What This Top Emerging Markets Fund Is Betting on Now

The fund targets companies selling the modern-economy goods and services that people living in big cities are buying. Above, Pedestrians in Mumbai. (Dhiraj Singh/Bloomberg)

Emerging markets have rallied over the past year after a decadelong slump. Investors may finally decide that the rebound is real.

The outlook is compelling, says Lewis Kaufman, portfolio manager of the $4.2 billion Artisan Developing World fund, as local currencies strengthen against a weaker U.S. dollar, which enhances local companies’ buying power. Similarly, emerging market central banks in places such as India and Mexico are cutting interest rates, lowering borrowing costs.

Emerging markets have burned U.S. investors in the past when their focus too broad, Kaufman says. To capitalize on growth, he targets companies selling the modern-economy goods and services that people living in big cities are buying.

“We think those modern population clusters have the propensity to consume faster,” he says. “They have the potential to realize the promise of low penetration and scale in the emerging markets, which, to me, is ultimately the essence of the emerging market story.”

His narrow focus has produced results. On a one-year basis, the large-cap growth Developing World fund is up 36.3%, versus the MSCI’s Emerging Markets index’s gain of 19.2% and the Morningstar diversified emerging market peer group’s 16.4% rise.

Since the fund’s inception 10 years ago, Kaufman has steered it to an 11.9% annualized return, putting Developing World in the top 1% of its Morningstar peers. Over 10 years, emerging market funds gained 5.6% annualized and the index rose 5.3%. Morningstar gives the no-load, four-star fund a bronze medal for the investor shares, although it notes that the fund’s 1.3% expense ratio is above average.

Kaufman seeks companies with scalable business models that he can hold for long periods, preferring financially sound companies that generate free cash flow and have high gross margins to produce what he calls “disproportionate equity outcomes.”

“We want to invest in dynamic companies that we hope are able to create value, not just in a year or two, but for five or 10 years,” he says, noting that he has owned his top five names for an average of 8.5 years.

The strategy to focus on modern, urban emerging market consumers means he holds a mix of emerging and developed market companies that provide goods and services desirable to that group.

Consider his top two holdings: MercadoLibre , a Latin American e-commerce and fintech platform, and Sea, a Southeast Asian e-commerce and gaming platform. Both have evolved from their e-commerce roots, and Kaufman expects they’ll continue to diversify as they expand further into fintech.

He also owns developed-market companies with economic ties to emerging markets, including Nvidia and No. 7 position CrowdStrike Holdings, which may raise some eyebrows. Kaufman is quick to say these names aren’t the sole reason for Developing World’s outsize returns. Since inception, two-thirds of the fund’s performance has come from companies domiciled or based in emerging markets.

“A lot of times, things that consumers want to buy in the emerging markets, that they aspire to buy, are made in the West,” he says.

Developing World is a growth fund, but Kaufman also thinks about risk and stores of value, leading him to hold defensive names. Coca-Cola , which he added in 2023, is an obvious example. This year he bought Tradeweb Markets, an electronic trading platform, which benefits from heightened fixed-income trading during market stress.

He also puts longtime holding Kweichow Moutai, a Chinese luxury spirits company, and Ferrari, bought in 2024, in the defensive bucket, arguing that, as supply-constrained names, their pricing models can get them through market turns.

What those store-of-value companies have in common is revenue variability. That allows him to manage through various environments without needing to buy and sell in difficult markets, he says.

Developing World is a high-conviction portfolio that can hold between 30 to 50 stocks, and Kaufman keeps a tight leash on weightings, capping names at 5%.

To manage the portfolio, he uses a multifaceted, contrarian concept he calls “flexion,” which has upside and downside components.

He will sell winners to redeploy capital elsewhere in the portfolio. It’s a way to capture value from strong-performing names, and if the companies continue to perform as expected, the position weight will increase its own. As an example, he has sold Nvidia several times to realize profits.

If a position is underperforming, he will add to it—enough to maintain the position but not necessarily back to full weighting. He’ll watch the position closely to see how it performs. This “transitioning to a lower weight,” as he calls it, gives him a way to minimize the damage from a potentially bad investment.

He recently built up exposure to India with sale proceeds from winners. He bought MakeMyTrip , an Indian online travel firm, in 2023; and Eternal, an Indian technology company with a 50% market share in food delivery and quick commerce, added in 2024. Already, MakeMyTrip has grown to become the fund’s No. 6 holding.

Kaufman continues to own several Chinese names, saying it’s important to have a toehold in the country when the economy rebounds. He sees moves such the White House rolling back export restrictions on semiconductors as a positive step in relations between the two nations.

High-quality names remain cheap, he says, flagging both Tencent Holdings, the fund’s No. 3 holding, and KE Holdings, a Chinese real estate platform, as examples. Tencent is deeply ingrained in Chinese society and well positioned to move into business services, such as cloud software.

KE’s business model doesn’t require capital, and incremental revenue flows disproportionately to the bottom line, he says, noting that at the end of the third quarter, the firm has a cash balance of $7.6 billion, a third of its market cap.

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