Looking Beyond the Index: Managing Concentration Risk in Emerging Markets

Concentration risk arises when a portfolio becomes overly reliant on a small number of holdings or risk factors, leaving investors vulnerable if those exposures disappoint. While this has been widely debated in developed markets, particularly US equities, it is becoming an equally important consideration within Emerging Markets (EM).

Many wealth managers still view EM as a naturally diversified allocation, providing access to dozens of countries and thousands of companies. However, beneath the surface, EM indices have become increasingly concentrated, with performance driven by a relatively small number of companies, sectors and countries.

As at the end of August 2026, Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics and SK Hynix accounted for roughly 30% of the MSCI Emerging Markets Index, with TSMC alone representing more than 15% of the benchmark. Such concentration raises important questions about the nature of the exposure investors receive when allocating to a traditional market-cap weighted index.

The implications extend far beyond stock selection. The dominance of these companies reflects the growth of the semiconductor industry and the importance of themes such as artificial intelligence, cloud computing and advanced manufacturing. While these are undoubtedly high-quality businesses, their growing index weights create concentration across several dimensions simultaneously.

Firstly, there is stock concentration, with index returns increasingly dependent on a handful of companies. Secondly, there is sector concentration, as all three businesses sit within the semiconductor and technology ecosystem. Thirdly, there is country concentration, with Taiwan and South Korea accounting for an ever-larger share of index exposure. As a result, what appears to be a diversified EM allocation can be heavily influenced by developments in just two countries and a narrow set of economic drivers.

For discretionary portfolio managers, this highlights the difference between holding a large number of securities and achieving genuine diversification. A passive EM fund may own hundreds of stocks, but if returns are increasingly driven by a small group of technology leaders, portfolio outcomes remain tied to a limited set of themes. In reality, investors may be gaining less exposure to the broad growth opportunity set within emerging markets and more exposure to a concentrated technology trade. This distinction is particularly important when constructing client portfolios where diversification is expected to provide resilience across a range of market environments.

In practice, investors may be more exposed than they realise to semiconductor demand, AI-related capital expenditure, global technology spending, supply chain dynamics and geopolitical developments surrounding Taiwan. While these factors have been powerful performance drivers, concentrated exposures can create vulnerabilities if market leadership changes or sentiment towards the sector weakens. History has shown that periods of market concentration can persist for longer than many expect, but they can also reverse quickly when earnings expectations, valuations or broader economic conditions change.

From our perspective, these trends strengthen the case for selective active management within Emerging Markets. At Isio, we believe active management should be employed only where there is a strong likelihood of delivering superior risk-adjusted outcomes relative to passive alternatives. Emerging Markets remains one of the clearest examples.

Compared with developed markets, the EM investment universe remains less efficient, less researched and more influenced by local political, regulatory and governance considerations. This creates opportunities for skilled active managers to identify attractive long-term investments while avoiding areas where risks may not be adequately reflected in valuations.

Active management also provides an important tool for addressing concentration risk. Unlike passive strategies, which allocate capital solely according to market capitalisation, active managers can make deliberate decisions about where risk is taken. This may involve reducing exposure to dominant semiconductor companies, increasing allocations to underrepresented markets with improving fundamentals or accessing sectors driven by different economic forces.

For wealth managers constructing multi-asset portfolios, this can result in a broader and more balanced range of return drivers. Rather than relying heavily on a small number of technology companies, investors can gain exposure to themes such as domestic consumption growth, financial deepening, healthcare development, digitalisation, infrastructure investment and the energy transition. Equally, active managers can seek opportunities across markets such as India, Brazil, Mexico and parts of Southeast Asia, where long-term structural growth drivers may be underrepresented within headline EM benchmarks.

At Isio, we focus on understanding the true sources of portfolio risk rather than relying solely on benchmark classifications. Our objective is to ensure diversification across economic drivers, sectors, regions and investment styles, helping to avoid hidden concentrations that can emerge within market-cap weighted indices.

While concentration can support returns during periods of strong market leadership, it can also increase downside risk when conditions change. For discretionary wealth managers, the key challenge is ensuring that diversification is genuine rather than simply apparent. In today’s EM market, selective active management can play a valuable role in broadening opportunity sets, reducing hidden concentrations and building more resilient portfolios capable of delivering better risk-adjusted outcomes over the long term. Ultimately, the goal is not simply to own more holdings, but to gain exposure to a wider range of return drivers, creating portfolios that are better positioned to navigate different market regimes while still capturing the long-term growth potential that Emerging Markets can offer.