Amid ongoing market volatility, Ed Simmonds, Head of Fidelity’s Portfolio Construction Advisory and Research for Global Equities, and Ouaile El Fetouhi, Global Head of Portfolio Construction and Risk across Multi Asset, Fixed Income and Real Estate, joined Stuart Rumble, Head of Investment Directing, Asia Pacific, to discuss how our Portfolio Construction and Risk framework operates in practice during periods of market stress.
Periods of market volatility can test portfolios in different ways, making disciplined portfolio construction and risk oversight especially important.
In the current environment, defined by persistent macro uncertainty, geopolitical tensions and shifting market leadership, risk management cannot be treated as a secondary overlay.
Instead, it is embedded from the outset of each strategy and remains central throughout the portfolio management cycle, helping portfolios stay aligned with their objectives as conditions evolve.
At Fidelity International, this begins with a clear understanding of how each strategy is expected to deliver value for clients. The Portfolio Construction and Risk (PCR) team works alongside portfolio managers to identify the key drivers of return, define risk budgets and establish guardrails that guide portfolio behaviour across market environments.
This ensures risk taking remains intentional, diversified and consistent with stated objectives.
The framework itself does not change when markets become more volatile. What changes is the pace. Monitoring becomes more frequent and more granular, reflecting both market dynamics and increased demand for insight.
Interaction between portfolio managers and risk specialists intensifies, allowing for more immediate assessment of positioning and portfolio behaviour.
A critical strength of this approach is that risk expertise is embedded within the investment organisation.
PCR operates alongside portfolio managers and CIOs, enabling a deep understanding of portfolio positioning and, critically, the rationale behind it.
This ensures that risk analysis remains closely aligned to investment decisions and avoids becoming detached from the underlying process.
For investors, this consistency is important. It reduces the likelihood of reactive decision making at times of stress and supports a more stable approach to navigating uncertainty.
Rather than adjusting strategies in response to short term market movements, portfolios remain anchored to their objectives while adapting through disciplined analysis and oversight.
A sharper focus on how risk is expressed
In more volatile markets, it becomes increasingly important to look beyond headline measures of risk such as volatility and tracking error.
These metrics can mask meaningful differences in underlying exposures, particularly as underlying drivers behave differently under stress.
The focus is therefore on how risk is expressed across portfolios. This includes analysing factor exposures, thematic risks and sensitivities to macroeconomic drivers such as growth, inflation and risk sentiment.
This deeper analysis supports earlier identification of unintended concentrations and provides greater clarity on how portfolios may behave under different market conditions.
This analysis also extends to aggregate exposures across portfolios. Risks that appear modest in isolation can become more significant when viewed at firm level.
Monitoring these exposures helps ensure that risk remains appropriate not only within individual portfolios but across strategies as a whole.
Scenario analysis is an important part of this process. It is used to test how portfolios may respond to a range of macroeconomic and geopolitical developments rather than to predict specific outcomes.
By assessing sensitivity to different underlying drivers, scenario analysis helps identify unintended exposures and supports a more informed assessment of resilience.
Risk models are a useful input, particularly in understanding factor relationships, but they do not determine decisions.
Their outputs are considered alongside stress testing, historical analysis and forward-looking scenarios informed by macro research.
This combination allows for a more balanced assessment, particularly during periods of market change.
A disciplined approach to portfolio construction remains central to building resilient portfolios.
The focus is on ensuring that risk is taken where there is a clear basis for expected returns, with position sizes aligned to conviction and exposures balanced across different drivers of return.
This reduces the likelihood of unintended concentrations and supports more consistent portfolio behaviour.
This is reinforced by a fundamentally driven investment process. Holdings are owned for clear investment reasons within a portfolio context, providing a clear source of diversification.
Our approach to risk management aligns with the belief that fundamentals are the most important long-term driver of markets, ensuring that portfolio risk remains aligned with durable sources of return rather than short-term market noise.
Liquidity is also an important consideration in the current environment. Maintaining appropriate liquidity supports portfolio resilience and provides flexibility to respond when market dislocations emerge.
Assessing how quickly portfolios can be adjusted under different conditions, alongside potential redemption needs, helps ensure that portfolios can adapt without compromising their overall structure.
For investors, this approach provides greater transparency on how risk is taken and managed.
It also supports confidence that portfolios are constructed to remain aligned with their objectives across different market conditions.
Maintaining perspective as risks evolve
One of the defining features of the current environment is the dominance of specific market narratives.
While these can drive short term volatility, an effective risk framework requires a broader perspective that captures both cyclical and structural risks.
Maintaining diversification therefore requires looking beyond dominant themes and ensuring that portfolios remain exposed to a range of underlying drivers.
This includes shifts in growth expectations, changes in market leadership and structural developments such as supply chain reconfiguration and technological disruption.
Artificial intelligence is a clear example of a structural theme that is reshaping markets. It introduces new sources of return but also new concentrations and valuation risks.
Portfolios need to reflect these developments in a measured way, ensuring that exposure is aligned with investment conviction rather than driven by momentum.
This highlights the importance of continuous risk discovery. By combining detailed portfolio analysis with a forward-looking view of emerging risks, the framework can adapt to new sources of uncertainty without losing discipline.
For investors, this points to the value of a consistent approach to risk.
Applying the same framework with greater intensity during periods of volatility can help portfolios remain aligned with their objectives while adapting to changing conditions.
In the current environment, this approach supports resilience without relying on reactive derisking.
It enables more informed decision making and ensures that portfolios remain focused on delivering long term outcomes despite short term uncertainty.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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