Fidelity International highlights growing importance of diversification in momentum-driven markets
Matt Jones
For the past few years, investors have been rewarded for owning what is already working but it is becoming increasingly important that they understand what is driving this success and what the risks might be, says Matt Jones, Fidelity International portfolio manager for the Fidelity Research Global Equities Fund.
He says that as markets have grown more concentrated, with a relatively small number of stocks driving a significant share of index returns, factors such as momentum have become powerful forces in investment performance.
“When something works for a long time, it can start to feel less like a risk and more like a certainty, but investors should be questioning what is driving returns beneath the surface. Momentum can be thought of as a bit like a wolf in sheep’s clothing. When enough capital crowds into the same ideas for long enough, many roads eventually lead to the same destination. The distinction between quality, growth and momentum can begin to blur. The challenge is that momentum often looks safest right before it becomes most vulnerable.”
He says that one of the more interesting characteristics of momentum is that it tends to reinforce itself.
“Strong performance attracts investment, and that flow of investment pushes prices higher. Higher prices then attract more capital. The cycle continues until it doesn’t. None of this means momentum is inherently bad. Indeed, momentum has been one of the strongest drivers of market returns in recent years.
“But for investors, it’s worth considering whether portfolios are benefiting from deliberate exposure to momentum, or whether exposure has simply accumulated over time as a by-product of portfolio construction.”
Jones says many investors may not be aware how concentrated their portfolios have become.
“When we talk about concentration, most people immediately think about stock or sector weights, but concentration can also exist at a much deeper level. For example, you could have multiple asset managers, across multiple strategies and mandates, and yet still end up heavily exposed to the same underlying factor, such as momentum.
“But at the same time, true diversification is becoming more difficult to achieve. It’s not about having more investments, it’s about owning different return drivers. That’s becoming increasingly relevant in a world where data is widely available – if everybody has access to the same data and increasingly the same AI tools, where does genuine diversification come from?
“Some of the most persistent sources of returns come from areas that are harder to replicate. Fundamental insights, deep company research and forward-looking views remain valuable because they involve judgement, context and interpretation, not simply historical datasets. The future rarely looks exactly like the past. What makes fundamental insight powerful is that it’s inherently forward-looking. It combines data, experience, company engagement and judgement in a way that purely backward-looking models cannot.
“Investors should ask themselves: How much of a portfolio’s return profile is dependent on a narrow group of stocks, sectors or factors that continue to dominate? How diversified are the underlying alpha sources? What risks are they actually being paid for taking? Some investors may conclude their existing exposures remain appropriate. Others may identify areas where diversification could be improved.
“For investors navigating an increasingly concentrated market, thinking about whether portfolios are sufficiently diversified should market leadership change is invaluable.
Momentum can be a powerful tailwind when it is working but the challenge is ensuring it’s not the only engine powering the portfolio,” Jones says.
