3 Winners and 3 Losers From Emerging-Market Funds’ Big Rally

Emerging-market funds will have a tough act to follow in 2026.

Why it matters: The category racked up big gains last year following small returns for years. And a mix of factors like trade tensions prompted many investors to shift their dollars outside the US. Should you add emerging-market funds to your portfolio? And which ones were winners or losers? Morningstar’s senior principal of ratings Russ Kinnel dug into the data. The editor of the FundInvestor newsletter is here to tell you want he found.

13 Questions on Emerging-Market Funds’ Reversal

1. Fortunes have reversed for many emerging-market funds. Many of them closed out 2025 with their best year in a decade. What made the environment ripe for their outperformance?
2. There’s been a big shift in five-year performance tables after 2025. What happened?
3. You wrote in Morningstar’s FundInvestor newsletter that India went from an emerging-market star to a dud. Why, and how have China, South Korea, and Taiwan benefited?
4. With trade tensions between the US and China, how are asset managers managing China in their portfolios?
5. You’ve identified emerging-market fund winners and losers of 2025 in December’s FundInvestor. Let’s start with Lazard Emerging Markets Equity. What’s the story there?
6. A couple of funds have a value focus, but their managers bet on Asian technology stocks like Alibaba and Taiwan Semiconductor. How has this strategy paid off for Dodge & Cox Emerging Markets Stock and Causeway Emerging Markets?
7. Let’s pivot to the emerging-market funds that have lagged the competition. Vanguard Emerging Markets Stock Index delivered solid returns, right? However, this is a case of passive versus active funds. Will you explain?
8. There’s a rationale that’s it’s reasonable to invest in developed-market companies if they’re generating significant revenue from emerging markets. You say two funds share this philosophy: GQG Partners Emerging Markets Equity and Artisan Developing World. Let’s start with Artisan. How did this strategy affect its performance?
9. And what additional factors limited the returns of the GQG fund last year?
10. What could the reversal in emerging-market funds’ performance mean for their ratings from Morningstar?
11. Why do you think investors should consider adding emerging-market funds to their portfolios? And which bucket suits them best?
12. What’s the outlook for these funds in 2026?
13. What’s the takeaway for emerging-market funds following their big rally?

Key Quote on Emerging-Market Funds’ Big Rally

Emerging markets are a good diversifier. I think last year showed that they behave differently, and there are some really important markets. Whether you count [South] Korea or not, you still got China and India, some huge economies that are with some dynamic companies, and so I don’t think you want to miss out on that.

The Takeaway: Emerging-market funds’ recent rally shows they have potential. The funds have been out of favor for years because of poor returns. Kinnel says there’s a possibility the momentum continues for some time with the weak US dollar. Because of emerging-market funds’ volatility, they shouldn’t be a core portfolio holding but instead be kept to a modest amount, according to the editor of the Morningstar FundInvestor newsletter.

More From Morningstar on Emerging-Market Funds and Debt

Some emerging-market funds lagged the competition despite delivering solid returns. In the case of Vanguard Emerging Market Stock Index, it was a story of passive versus active funds. Kinnel says funds in emerging markets often produce dramatically different results. One of the factors that stunted the Vanguard fund’s results last year was that it had no exposure to [South] Korea, unlike all the active funds.

Dominic Pappalardo, chief multi-asset strategist at Morningstar Investment Management, discusses why emerging-market debt looks compelling in this episode of Investing Insights. Check out Morningstar’s 2026 Outlook to prepare for what’s ahead.

Securities mentioned in this episode:

Lazard Emerging Markets Equity LZOEX

Dodge & Cox Emerging Markets Stock DODEX

Causeway Emerging Markets CEMVX

Vanguard Emerging Markets Stock Index VEMAX

GQG Partners Emerging Markets Equity GQGPX

Artisan Developing World ARTYX

Fidelity Contrafund FCNTX

Alibaba BABA

Taiwan Semiconductor Manufacturing CO. TSM

Tencent TCTZF

Nvidia NVDA

Meta Platforms META

Google GOOG GOOGL

Amazon.com AMZN

Big change: An investing legend will retire from one of the world’s biggest and most successful actively managed mutual funds. Will Danoff, longtime manager of Fidelity Contrafund, has announced he will retire at the end of the year. Kinnel says Danoff excelled where others didn’t because he loved absorbing a fire hose of information from analysts, company visits, and more. The great investor focused on building a successful long-term performance with good year-to-year success. Read more about the star manager’s track record and Fidelity Contrafund’s leadership change.

Coming up: Investing Insights is starting a new personal finance series that will help you organize your financial life throughout this year. Morningstar senior editor Margaret Giles and Morningstar’s director of personal finance Christine Benz will break down those meaty tasks into digestible bites each month. In the meantime, watch them discuss 4 Financial To-Dos to Kick Off the New Year. Margaret will host Investing Insights on Feb. 6 and talk with Christine about how to use your IRA to optimize your portfolio following 2025’s market performance.