Emerging markets equities outperformed Canadian and U.S. equities over the past year, yet most Canadian investors are underallocated. With improving earnings and structural growth drivers, the potential in emerging markets is still unfolding. NEI Emerging Markets Fund’s disciplined process helps manage risk and unlock opportunity.
Summary:
Over the past 15 years, emerging markets (EM) equities have tended to underperform Canadian and U.S. equities — but there has been a recent shift. In the 12 months ending on April 30, 2026, the MSCI EM Index returned about 49%.[1]. In contrast, the S&P/TSX Composite Index returned about 40%,[2] and the S&P 500 Index returned about 31%.[3]
Many factors played into EM underperformance over the last decade and a half, says Dijana Kostic, Quant Equity Client Portfolio Manager with Robeco, an international, active, research-centric asset manager and sub-advisor for the NEI Emerging Markets Fund. An extended period with a strong U.S. dollar increased debt servicing costs for USD-denominated debt and made exports less competitive. Also, China-specific challenges were a drag on EM, seen as a whole, because China represents more than 30% of the MSCI EM Index.
“When your largest constituent within the market is restructuring its entire economic model and seeing a lot of volatility, that is, of course, a headwind for the asset class,” says Kostic.
Meanwhile, EM equities were missing the technology giants that powered U.S. equity performance over the past few years. Historically, the MSCI EM Index has been skewed toward financials, commodities, and more traditional industrial sectors. That’s now changing with a structural shift toward the technology, communication services, and consumer discretionary sectors.
For Canadian investors, EM equities represent an opportunity to diversify into markets that deliver about 40% of global GDP, are subject to a different set of growth drivers, and offer both compelling valuations and accelerating earnings growth. Kostic points out that EM equities are trading at around a 30% discount to developed markets, while earnings growth has almost doubled in the past year.
“The expectation is that improvement in earnings growth will continue. Performance wasn’t just based on multiple expansion and investors starting to step more into the emerging markets space. We also saw real fundamental improvement,” she says.
An underallocation to EM, she adds, can have a wealth impact that compounds over time. As an example of “quite a meaningful portfolio risk,” Kostic points out that AI is one of the biggest investment themes globally, and EM jurisdictions like Taiwan and South Korea play critical roles in the AI hardware supply chain. In particular, they’re manufacturing powerhouses for advanced semiconductors and memory.
“Not having exposure to these companies could hurt portfolios over the long term.”
Managing risk with an active, systematic process
For many investors, risk is the sticking point when thinking about increasing allocations to EM. Common concerns include currency volatility, political risk, and liquidity risk.
Kostic says these risks are well understood and largely priceable. Moreover, EM economies aren’t as fragile as they were a couple of decades ago. In many cases, reserves are stronger, foreign currency debt is down, and central banks are more independent. Political risk remains inherently unpredictable, which is precisely why a human overlay exists alongside the quantitative model. The biggest risk, in Kostic’s view, is to treat EM as one block — without ensuring exposure is diversified and differentiated.
“That’s where active management becomes really important.”
Robeco’s approach with the NEI Emerging Markets Fund starts with the application of a proprietary quantitative model to about 700 of the largest names in the MSCI EM Index.
The model includes more than 50 signals — each one built in-house — that span perspectives such as value, quality, momentum, analyst revisions, and short-term signals. The signals also exploit machine learning and natural language processing models to identify what’s going on in markets — such as short-term reversals and sentiment shifts — and tap into them.
Each signal provides a positive or negative indication for a specific company. These are combined into a score and rank for each of the long list of 700 names. Then, a proprietary algorithm proposes an “optimal” portfolio of about 250 names that balances alpha exposure, risk constraints, trading costs, and other factors while integrating sustainability considerations.
The quantitative process includes ongoing oversight from the quantitative portfolio managers. Portfolio construction and management of the NEI Emerging Markets Fund are further enhanced, when warranted, by insights from fundamental EM portfolio managers. This is essential to know when to act in response to corporate actions, regulatory shifts, or political turmoil.
At its heart, Robeco’s approach prioritizes bottom-up analysis over top-down country and sector views to focus on the quant model’s strengths in stock selection. Adaptability is also key to allow adjustments in response to short-term market movements.
“Our strategy is designed to be a core building block of portfolios. The way it’s engineered is to target consistent performance over the long term and not chase short-term trends,” says Kostic. “In these turbulent times, you do not want to take any impulsive actions. Discipline really matters.”
To learn more about Robeco’s investment approach and the EM opportunity, attend NEI Investments’June 25 webinar featuring Robeco’s Dijana Kostic and Jan Sytze Mosselaar.
[1] www.msci.com/indexes/index/891800
[2] www.bnnbloomberg.ca/markets/tsx
[3] www.bnnbloomberg.ca/markets/s-p-500/
