Emerging markets have spent much of the past decade testing investors’ patience. After years of trailing U.S. equities, the asset class finally turned the tables in 2025, outperforming the U.S. and reopening a debate some allocators had quietly shelved: is it time to reconsider emerging markets?
For Folksam, the answer remains nuanced. Years of weak relative performance, higher volatility, weaker sustainability characteristics, and higher relative costs have led the Swedish insurer and pension provider to broadly exclude emerging markets from its own model portfolios. The asset class is not off-limits for its clients, however. Through its fund platform, Folksam allows savers to allocate to a select group of emerging markets equity funds that meet its standards for quality, risk management, long-term consistency, and sustainability.
Long-Term Capital, Long-Term Responsibility
That selectivity reflects Folksam’s role as a long-term insurance and pension investor, where capital is managed with a dual mandate. “Long-dated savings are managed with the dual objective of delivering competitive returns while also taking responsibility for how capital is allocated,” says Oskar Sandvik, fund analyst focused on manager selection and asset allocation at Folksam.
“Much of successful investing is about avoiding the largest pitfalls. That is why we focus on funds with stable, repeatable investment processes, disciplined risk management, credible long-term track records, and teams with a consistent and coherent philosophy.”
Oskar Sandvik
In practice, this translates into a strong emphasis on quality at both the fund and corporate level. “Much of successful investing is about avoiding the largest pitfalls,” Sandvik explains. “That is why we focus on funds with stable, repeatable investment processes, disciplined risk management, credible long-term track records, and teams with a consistent and coherent philosophy.” Sustainability is embedded in that process, with its ESG framework forming a core part of the assessment.
Structural Advantage and Curated Breadth on the Fund Platform
One feature clearly differentiates Folksam from many peers: the absence of an in-house fund management company. “We do not have an own fund company and are therefore free to choose funds freely,” Sandvik notes. That independence offers two structural advantages. “First, we can choose funds freely across the entire market,” he says. “Second, we can remove funds from the platform that no longer perform or live up to our standards without having to consider internal commercial interests.” This flexibility allows Folksam to maintain a consistently high bar across its offering.
“Our goal is to make fund selection easy and straightforward for customers by offering a toolkit that is broad enough to meet varied needs but curated enough to avoid unnecessary complexity.”
Oskar Sandvik
To be included on Folksam’s fund platform, funds must meet core requirements around stability, long-term orientation, and quality across people, process, and outcomes. The objective is to strike a balance between choice and simplicity. “Our goal is to make fund selection easy and straightforward for customers by offering a toolkit that is broad enough to meet varied needs but curated enough to avoid unnecessary complexity,” explains Sandvik.
Customer demand also plays a role in shaping Folksam’s offering. “There must be a clear customer purpose for a product to be on the shelf,” he adds, noting that brand familiarity and, in some cases, a degree of home bias influence what resonates with savers.
Selective Emerging Markets Exposure
Folksam offers a broad range of investment options on its fund platform, including a selection of emerging markets equity funds. Clients are free to choose whether and to what extent they want exposure to emerging markets. “From a platform perspective, we want to offer compelling products that meet customer interest and allow for satellite exposure where appropriate.” This rationale underpins the presence of emerging markets equity funds on the platform.
“From a platform perspective, we want to offer compelling products that meet customer interest and allow for satellite exposure where appropriate.”
Oskar Sandvik
The approach is more cautious within Folksam’s own model-portfolio concepts, Folksam Spar and Folksam Pension, which currently have limited to no exposure to emerging markets. This reflects a long period of weak relative performance, higher volatility, weaker sustainability characteristics, and higher relative costs compared with developed market equities: factors that make the asset class less suitable as a default, core allocation. Clients can still select emerging markets funds individually, but the exposure remains an active choice rather than a built-in allocation.
Performance Inflection, But Limited Flows
From a portfolio construction perspective, Sandvik does not dismiss emerging markets outright. “Emerging markets can certainly contribute positively to returns,” he says, “but we would like to see further progress in sustainability, governance, and risk transparency before reconsidering larger allocations.”
Still, recent performance has shifted the conversation. After more than a decade of underperformance, by roughly six percentage points per year relative to U.S. equities since 2010, emerging markets staged a reversal in 2025. “2025 marked a clear shift, with emerging markets outperforming the U.S. for the first time in many years,” Sandvik points out.
“Emerging markets can certainly contribute positively to returns, but we would like to see further progress in sustainability, governance, and risk transparency before reconsidering larger allocations.”
Oskar Sandvik
The product landscape has evolved alongside these cycles. “We’ve seen consolidation within segments and rotating investor preferences, from the surge in China A-share products a few years ago to the more recent popularity of emerging markets ex-China strategies,” Sandvik notes. “While trends come and go, emerging markets as an asset class remain strategically important,” he emphasizes. “The strategic case for emerging markets has both structural and cyclical dimensions.”
Despite emerging markets outperforming U.S. equities in 2025, Sandvik does not yet see a meaningful shift in investor flows, either on Folksam’s platform or across the broader Swedish fund market. “At this stage, we are not seeing a broad-based resurgence in EM inflows,” says Sandvik. “Most new capital continues to be allocated to global equity, Swedish equity, reflecting a preference for scale, stability and strong recent performance relative to emerging markets.”
Active Management and ESG as Key Differentiators
Looking ahead over a five- to ten-year horizon, Sandvik expects emerging markets to regain relevance within strategic asset allocation, supported by improving fundamentals, broader sector leadership, more compelling valuations, and gradual sustainability improvements. However, he does not expect the return of emerging markets as a core portfolio allocation. “Emerging markets are unlikely to return as a uniform ‘core’ allocation,” he cautions. “Instead, they will remain a selective but increasingly important component of long-term portfolios, with a greater emphasis on high conviction, actively managed exposure rather than broad passive holdings.”
“[Emerging markets] will remain a selective but increasingly important component of long-term portfolios, with a greater emphasis on high conviction, actively managed exposure rather than broad passive holdings.”
Oskar Sandvik
Despite higher correlations between emerging and developed market equities, Sandvik argues that emerging markets still offer meaningful diversification benefits. “Their economic cycles, policy regimes, and sector compositions differ fundamentally from those of developed markets, and recent performance shows that divergence still occurs,” he says. “However, the greatest diversification benefit tends to come from selective, actively managed exposure rather than broad market beta.”
More broadly, Sandvik believes emerging markets are particularly well suited to active management. “Structural inefficiencies, uneven information flows, and concentrated benchmarks create opportunities for skilled managers to add value, both by avoiding weak governance and by overweighting higher-quality companies,” he explains. “Passive strategies still have a role to play, especially for investors seeking low-cost beta during broad emerging markets rallies, but EM remains one of the asset classes where active management can make a tangible difference.”
“The greatest diversification benefit tends to come from selective, actively managed exposure rather than broad market beta.”
Oskar Sandvik
ESG considerations remain central to any renewed strategic role for emerging markets. “Weak governance structures and inconsistent regulation can amplify downside risk and volatility,” Sandvik warns. “At the same time, emerging market companies with strong sustainability credentials and transparent governance often benefit from greater investor confidence and more supportive market reactions,” he continues. “As disclosure standards improve and regulatory frameworks mature, high-quality emerging market issuers become increasingly investable for global institutions.”
For emerging markets to regain broader strategic prominence, several factors would need to align: stronger growth differentials versus developed markets, compelling valuations, and meaningful improvements in governance and ESG standards. “Growth and valuation drive returns, while governance and sustainability expand the investor base,” Sandvik concludes. “Together, they enhance both the attractiveness and investability of the asset class.”
