EM: getting beyond the broken record

As with any investment, your capital is at risk.

Seattle, 1991.

The first thing that comes to mind is, well, Nevermind…

Nirvana’s biggest album is widely cited as the most influential of its generation, and without question, its genre. Those that bought this on CD may remember the hidden track phenomenon. About 10 minutes after a period of silence at the end of “Something in the Way”, came another track. Initially people thought this was a broken record, when in fact it was a reward for patience.

For our longest standing clients, ‘broken record’ is a common accusation. Something along these lines: “You’ve been telling us absolute returns from emerging markets (EM) are going to improve for years now, but what is the catalyst?” Our response has been predictable: “innovation is rising, operational performance from your holdings is largely strong. And when the macro and micro conditions align, the best companies will be rewarded.” However, the longer this broken record went on, without the absolute returns to back it up, the more tiring that became.

So phew. EM is finally pulling its weight again. The asset class was up c.30 per cent in US dollar terms in 2025. And for what it’s worth, we don’t think that’s a short-term phenomenon.

The hit singles

The danger now, of course, is that anyone professing to be an active EM manager coalesces just around the big obvious songs: Smells Like Teen Spirit, Come As You Are, the equivalent of the index heavyweights. For a superfan, there’s nothing wrong with that per se. But the extra reward comes if you keep listening long enough to uncover the hidden track. It’s like the second bite of the apple.

It's critical that we always understand where we differ from the market. So for those heavyweights, where it may appear that the ‘herd is chasing’ and everyone owns the stocks, it’s especially important that we differentiate between ownership and committed ownership. Conviction is a function of knowing and appraising a business deeply enough, to underwrite multi year earnings growth, through cycles. Take two commonly cited examples, and two of our most notable holdings, TSMC and MercadoLibre.

Source: Copley Fund Research, Baillie Gifford. Representative portfolio of EM All Cap strategy, our longest standing diversified EM portfolio.

TSMC: 93 per cent of EM peer funds¹ own this, but the average position is around 2 per cent underweight to the MSCI EM index. So let’s not conflate wide ownership with conviction. In contrast, it’s one of our top overweights² and has been so for some time. We’ve held this much longer than peers, building our conviction in the deep competitive moat over two decades.

MercadoLibre: It is owned by around half of peer funds. We have a 3.5 per cent position here in our longest running strategy, which is over 3x the average in the peer group. We’ve owned this LatAm ecommerce and payments giant since 2010, over 3x longer than the average EM manager. We’ve been the top (or second top) holder of the outstanding equity for many years now, which affords us very deep access to the talent throughout the company, a position that many others cannot boast.

The album tracks

But it’s beyond such heavyweights where we might argue that things are in fact more interesting. One of the many great things about EM investing is that perceptions of “risk” leave a vast number of excellent companies under-researched and under-owned. And there are even more that our global equity siblings are too nervous to go near. They often hide behind the idea that it’s only the big well known EM companies that get anywhere close to being thought of as “world class”.

What if this is plain wrong? Several of our portfolio companies do a good job of helping the rebuttal.

In China, ride hailing firm Didi optimises mobility at a scale Uber has never seen. Its dispatch algorithms are widely regarded as more efficient anywhere due to extreme trip density; Uber’s optimisation problems are comparatively easier.

In Korea, Hyundai Glovis is the global leader in finished-vehicle logistics. This is a niche where precision, capital discipline, and reliability matter more than pure scale. It integrates shipping, inland logistics, warehousing and more. Maersk and DHL each cover slices, but not the entire chain.

In consumer mobile apps, Kaspi is the everything app in Kazakhstan. It is what PayPal or Square have often wished they were: a unified, profitable, fully integrated consumer and merchant ecosystem. Monthly active users generate significantly higher cross-product usage than these more recognised global peers.

In ecommerce, Shopee is arguably the most efficient cross-border e-commerce network in the world, operating primarily in South East Asia. It grew faster than Amazon, eBay or MercadoLibre in its first 5 years because it mastered social commerce, gamification, and localised marketing.

In coffee, we’ve highlighted before that Luckin has outdone Starbucks in China in recent years. It has demonstrated that it can add 2000 stores in a single quarter, a pace Starbucks has never achieved in any market. Mobile ordering is critical too, as nearly all Luckin orders go through the app; Starbucks mobile order share is under 30 per cent globally.

Across mobility, logistics, payments, e-commerce and consumer technology, we’re able to find EM companies that are objectively ahead of their developed market peers. These firms typically operate in tougher environments, scale faster, iterate more quickly, and leapfrog legacy infrastructure; the exact conditions that can help to generate the type of growth that we seek.

Source: Copley Fund Research, using data covering $1562bn of peer group AUM across 358 Global equity funds. As at 31 October 2025.

And back to the point of difference. These are clearly under owned in EM portfolios. Even more so by global ones.

The whole record

We could go on. Know your anthems, sure. But also keep your ears alive to the best ‘album tracks’, before they hit the charts and streams.

The key point is this: knowing exactly where we differ from the market is central to our investment process.

Among the heavyweights, the distinction between simple ownership and true conviction is crucial. And among the lesser-owned names, the lack of following often reflects neglect, creating space for meaningful differentiation and mispricing.

An active EM portfolio that truly understands its points of departure from the market is, in our view, far better placed to deliver strong long-term outperformance.

Footnotes

1. Using data from Copley Fund Research, covering $568bn of peer group AUM across 359 GEM Funds. Tenure data at 30/6/25, weighting data at 31/10/25. Copley Fund Research builds its universes using a holdings-driven, bottom-up approach rather than relying on traditional fund classifications (e.g. Morningstar, Lipper). They aggregate disclosed holdings from a large global sample of active long-only equity funds — across all domiciles and vehicle types, including mutual funds, OEICs, SICAVs, investment trusts and other pooled vehicles. Because the universes are based on what managers actually own rather than how products are labelled or where they are domiciled, Copley’s peer groups reflect real investment behaviour and active capital allocation, not marketing categories.

2. Where mandate restrictions don’t cap this.

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