December 17, 2025 | Global Equity
The Big Squeeze: EM Mega Caps Up, Breadth Down
Portfolio Specialist
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Key Takeaways
- Emerging markets (EM) equity returns have been driven by extreme mega-cap concentration, with index breadth collapsing to historic lows and masking weakness across much of the opportunity set.
- This concentration has distorted relative results for active managers, particularly those constrained by diversification rules or broad benchmarks, as small-cap underperformance and index construction limit flexibility.
- We view these dynamics as cyclical rather than structural, with history suggesting breadth should mean revert and opportunities broaden for managers able to invest across the market-cap spectrum.
Emerging markets (EMs) are delivering a familiar paradox: strong headline returns but shrinking opportunity beneath the surface. Index breadth has collapsed to historic lows, with only about a third of EM stocks beating the benchmark, thanks to surging tech-heavy mega caps that increasingly dominate performance.
For active managers, especially those constrained by funds’ diversification rules or running broad all-cap strategies, this creates an unusually narrow playing field and challenges relative results. As a result, a smaller share of active managers have beaten the index: over the past year, the MSCI Emerging Markets Index ranks in the 36th percentile among U.S.-domiciled emerging markets funds, compared with the 51st and 55th percentiles over the three- and five-year periods, respectively.
But this isn’t necessarily a structural reality. Market breadth tends to be cyclical, and today’s concentration, however extreme, has a long history of mean reverting. However, in the current environment, having the flexibility to invest in the most attractive opportunity set across the market-cap spectrum is key.
Breadth Collapses as Mega Caps Take Over
The percentage of stocks outperforming the MSCI EM Investible Market Index (IMI) has fallen to a historic low of 32%. This weakness reflects the sharp rise in index concentration, with large mega caps driving returns—a dynamic similar to the “Mag 7” effect in the United States.
This is creating a more challenging backdrop for active managers, especially for funds subject to diversification rules, limiting the ability to overweight the biggest names just as they exert the most influence on index performance.
However, as the chart below shows, index breadth is cyclical. These periods of extreme concentration have historically mean reverted.
Percentage of Stocks Outperforming the MSCI EM IMI Over the Past Year
Source: William Blair, as of October 14, 2025. Past performance is historical and does not guarantee future results. A direct investment in an unmanaged index is not possible.
The largest index holdings have steadily grown over time, and TSMC now represents nearly 10% of the MSCI EM IMI (and an even higher weight in the standard MSCI EM Index). This makes it impossible to overweight the stock in a UCITS fund, which is capped at a 10% position in any individual security, and creates challenges for more diversified portfolios in general.
This issue is even more pronounced when using an EM growth index as benchmark. While it may seem reasonable and appropriate to measure a growth manager’s results against the relevant style index, the current concentration level of EM growth indices makes headline performance of the index less representative of the overall style performance as it is highly biased by a few stocks. As a matter of fact, TSMC represents 13% of the MSCI EM Growth IMI and 15% of the MSCI EM Growth Index. Moreover, the top five largest holdings in the EM growth indices account for roughly a third of the overall index performance.
Weighting of Top 1, 5, 10 and 20 Positions in the MSCI EM IMI
Source: William Blair, as of October 31, 2025. Past performance is historical and does not guarantee future results. A direct investment in an unmanaged index is not possible.
Small-Cap Weakness Distorting Relative Results
Another unusual dynamic is the quite significant underperformance of small caps relative to large caps. Because of this, the MSCI EM IMI (which includes small caps) is underperforming the more concentrated, large-cap-heavy MSCI EM Index.
As the chart below shows, the MSCI EM Index and MSCI EM IMI have delivered broadly similar returns over longer periods (such as 10 years), but in 2025 the standard index has meaningfully outperformed the IMI version. The key driver is the sharp underperformance of small caps relative to large mega caps.
EM Benchmark Performance Comparison
Source: FactSet, MSCI, and William Blair, from September 29, 2000, to October 31, 2025. Shows gross returns. Past performance is historical and does not guarantee future results. A direct investment in an unmanaged index is not possible.
Transitory Effects?
We view these effects as transitory and reflective of short-term distortions. Small caps have significantly underperformed over the past year but have outperformed over five years, and in our opinion remain attractive over the long term. As the chart below shows, the MSCI EM Small Cap Index has delivered stronger long-term returns than both the MSCI EM Index and the MSCI EM IMI, which, notably, have performed in line over longer periods despite the more than 200-basis-point gap between them year-to-date.
Small-Cap Index Has Outperformed Over the Long Term
Source: FactSet, MSCI, and William Blair, as of October 31, 2025. Shows cumulative performance. Returns are gross. Past performance is historical and does not guarantee future results. A direct investment in an unmanaged index is not possible.
While EM performance in 2025 has been dominated by mega caps and marked by historic small-cap underperformance, we believe these extremes are unlikely to persist indefinitely. Market breadth has always been cyclical, and history suggests that opportunities will broaden again. For active managers, we believe maintaining flexibility remains essential to navigate these shifting dynamics and capture alpha in the areas offering the most attractive opportunities.
Romina Graiver, partner, is a portfolio specialist for William Blair’s global equity team.
The MSCI EM Index is a free float–adjusted, market-capitalization index representing large- and mid-cap companies across EMs. The MSCI EM IMI is a comprehensive EM index that includes large-, mid-, and small-cap companies to reflect the full investable universe. The MSCI EM Small Cap Index is an index that captures the performance of small-cap companies across EMs. The MSCI EM Growth Index is the growth-focused style index derived from the MSCI EM universe, emphasizing companies with higher expected earnings growth and growth-oriented characteristics. The MSCI EM Growth IMI is the growth-focused style index derived from the MSCI EM IMI universe, emphasizing companies with higher expected earnings growth and growth-oriented characteristics.