Momentum has been one of the market's biggest winners in recent years. But what happens when the trade everyone loves starts to unwind?
In this month's episode of Sound Bites, Matt Jones, Portfolio Manager for the Fidelity Research Global Equities Fund explores why momentum has become such a powerful force in markets, why it can act as a "wolf in sheep's clothing" for investors, and how investors can identify hidden concentrations that may be building beneath the surface of portfolios.
Topics covered:
- Why momentum has become a dominant market driver
- The risks of factor concentration and crowded trades
- How market-cap weighted benchmarks can amplify momentum exposure
- Why diversification goes beyond simply owning more stocks
- The role of differentiated alpha sources in today's market
This episode was recorded 19 August 2026.
Edited transcript
If you think about what's driven the market over the last several years, is it's been concentrated and unique. You've been in markets for well over 20 years but looking at the past 5 years, what has been the key drivers and what does the performance profile look like?
I think the volatility and some of the rotations in the last five years have been quite unique, large and extreme. When you think of that from an equities investment point of view, that rotation has been through things like big factor bets and biases, value, growth and, more importantly, momentum. They've been very strong. Some of these kinds of drivers of performance are unique in the presence that they have in the market and the power that they've been delivering to single stocks and portfolios generally.
Reflecting on your time in markets, has the momentum been stronger this time round than in other market environments?
It's becoming increasingly stronger, and we've seen that especially in APAC markets in recent weeks where we've seen six standard deviation negative returns to things like momentum. But, I think, the last five years and even the last 21 years, when we talk about momentum it's quite an interesting factor or character of stock markets.
I refer it to as the wolf in sheep's clothing. Quality and growth, or even value, they're great things to invest in when you look at a stock. But the problem is, when there is too much investment in that, too much crowding and too much chasing in one individual thing, it turns into momentum. That's kind of like the wolf, and the wolf will bite when it rotates, like we've seen recently.
Looking at the S&P100, the top 10 stocks make up about 20% of the market and a lot of that has been from the AI tech-led companies. To your point, it's almost like a self-fulfilling prophecy when you've got this momentum driving stock prices up. How does that break down?
It breaks down through several things. You see that that crowding chasing the same thing and then you see fractures or fundamental things in what's driving its break down. If you think of momentum in in a formulaic sense, it's Mass x Velocity. We've got a whole lot of mass. Weight is in a couple of names chasing this one thing very quickly and that momentum picks up. All you need is a small break that no one's looking for, that no one might see for that to fall apart.
Currently, I’m thinking about things like capex spending. How will companies generate income from that? How are free cash flows? I think about the debt markets currently starting overnight. We saw the bond and the debt market starting to panic a little bit about all these kinds of things, and one of those things will eventually break and trigger that unwind.
In this environment where momentum, along with other factors, has been a strong factor driving markets, we’ve seen the index perform well. We've also seen what we would call ‘traditional quantitative managers’, managers that apply a more mathematical model-based approach in terms of how they analyse the market, with an exposure to momentum perform well too in recent times.
How has the way you manage portfolios been a headwind for you and what are the key risks of that?
When you think about the benchmark and the index, they're cap weighted (cap weighted = price X shares), price is momentum. When you see things run hard, naturally the benchmark will build a whole lot of momentum into to a cohort of three or four possible names. We've seen that in the history of benchmarks. That then rotates momentum unwinds to something else.
When you think about quantitative funds and some of the traditional pure quant funds, they're coming from your Fama-French background. Fama-French breaks stocks down into momentum, quality, value, growth. They try to time those things which can result in too much crowding, then you can see the fundamental breakdown of some of those factors and the unwind in in that alpha generation.
Our aim is to build portfolios that don't have any of those big exposures and we remain more forward-looking in the nature of the alpha driver behind the import into returns.
When you do have a momentum-driven market, a benign market as well, these types of strategies look good within the context of a broader portfolio, on a risk-adjusted basis. It does make me think back to my previous roles in managing portfolios before the GFC where we saw a lot of quant strategies look nice in terms of the risk and return.
Thinking about some of the risks such as concentration in factor exposures, how do you navigate that from a broader portfolio perspective?
It’s basically two things: the input into your portfolios, that that alpha source that you're trying to deliver and the portfolio construction around that that alpha source.
I think the important thing is to ensure that both of those things are unique and independent and when combined together, they provide you with a return profile or return source that is uncorrelated to all of those types of things, and is more of an idiosyncratic exposure that's not driven by what everyone else is being driven by.
I think it's important to make sure that you understand what's driving your fund and that you do have a diversified alpha source. It goes back to basics.
I know the way you approach portfolios is looking at our proprietary research as the fundamental driver of alpha but applied in a systematic way in terms of the portfolio construction.
In a world where data increasingly is becoming a commodity, how much do you think access to proprietary fundamental research is a strength and advantage?
I think fundamental research is immensely critical. When we think of the world of AI and the access to data now from everyone with access to things like ChatGPT, OpenAI and Anthropic and more, it allows people to get access to more generic kinds of exposure and alpha drivers available - value, growth, momentum, quality.
I think what's very important is to have is a unique data source that provides strong alpha that no one else has access to and there is very few of these kinds of data sets or alpha sources in the world.
It's quite unique to have that here at Fidelity with more than 120 analysts and over 50 years of strong quality data. It's unique and I think, incredibly important to have something that nobody else has. The quality of that data also is extremely important.
You’ve done some interesting work looking how much value just research alone can add over time. What insights can you share?
I think the most important thing to think about with a fundamental research team like what we have at Fidelity and the provenance and history of our research team, is that it's not that they're not looking at things like momentum and value and quality for example. What we've got is that human interaction and human input that is much more forward-looking than your traditional backward-looking factors.
What I've seen over time when we've analysed the alpha generation from our research team globally, is that it’s really persistent across time and regions, and is uniquely uncorrelated to what we see out there in the alpha from that can be generated from other things outside of our team here at Fidelity.
There's also a pragmatic element to it because you can have something which, no doubt, looks nice from a quantitative perspective, it ticks a lot of boxes. But you can speak to an analyst and get the bird's eye view of what's happening.
Can you share some insight on where things may have looked one way on screen from a quantitative perspective, but, where obtaining that pragmatic fundamental insight added high value?
The uniqueness of speaking to a human being that's taken all our historic research information is incredibly useful. Our analysts are looking at a rapidly changing market that's not picked up in any data and then predicting what might happen in the future. You don't get that from more traditional, back-tested quantitative-looking models.
When things rapidly change, like in the current market now, and there is no history of that change, then you need a human being. I look at our analysts research to work out whether a stock's adequately priced given market conditions. That's from an alpha point of view, but also from portfolio construction point of view, markets break down, you get large systematic shocks, and the models you might be using from a factor point of view get shocked rapidly.
You don't want to trade off that information in immediate terms. You want to digest that information, slow everything down, and make sure everything's a bit more stable for the future.
Your approach is unique because you are leveraging those fundamental insights from the analyst team but then you are constructing a portfolio in a systematic way. Can you explain how you use a systematic approach to portfolio construction?
My approach is unique. We are literally taking the output from a human being doing deep fundamental research, quantifying that in certain ways, and then building a very repeatable, consistent process around that. I think that's the most important thing: a very strong, repeatable, risk-aware construction process.
We're trying to eliminate some of those big factor exposures, those market timing bets and uniquely deliver a purely systematic proprietary alpha that we have at Fidelity. I think it's all about making sure that you've got a robust, disciplined process.
When our clients come to us to invest in what we're doing, they know the outcome they're going to get every time. There's nothing hidden, nothing under the bonnet that that is going to be scary or pop up in the future and lead to potential drawdowns.
What makes our research unique and different and What has your experience been in terms of the efficacy of that research?
What we do at Fidelity is quite unique and differentiated in its structure. Having been here since early 2005, I've been using the output from our fundamental research team to generate alpha through many different cycles. From the European research team and running European portfolios to UK centric portfolios, to global developed world or country world, long short. Generating alpha has been relatively consistent and persistent through all those types of lenses and experiences I've had through the last 21 years.
I guess what it comes down to at its core is what we've been doing since 1969. When you're an analyst here at Fidelity, you've got hundreds of eyes from across on you from different portfolio managers to heads of research, and your key job is to generate alpha for our clients.
My key job as a portfolio manager is to capture that alpha, and it's our history, provenance and depth of data and research that creates a consistent and repeatable alpha source.
I think ultimately, on top of all of that, is our analysts who pay to outperform. They're paid to outperform and beat the markets to deliver that our clients, which is very different when you think of for example, the sell-side world, where a lot of your job is to market research rather than specifically generate alpha.
From a practical perspective, how do you consume our proprietary research? How do you take a report with a stock recommendation and bring that into your portfolio?
We've got around 2,500 ratings with maybe 1,200 buy ideas; how do you shrink that down? I think it's focusing on the key outputs from the research team. If I've got 10 stocks on a buy, I can look at their model portfolios and question, what are your three best ideas in the portfolios that they're measured on, and then ultimately too, it's reading the research note and speaking to the analyst.
On the research note - is there conviction in the thesis? What are the outliers that might happen to that stock? What are the positives? What are some of the key negatives? Then, drilling it down from those broader ideas from the quantitative output from the research team, reading the research note and focusing on what is the highest conviction idea that I can get into our fund.
I know one of the things you look at also is the recency of the rating. Why is this an important factor in terms of determining the efficacy of the research?
The recency of the rating is how you can quantify output from a human being. Our analysts must publish research notes very regularly. I think the important thing that that we do in our process is to make sure that when adding capital to a new name or when looking to increase capital to an existing name, is has the that analyst has published a full research note in the last month or two, and this is very important in rapidly changing environments because I want to make sure I've captured all of that information in a timely manner to be able to deliver that to clients and their portfolios.
In the last couple of years, we've seen a very narrow market driving performance. Momentum, for example, played a big role in driving markets, which benefited index players as well as traditional quantitative strategies.
Your process is an interesting one because it's a bit of a hybrid process. It is accessing a unique alpha source in the fundamental research but applying that in a more systematic way. How does that fit in in the context of your more traditional quantitative or index strategies?
I think it is a unique moment in the market to make sure you do focus on portfolio construction, and that's what we do strongly in the processes that we run. The focus of our portfolio construction is to deliver idiosyncratic alpha, meanings we make sure we look at our portfolio on a daily, weekly, monthly, quarterly basis, ensuring that we don't have any big bets or exposures; we don't have any big momentum bets, we don't have any big market cap bets, we don't have any big AI or factor type bets or anything we can't see.
With the strong portfolio construction and oversight that we have here at Fidelity, we're able to ensure that we're delivering pure idiosyncratic alpha, so we won't get hit if there is large rotation out of some of these big exposures that some of our peers following the benchmark or following momentum, growth or quality, will have in their portfolios.
We're trying to deliberately avoid that and make sure we, in our portfolio construction, are focusing on that pure idiosyncratic alpha.
Certain things like momentum have performed well over the last couple of years. But be aware of what your exposures are and make sure that you are diversified. Because just being exposed to a very narrow set of factors is great when it works, but when it reverses, you could be overexposed.
That's exactly what I mean when I say momentum is like a wolf in sheep's clothing - it's great when it works, but the minute it rotates and that wolf comes out, that's where you will feel pain.
