Strategic Advantages of Active Management in Navigating High-Yield, High-Volatility EM Debt Markets

Emerging markets (EM) debt has long been a double-edged sword for investors: a source of high yields but also a hotbed of volatility. In recent years, the gap between active and passive management in this space has widened, with active strategies consistently outperforming their passive counterparts. From 2023 to 2025, the VanEck Emerging Markets Bond Fund, for instance, delivered average annual total returns of 11.04% (Class I shares) and 11.03% (Class Y shares) over five years, vastly outpacing the 1.89% return of its 50% GBI-EM/50% EMBI benchmark. This performance underscores the structural advantages of active management in EM debt, where agility, risk mitigation, and local expertise are critical in navigating a landscape defined by geopolitical shocks, currency swings, and fiscal imbalances.

Agility in a Shifting Landscape

The EM debt market has evolved into a sprawling, granular asset class. Over the past two decades, the number of investable countries has more than doubled, and the range of instruments has expanded nearly 20-fold. Passive strategies, which rely on index-based allocations, struggle to adapt to such complexity. In contrast, active managers leverage bottom-up relative-value analysis to identify opportunities in underfollowed regions or sectors. For example, during the Russia-Ukraine war, the VanEck fund's portfolio managers took a contrarian stance by accumulating Ukrainian bonds trading at 23 cents on the dollar, anticipating a recovery driven by international support. This agility allowed the fund to capitalize on market overreactions, a hallmark of EM volatility.

Risk Mitigation Through Selective Exposure

High volatility in EM debt often leads to asymmetric risk profiles, where downturns can be disproportionately severe. Active managers excel in mitigating these risks through portfolio construction. The VanEck fund, for instance, avoids concentrated positions in high-yield, high-risk issuers and instead prioritizes countries with strong fiscal discipline and senior debt structures. In 2025, the fund increased local currency exposure in Brazil, Thailand, and South Africa due to improved policy frameworks and inflation control, while reducing exposure to Indonesia and Chile amid deteriorating economic signals. This selective approach minimized downside risks during periods of acute stress, such as the 2024 selloff in EM currencies.

Local Expertise as a Competitive Edge

Emerging markets are inherently heterogeneous, with credit fundamentals, regulatory environments, and geopolitical dynamics varying widely. Active managers with deep local expertise—such as the PIMCO Emerging Markets Debt team, which operates across three major time zones—can navigate these nuances more effectively. For example, the fund's decision to increase hard currency exposure in Romania and Oman in 2025 was driven by insights into political stability and economic reforms. Local teams also integrate ESG criteria into their analysis, ensuring that investments align with long-term sustainability goals. This level of due diligence is often absent in passive strategies, which lack the flexibility to adjust for country-specific risks.

The Case for Active Management Over Passive Strategies

While passive EM bond funds have attracted inflows in broader fixed income markets, their underperformance in volatile environments is well-documented. Morningstar data reveals that 79% of active U.S. intermediate core bond managers outperformed their benchmarks in 2024, and 45% of active EM bond funds beat passive peers over the past decade. The VanEck fund's top-quartile rankings from Morningstar over five years further validate the value of active decision-making. Passive strategies, by contrast, often include underperforming issuers and struggle to adapt to sudden shifts, such as sanctions on Russian debt or the collapse of Argentine peso bonds.

Investment Implications

For investors seeking exposure to EM debt, active management offers a compelling solution. It provides the tools to navigate high-yield opportunities while managing the inherent risks of currency volatility, political instability, and fiscal imbalances. The VanEck fund's success in 2025—achieved through tactical shifts in local currency exposure and issuer selection—demonstrates how active strategies can deliver consistent, risk-adjusted returns. Investors should consider allocating to active EM bond funds, particularly those with a proven track record of adapting to geopolitical shocks and leveraging local expertise.

In a world where EM debt remains a key driver of portfolio diversification and yield, the advantages of active management are clear. As global uncertainties persist, the ability to pivot quickly, mitigate risks, and capitalize on market dislocations will separate winners from losers in this volatile asset class.