The Strategic Rebalancing of Portfolios: Why Active EM Exposure Outperforms Passive in a Geopolitical Reset

The global investment landscape is undergoing a seismic shift. From 2020 to 2025, emerging markets (EM) have become a battleground for alpha generation, where active strategies have consistently outperformed passive benchmarks. The MSCI Emerging Markets Index, for instance, returned 8.62% year-to-date (YTD) as of May 2025, outpacing the S&P 500's 1.12%. This divergence underscores a critical truth: in a world defined by geopolitical volatility and macroeconomic restructurings, passive index-tracking is no longer sufficient. Investors must rethink their core EM allocations, embracing active, bottom-up strategies to capitalize on inefficiencies and navigate the new normal.

The Inefficiencies of Emerging Markets: A Goldmine for Active Managers

Emerging markets are inherently inefficient. Unlike developed markets, where information asymmetry is low and liquidity is high, EMs are characterized by fragmented regulations, currency volatility, and policy-driven market dynamics. These inefficiencies create fertile ground for active managers to exploit mispricings. For example, during the 2024–2025 period, active strategies in India and Brazil outperformed passive peers by leveraging policy shifts. In India, a surprise 100-basis-point rate cut by the Reserve Bank of India (RBI) in Q2 2025 allowed active managers to overweight financials, capturing gains as the sector surged. Similarly, in Brazil, early positioning in infrastructure and renewables—sectors insulated from trade tensions—proved lucrative as the economy rebounded from high inflation.

Passive strategies, by contrast, are shackled by index weights. The MSCI EM IMI Index, for instance, declined 7.9% in Q4 2024, reflecting broad-based underperformance in markets like China and the Philippines. Active managers, however, could dynamically adjust exposures. The VanEck Emerging Markets Fund, for example, trimmed overweights in Brazil and the Philippines while increasing stakes in Georgia and South Korea, where structural reforms and AI-driven growth created tailwinds. This agility is a hallmark of active management in EM, where rigid index weights often force investors to hold underperforming assets.

Macroeconomic Restructurings: Active Risk Management as a Competitive Edge

The 2024–2025 period was marked by aggressive macroeconomic restructurings in EM. China's pivot from “common prosperity” to pro-growth policies, Argentina's fiscal discipline reforms, and Greece's investment-grade upgrade all created asymmetric opportunities. Active managers who anticipated these shifts—such as those who positioned in China's “Digital China” initiatives or Argentina's privatization-driven sectors—generated outsized returns. For instance, TSMC's dominance in AI-driven semiconductor demand, a key holding for active EM funds, delivered double-digit gains as global demand for chips surged.

Passive strategies, however, struggled to adapt. The MSCI EM IMI Index's uniform exposure to trade-sensitive sectors like consumer discretionary and industrials left it vulnerable to U.S.-China tensions and U.S. dollar strength. Active managers, in contrast, rotated into sectors like utilities and renewables, which were less correlated with global macro risks. This ability to rebalance in real time—whether by hedging currency exposure or tilting toward high-conviction themes—has become a critical differentiator.

The Case for Active Core Allocations: Beyond Tactical Adjustments

The argument for active EM exposure extends beyond tactical adjustments. It is a structural necessity in a world where geopolitical risks are no longer episodic but endemic. The Visegrád 4 (Czechia, Hungary, Poland, Slovakia) exemplifies this shift. By proactively decoupling from Russian energy supplies and restructuring supply chains, these countries created a playbook for active EM strategies. Their deliberate policy interventions—such as sourcing energy from alternative providers—mirrored the agility of active fund managers, who similarly avoid overreliance on single markets or sectors.

In contrast, passive strategies in EM often mirror “derisking” approaches, which prioritize diversification over conviction. While this reduces volatility, it also dilutes returns. For example, Indonesia's reactive response to fertilizer supply shocks—relying on diplomatic engagement rather than proactive policy—highlighted the limitations of passive adaptation. Active managers, by contrast, can identify early-stage opportunities in such scenarios, such as investing in local agricultural tech firms or renewable energy projects.

Investment Advice: Rebalancing for the New Geopolitical Era

For investors, the lesson is clear: core EM allocations must evolve. Here's how:
1. Increase Active Exposure: Allocate a larger portion of EM portfolios to active strategies, particularly those with strong macroeconomic insights and sectoral expertise. Look for managers who can navigate currency risks and policy shifts, such as those with on-the-ground presence in high-conviction markets like India and Southeast Asia.
2. Focus on Bottom-Up Analysis: Prioritize funds that combine top-down macro views with rigorous stock-picking. For example, the VanEck fund's outperformance in Q2 2025 was driven by its focus on companies like Bank of Georgia Group (ROE >25%) and MINISO Group, which benefited from structural trends.
3. Diversify Across EM Sub-Regions: Avoid overconcentration in traditional EM powerhouses like China. Instead, explore underpenetrated markets such as Georgia, Turkey, and Argentina, where reforms and undervaluation create alpha potential.

Conclusion: Active EM Strategies as a Hedge Against Uncertainty

The geopolitical reset of 2024–2025 has redefined the rules of EM investing. Passive strategies, once seen as a low-cost solution, now expose investors to systemic risks they cannot control. Active management, with its ability to harness inefficiencies, adapt to macro shifts, and target high-conviction opportunities, has emerged as the superior approach. As global capital flows shift toward EM and the U.S. dollar's dominance wanes, the time to rebalance portfolios is now. Investors who embrace active EM strategies will not only outperform but also build resilience in an increasingly fragmented world.