By Matt Jones, Hiten Savani and Dan Swift, portfolio managers of the Fidelity Absolute Return Global Equity Fund
Positive returns from global equities over the past few months have masked very challenging market conditions beneath the surface. Evolving interest-rate expectations, geopolitical uncertainty, shifts around AI investment and episodes of deleveraging and profit-taking have resulted in repeated reversals in sentiment and market direction. Moreover, market leadership has remained narrow and fast-moving, with the valuations of many stocks running ahead of changes in corporate fundamentals.
As a result, global equities are rife with valuation distortions, with herd-like investor behaviour resulting in top-heavy stock and sector concentrations in many markets. A large cohort of stocks now exhibit negative or unusually low beta, and distribution has widened. Chasing the same few ‘in vogue’ names and investment themes – particularly in technology and around the AI trade – has enabled some quick runs to be scored.
But momentum is a two-way street: elevated valuations in some areas means investors could take some pain on the downside if sentiment turns and the market turns against them. When relationships change quickly, portfolios that appear balanced on the surface can have unintended directional, factor or thematic exposures. This is particularly concerning at a time when macro externalities are piling more risk onto equity markets.
All of this is important to us as portfolio managers, given our focus on preserving investors’ capital. First and foremost, we think about markets from a risk-management perspective – of course generating alpha is important too, but there’s no merit in having one without the other.
After all, delivering superior returns over full market cycles means avoiding losers as well as identifying winners. With this in mind, we are very mindful of the risk of being over-exposed to stocks and sectors with the greatest downside risk and focus as much on mitigating risk as we do on generating alpha.
A fund for all seasons
With so much risk present, market neutral, long-short strategies like the Fidelity Absolute Return Global Equity Fund could be particularly appealing currently. By neutralising market beta, fund returns are not driven by market direction. The fund is therefore well placed to withstand changes in broader market sentiment and should not be geared into any adverse market movements in any way.
Instead, the fund has the potential to outperform across a range of market environments, and its low correlation with more traditional equity allocations means it can act as a useful diversifier in broader portfolios. In fact, our research shows that including allocations to absolute return strategies in diversified portfolios can reduce overall risk, without compromising on potential returns.
Returns from the fund are expected to be largely unaffected by market rotations through time. The removal of unintended biases is an important part of the portfolio construction process, meaning the fund has no big bets in any sector or region.
Rather than relying on broader market movements or individual themes to drive positive returns, the fund seeks to generate alpha by exploiting the highest conviction calls from Fidelity’s global research engine. In fact, the fund is arguably the purest play on our fundamental research insights, leveraging the highest conviction ideas on both the long and short side from our global analyst network, which is known to have generated alpha for Fidelity clients for over 50 years.
The fund holds long positions in our analysts’ most highly rated stocks, and short positions in the worst rated stocks that are expected to fall in value, or at least lag their regional market. Essentially, we are looking to capture the spread in return between winners and losers, regardless of prevailing market conditions. Returns are therefore driven overwhelmingly by stock selection, rather than broad market movements or sector or regional biases.
Favouring simplicity and transparency
The investment process is simple and transparent: it is always very clear why a position in the fund has been established, either on the long or short side. Active positions start with human beings – our in-house analysts who conduct detailed, fundamental analysis into the drivers of companies’ operational and financial performance. Their role is to summarise these insights into written research notes and clear, actionable investment recommendations.
It is difficult to generate alpha from ‘neutral’ or ‘hold’ recommendations and so these are discouraged. Our analysts are paid to have a view one way or the other and there is typically a reasonably even distribution between buy and sell recommendations. This is particularly relevant for the Fidelity Absolute Return Global Equity Fund and its ability to exploit investment opportunities on both sides of the ledger.
Our analysts actively cover approximately 90% of the global equity universe (represented by the MSCI All Country World index). This enables them to identify and exploit opportunities wherever they arise but presents an additional challenge: the investment universe comprises around 2,500 individual stocks, meaning the lists of buy and sell recommendations can be lengthy. Additional filtering is required.
We need to narrow these long lists of ‘buy’ and ‘sell’ recommendations into a portfolio that is broadly diversified, but not over diversified or too concentrated. This means working with the analysts to ascertain the level of conviction and context supporting their stock recommendations, to ensure only the highest conviction ideas are included in the portfolio.
Consistent with our overall investment philosophy, risk is at the forefront of the approach. As well as identifying positive or negative share-price catalysts in the first place, it is critical to keep revisiting the original investment rationale on an ongoing basis, stress testing previous assumptions as things change. This process involves extensive engagement with analysts to understand the current level of conviction and context underpinning each buy or sell rating.
The following signals are used to scrutinise the quality and relevance of views:
- Research ratings – buy / sell recommendations define the opportunity set for long / short positions.
- Ratings change – upgrades / downgrades indicate the direction of recent ratings changes.
- Ratings conviction – signals whether a stock is a top or bottom idea within an analysts’ coverage universe.
Ratings recency – while all stock ratings are refreshed within 120 days, the ratings recency indicates how relevant the rating is at any given point in time.
The filtering process is one area where Fidelity has embraced AI to enhance research processes. Natural Language Processing tools systematically analyse analysts’ research notes and extract embedded sentiment and conviction indicators. These AI-derived insights are used primarily as a confirmatory layer to validate and reinforce analyst ratings and signals, enhancing consistency and robustness in interpretation, and to ensure only the highest conviction ideas are considered for inclusion in portfolios.
While fundamental internal research is the most important input into the investment process, external information sources are used to supplement our proprietary research signals and to challenge and validate in-house investment theses. The following external signals provide additional information:
- Consensus ratings – used to evaluate sell-side sentiment and, in particular, focus on whether stocks are seeing upgrades or downgrades in recommendations in the broker community.
- Earnings revisions – signals changes or trends in earnings expectations for stocks.
- Valuation – helps evaluate the attractiveness of a stock using a range of relevant metrics.
Ideally, external conviction will support and reinforce our in-house insights, but this is not always the case. Ultimately, our job as portfolio managers is to balance different views, ensuring portfolio positioning remains appropriate considering the latest news and market conditions. What has changed? How are evolving external factors likely to affect companies? Is the investment still expected to outperform or underperform peers following shifts in relative valuations? Has share-price performance caused the position size to drift sufficiently to alter the individual stock’s overall contribution to portfolio risk? These are the questions we ask ourselves on a daily basis.
Human oversight
At times there is lively debate as we deep dive into potential scenarios that could derail analysts’ original assumptions. Where the risk/return trade-off of an exposure changes we act, divesting long positions, closing out short exposures and moving on to other opportunities.
Following this detailed work at the stock level, we seek to eliminate any unintended sector, regional, factor or style biases in the portfolio. This is another important part of the investment process, as it helps ensure that stock selection remains the dominant driver of both risk and return.
A risk optimisation tool is used to establish a model portfolio and recommend position sizes, based on each stock’s anticipated contribution to risk-adjusted returns. But importantly, the three portfolio managers retain full discretion over portfolio construction, after reviewing and evaluating the investment thesis underpinning every security in the model portfolio. This is a key differentiator from quant-based approaches, where positions are established and adjusted based on a prescribed set of criteria, with little or no manual oversight.
Normalising beta relationships – at some point
A high level of market dispersion often creates opportunities for fundamental stock selectors, although it tends to be less helpful when leadership is narrow, betas and correlations are unstable, and rotations are driven by positioning, liquidity or rapidly changing narratives. This is what we have seen in 2026, but should not be a concern for long-term investors.
Having managed money for several decades and over multiple market cycles, we have seen unusual market conditions many times before. The timing was uneven, but in all cases – following the dotcom boom, the global financial crisis, and significant factor rotations in the late-2010s and around the Covid pandemic, for example – beta relationships have ultimately stabilised and market leadership has broadened.
This is encouraging and reinforces our view that the recent challenging period for fundamental stock pickers is consistent with an unusual market structure, rather than being indicative of an erosion of the importance of disciplined, bottom-up research. Indeed, we remain confident that long-term fundamental differentiation will reassert itself as technical pressures fade and as price formation reconnects with listed companies’ cash flows, competitive position and earnings durability,
To be clear, we are not assuming market conditions will normalise in the very near term – with so much uncertainty in the world, nobody really knows how market conditions will evolve in the months and years ahead.
What we do know is that beta neutral, absolute return strategies are much less likely to experience sizeable drawdowns during periods of ‘risk off’ sentiment. This is important to bear in mind given the difficulty in clawing back lost ground after widespread market selloffs and should help funds like the Fidelity Absolute Return Global Equity Fund deliver positive returns in most market environments. These characteristics could be particularly valuable if risk appetite turns and equity markets start to weaken.
Discover the Fidelity Absolute Return Global Equity Fund
Register now: Live webinar on 5 Nov – Introducing the Fidelity Absolute Return Global Equity Fund
Important Information
This is for investment professionals only and should not be relied upon by private investors. Investors should note that the views expressed may no longer be current and may have already been acted upon. The value of investments can go down as well as up so you may get back less than you invest. The value of investments in overseas markets can be affected by changes in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Investments in emerging markets can be more volatile than other more developed markets. The Fund may make increased and more complicated use of derivatives, and this may result in leverage. In such situations performance may rise or fall more than it would have done otherwise. The fund may be exposed to the risk of financial loss if a counterparty used for derivative instruments subsequently defaults. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. The Key Investor Information Document (KIID) is available in English and can be obtained from our website at www.fidelityinternational.com. The Prospectus may also be obtained from Fidelity. Issued by FIL Pensions Management. Authorised and regulated by the Financial Conduct Authority. UKM1026/420149/SSO/NA
