dance while underweighting TSMC by several percentage points and allotting a mere 2% of assets to SK Hynix.

A More Cautious Approach

Three prominent funds have been more circumspect.

Dodge & Cox Emerging Markets Stock DODEX underweighted all three of the heavyweights, with just 3% in Samsung. Lazard Emerging Markets Equity LZEMX allotted only 6% to TSMC and nothing to Samsung. Only SK Hynix had anything close to its index weighting.

That didn’t stop either fund from performing well over the past couple of years, propelled by overweightings in other soaring tech names such as Taiwan-based semiconductor firm MediaTek.

GQG Partners Emerging Markets Equity GQGIX took a more extreme stance. As of March 31, 2026 (its most recent full portfolio), it did not own SK Hynix or Samsung, with TSMC at 6%. Its June 30 fact sheet implied that at that time the fund was still shunning the Korean pair: South Korea did not make the top 10 country list.

Those decisions aren’t the only reasons the GQG fund lagged so far behind its peers and benchmark this year and last—struggling India stocks also took a toll—but they certainly didn’t help.

Different Indexes, Similar Issues

Other index providers have their own views.

Morningstar offers a variety of emerging-market benchmarks, and one of them—the Morningstar Emerging Markets Index—had slightly lower weightings in TSMC, SK Hynix, and Samsung Electronics than the MSCI Emerging Markets Index did.

Using that Morningstar index would alleviate the pressure on managers to scale up their stakes. But only to a very small degree. And a differently constructed benchmark, the Morningstar Emerging Markets Target Market Exposure Index, which takes liquidity into account, had almost the same weightings in those three stocks as the MSCI index did.

Meanwhile, the FTSE Emerging Markets All Cap China A Inclusion Index has its own distinct take. That index—tracked by Vanguard Emerging Markets Stock Index VEMAX—doesn’t hold any Samsung or SK Hynix, because it doesn’t consider South Korea an emerging market. The Vanguard fund had more than 15% of assets in TSMC, with nothing else getting even 3%.

The challenge for managers remains. Save for using an equal-weighted index, which would be a drastic step, emerging-market managers are likely to be judged against a benchmark that features frustratingly steep weightings in one or more very large companies.

On the Bright Side

Although this story could discourage investors already fretting about US stock market concentration, it has a silver lining.

For years, investors have been concerned that active managers aren’t all that active. Wary of taking bold decisions that could threaten their careers, managers stick close to index weightings, ostensibly protecting their jobs but limiting the chances of meaningful outperformance.

The above examples show that some emerging-market fund managers didn’t get the memo. They’re willing to look past the benchmark and invest with conviction. Although that will lead to disappointment for some, it’s beneficial overall. Active managers should be active. It’s encouraging to see that some still are.