Have you ever looked at your emerging markets allocation and wondered if it really matches the growth story you signed up for? Lately that question keeps coming back to me. The mainstream indexes that most of us use as a proxy have shifted so far toward a few technology heavyweights that the original idea of broad emerging markets exposure feels almost secondary.
Why Mainstream Emerging Markets Indexes Feel Distorted Today
Three names now dominate the picture: a leading semiconductor manufacturer from Taiwan, a major electronics group from South Korea and another memory-chip specialist from the same country. Together they represent nearly thirty percent of the widely followed emerging markets benchmark. Add in the rest of Taiwan and South Korea and those two countries alone account for almost half the index. Asia as a whole sits close to eighty percent. Technology itself makes up roughly forty-four percent of the entire basket.
Recent performance has been spectacular for those three stocks. Gains of ninety percent, two hundred thirty-eight percent and over four hundred percent in a single year tend to grab attention. Yet the numbers also highlight a problem. When investors buy an emerging markets fund they usually expect exposure to domestic consumption, infrastructure build-out, financial deepening and a wider geographic spread. Instead many end up holding a concentrated bet on global technology supply chains.
I have spoken with several private investors who felt genuinely surprised when they checked the underlying holdings. One told me he thought he was buying Brazil, India and bits of Southeast Asia. What he actually owned was mostly Korean and Taiwanese chipmakers. That mismatch between expectation and reality is why some of us have started looking for specialist vehicles that deliberately step away from the index.
The Search For Genuine Domestic Growth
Fortunately the investment trust universe still offers options that prioritise different themes. One approach focuses on infrastructure, utilities and related assets. Another concentrates on dynamic smaller and mid-sized companies. Both paths reduce reliance on the same handful of technology giants and open the door to more local economic activity.
In my view the most interesting aspect is not simply the avoidance of tech concentration. It is the chance to capture growth that is driven by rising middle-class spending, urbanisation and the steady improvement of basic services inside emerging economies. Those forces tend to be more durable than short-term semiconductor cycles, even if they produce less eye-catching quarterly numbers.
Infrastructure And Utilities As A Counterweight
Consider a trust that specialises in infrastructure and utilities across emerging markets. Its portfolio looks nothing like the mainstream index. Brazil sits at around twenty-two percent, the rest of Latin America contributes another seventeen percent and Eastern Europe, including Greece, makes up roughly nine and a half percent. China exposure stays deliberately low at about nine percent, mostly through Hong Kong listings, compared with the twenty percent weighting in the broad benchmark.
The managers are open about their caution toward China. Regulations can shift overnight, they note, and that unpredictability makes long-term capital allocation harder. Instead they prefer markets where the rules of the game feel more stable and where they can identify assets that generate reliable cash flows.
Stock selection remains critical because mismanagement can destroy even a high-quality asset. If value cannot be found in a particular country or sub-sector, the capital simply stays away.
That discipline shows up in the holdings. The largest position is a Brazilian waste-management company that benefits from growing urban demand for professional disposal and recycling services. Next comes a container-terminal operator based in the Philippines that runs facilities in nineteen countries. Other names include an internet-exchange business in Korea, a group that runs airports along Mexico’s Pacific coast and the operator of the main port in Athens.
These businesses share a common trait. They are tied more closely to local economic activity than to global technology demand. A mobile operator in West Africa, for instance, continues to grow customer spending at twelve to thirteen percent a year yet still trades at only two point seven times cash flow. That kind of valuation gap is rare among the large-cap technology names that dominate the index.
Because the portfolio avoids the recent technology surge, short-term relative performance has lagged. Over one year and three years the trust has trailed the mainstream benchmark, although absolute returns of fourteen percent and thirty-four percent remain respectable. The longer picture looks more encouraging. Since its launch in the mid-nineties the trust has delivered an annualised return of roughly nine and a half percent, ahead of its own benchmark. Shares currently trade at a ten percent discount to net asset value and offer a yield of about four point three percent.
For investors who want emerging markets exposure that actually feels emerging, this style of portfolio provides a useful counterweight. The geographic tilt toward Latin America and Eastern Europe, combined with the focus on real assets, creates a different risk and return profile from the Asia-heavy, tech-heavy mainstream approach.
Smaller And Mid-Sized Companies Offer Another Route
A second trust takes a different but equally deliberate path. It concentrates on dynamic smaller and mid-sized companies rather than the household-name giants. The portfolio remains tightly focused, typically holding only twenty-five to thirty stocks, and shows minimal overlap with the broad emerging markets index.
Taiwan and Korea still account for around thirty-eight percent of assets, and technology remains a meaningful thirty-one percent. Yet the managers have actively reduced those weightings in favour of industrials and financials. China exposure sits below three percent. That underweight hurt relative performance last year when Chinese mid-caps did better, but it has been rewarded with double-digit outperformance so far this year.
India has become a larger part of the story, rising to twenty-eight percent of the portfolio. Foreign investors have been net sellers, yet domestic buyers have stepped in. The main equity index sits about ten percent below its previous peak even though economic growth continues at seven and a half to eight percent, inflation stays near four percent and policy rates hover around five and a quarter percent. The currency has weakened by roughly ten percent over the past year, which helps exporters and encourages local substitution of imports.
Mid-cap stocks have lagged their larger counterparts for some time. As a result the trust’s one-year and three-year returns of thirty-three percent and forty-four percent trail the mainstream emerging markets index. The managers argue that a catch-up phase is overdue. They estimate the current portfolio can deliver operating margins around twenty-three percent and annualised earnings growth above forty-five percent over the next five years. Shares trade at a ten percent discount to net asset value and yield roughly one percent.
What appeals to me about this approach is the emphasis on companies still early in their growth curves. Many of these businesses serve domestic markets that continue to expand as incomes rise and infrastructure improves. The concentrated portfolio also means that each holding can make a real difference to overall performance, for better or worse. That concentration requires careful stock selection, but it also offers the potential for meaningful outperformance if the thesis proves correct.
Comparing The Two Approaches Side By Side
Both trusts trade at similar discounts of around ten percent. Both deliberately limit exposure to the three technology giants that dominate the mainstream index. Beyond those similarities the strategies diverge sharply.
| Feature | Infrastructure Focus | Smaller Company Focus |
| Primary Theme | Utilities, ports, airports, waste | Dynamic mid and small caps |
| Geographic Tilt | Latin America and Eastern Europe | India rising, Asia still present |
| China Weight | Around 9 percent | Below 3 percent |
| Income Yield | Approximately 4.3 percent | Around 1 percent |
| Portfolio Size | Broader across real assets | 25–30 stocks |
The infrastructure-oriented trust offers higher income and a more defensive cash-flow profile. The smaller-company trust offers higher expected earnings growth and greater sensitivity to domestic economic expansion. An investor could reasonably hold both as complementary pieces within a broader emerging markets allocation.
I have found that combining the two styles helps smooth the overall experience. When technology leads, the mainstream index pulls ahead. When domestic growth or infrastructure investment takes the spotlight, these specialist trusts tend to close the gap or move into the lead. Over a full market cycle that balance can matter more than any single year’s relative performance.
Valuation And Risk Considerations Worth Weighing
Discounts to net asset value of ten percent are not extreme by historical standards for investment trusts, yet they still provide a margin of safety. More important is the underlying valuation of the holdings themselves. Many of the infrastructure assets trade on modest multiples of cash flow despite delivering steady growth. The smaller companies in the second portfolio are expected to grow earnings rapidly, which can justify higher multiples if those forecasts materialise.
Liquidity remains a practical point. Both trusts are listed and can be bought and sold through normal brokerage accounts, but daily volumes are lower than those of large open-ended funds. Investors who need to move large sums quickly should take that into account. Currency exposure is another factor. Neither trust systematically hedges emerging-market currencies, so sterling-based investors will feel the effects of local currency movements.
Perhaps the most interesting aspect is the behavioural one. Holding specialist trusts requires a willingness to look different from the benchmark. In periods when the three technology names surge, relative performance can look disappointing even if absolute returns stay positive. That psychological pressure has caused some investors to abandon well-constructed portfolios at the wrong moment. Staying the course demands conviction in the underlying thesis.
How These Trusts Fit Into A Broader Portfolio
Most investors already hold some form of emerging markets exposure, often through a low-cost tracker that mirrors the mainstream index. Adding one or both of these specialist trusts can rebalance the overall mix. A modest allocation of five to ten percent of the emerging markets sleeve toward infrastructure and smaller companies can reduce concentration risk without abandoning the asset class entirely.
The higher yield from the infrastructure trust can also appeal to investors who need income. At more than four percent the distribution stands well above the yield available from most broad emerging markets equity funds. The smaller-company trust contributes less income but potentially more capital growth. Together they create a more balanced risk profile than either would alone.
- Infrastructure focus brings geographic diversification and cash-flow stability
- Smaller-company focus adds growth potential from domestic expansion
- Both reduce reliance on a handful of technology heavyweights
- Discounts to net asset value provide an additional entry buffer
- Complementary styles can smooth relative performance over time
I sometimes describe the combination as a form of insurance against index concentration. No one can predict whether the technology leaders will continue their extraordinary run or whether domestic themes will regain leadership. Holding both styles means the portfolio is less dependent on any single outcome.
Looking Ahead At Structural Drivers
Several longer-term forces continue to support the case for diversified emerging markets exposure. Urbanisation remains far from complete across Latin America, parts of Africa and South Asia. Demand for reliable electricity, clean water, waste management and efficient logistics keeps rising. At the same time a growing middle class wants better mobile connectivity, financial services and consumer goods produced closer to home.
These trends do not move in straight lines. Political cycles, commodity prices and global interest-rate shifts can create periods of volatility. Yet the underlying direction of travel looks durable. Specialist trusts that focus on real assets and growing domestic companies are well placed to capture that progress.
Technology will of course remain important. Semiconductors and digital infrastructure are critical to modern economies. The point is not to abandon technology exposure entirely. It is simply to recognise when one part of the index has become so dominant that it no longer reflects the broader opportunity set.
In my experience the investors who fare best over multi-year periods are those who periodically rebalance away from the most crowded trades. The current concentration in three technology names feels like one of those moments. Specialist vehicles that emphasise infrastructure and smaller companies offer a practical way to restore balance without leaving the asset class.
Practical Steps For Investors Considering A Shift
Anyone thinking about adding these trusts should start by reviewing their existing emerging markets holdings. A quick look at the top ten positions in a mainstream fund will usually reveal the same three technology names at the top. Once that concentration is clear, the case for a complementary allocation becomes easier to evaluate.
Next comes an honest assessment of time horizon and risk tolerance. Both trusts can experience periods of underperformance relative to the index. Investors who check relative returns every month may find the experience uncomfortable. Those who focus on absolute progress and multi-year outcomes tend to sleep better.
Position sizing matters as well. These are specialist tools rather than core holdings. A total allocation of five to fifteen percent of the overall emerging markets exposure is often enough to make a difference without dominating the portfolio. Rebalancing once a year keeps the weights in line with the original plan.
Finally, costs deserve attention. Investment trusts charge ongoing fees that are typically higher than those of passive trackers. The question is whether the active approach and the different exposure justify the extra expense. For investors seeking genuine diversification beyond the technology heavyweights, the answer is often yes.
A Final Thought On Balance
Emerging markets remain one of the more dynamic corners of global equities. The challenge is that the way most investors access the asset class has become narrower than the opportunity itself. Two specialist trusts show that alternatives exist. One leans into infrastructure and utilities with a tilt toward Latin America and Eastern Europe. The other seeks growth among smaller and mid-sized companies, with rising exposure to India and a deliberate underweight in China.
Neither approach is perfect. Both have lagged the mainstream index during the recent technology surge. Yet both continue to deliver solid absolute returns, trade at discounts to asset value and offer exposure that feels closer to the original promise of emerging markets investing. For anyone who values balance over pure benchmark hugging, they deserve a closer look.
The next few years will reveal whether domestic growth and infrastructure themes regain leadership or whether technology continues to dominate. Either way, a portfolio that holds a bit of both worlds is better prepared for whatever comes next. That, in the end, is what thoughtful diversification is supposed to achieve.
