Emerging markets offer investors plenty of opportunity, but managing downside risk effectively is critical. A flexible framework that integrates multiple asset classes can help.

It Isn’t Just Returns—It’s the Path of Returns

Today’s markets may seem calm—and the economic backdrop looks solid. But don’t underestimate the risks. The monetary-policy safety net is being slowly withdrawn and geopolitical risks loom. A sudden surprise in either of these areas could trigger a market downturn and sizable losses.

So, managing both upside and downside can make a big difference during this cycle, especially with many investors nearing retirement age and getting ready to start tapping into their savings. It’s not just the level of returns that matters—it’s managing the path of those returns.

More of the Highs and Less of the Lows

Emerging markets are a good case in point. Stocks are enjoying a bull market supported by strong fundamentals, attractive valuations and an improving technical picture. But going “all in” can be risky. For one thing, emerging-market (EM) stocks are more volatile than developed-market stocks are, with drawdowns that tend to be more frequent and severe.

Is there a way to grab a lion’s share of EM returns with less downside?

Going active can be a good first step. EM indices aren’t built very well: following one too closely can produce unwanted exposures to countries, sectors and securities—and unexpected risks. A better approach is to use research to develop an information advantage and apply that edge through active stock-picking. After all, the average equity manager beat the MSCI Emerging Market Index nearly every year from 2005 through 2016 (Display), so good research can stand out.