In a world of profound transformations and markets that are shaped by uncertainty and volatility, how do you set about building portfolios that remain resilient?
Read this article to understand:
- What makes a portfolio efficient and why that matters
- What makes a portfolio resilient and why it is essential in today's environment
- How we combine efficiency and resilience across our fixed-income portfolios
During the post-financial crisis years of tight corporate bond spreads and low dispersion in returns, fixed income investors became heavily reliant on credit beta, or the direction of the overall market, rather than credit alpha – which relies on strong security selection – to deliver returns.
This beta-led approach delivered strong results in bull markets but left portfolios vulnerable during episodes of widening spreads when risk aversion surged, and drawdowns were severe (see Figure 1).
Figure 1: Excess returns highly correlated to market direction
Past performance is not a reliable indicator of future performance.
Note: Global corporate bond peer group, returns in USD. Data from September 30, 2015 to November 27, 2025.
Source: Aviva Investors, Bloomberg, eVestment. Data as of November 27, 2025.
In today’s environment with compressed spreads and asymmetric risk profiles, investors need an alpha-led approach; one that maintains a disciplined, market-neutral positioning while targeting high-conviction opportunities.
Why efficiency alone is not enough
For decades, investors have focused on building efficient portfolios – those that maximise returns for a given level of risk. Efficiency works well in stable markets, it reduces unnecessary risk and avoids over-concentration.
But markets aren’t always stable. Efficiency assumes normal conditions, and today’s environment of compressed spreads and heightened volatility challenges that assumption. When shocks occur, an efficiency-only approach can leave portfolios vulnerable.
That’s why we believe efficiency is only part of the solution. The other key factor is resilience – and we have made it a cornerstone of our investment process.
Introducing ‘resilience’
Aviva Investors’ concept of resilience aims to take efficiency a step further. It’s not just about how a portfolio performs in calm waters – it’s about how it behaves in a storm. A resilient portfolio can absorb shocks, adapt, and recover without forcing the investor into costly decisions like selling at the bottom and/or reducing risk at the worst possible time.
Resilience considers factors beyond historical volatility. It looks at:
In short, resilience provides a deeper insight into total return potential and helps build portfolios that can withstand shocks and recover effectively.
Our approach to bond selection uses an adjusted measure of efficiency that accounts for resilience in different market environments. For example: a five-year bond with an option-adjusted spread of 200 basis points (bps) and duration of five years might have a break-even spread of 40 bps and spread volatility of 20 bps. This gives an efficiency score of roughly two (earning two basis points of carry for each basis point of volatility).
If the bond trades 50 bps wide of its historical mean, the resilience score could be +4.5x, signalling strong upside potential (see Figure 2). If it trades 50 bps tight, the score might be ‑0.5x, indicating limited upside. Why? Because resilience accounts for positioning relative to historical norms and structural strength – not just carry.
Figure 2: Calculating resilience
Efficiency adjusted for how spreads behave relative to government bonds and other factors
For Illustrative purposes only.
Source: Aviva Investors, as of December 2025.
Over time, resilient portfolios have the potential to lead to better information ratios and smoother performance across the credit cycle – not just higher returns, but more consistent ones.
An efficient portfolio assumes conditions stay calm while a resilient portfolio prepares for a storm.
Combining efficiency and resilience in our portfolios
Resilience isn’t an abstract concept – it’s embedded in how we evaluate opportunities and construct portfolios. Take the earlier five-year bond example. On efficiency alone, it looks attractive: strong carry relative to volatility. But when we layer in expected mean reversion and historical positioning, resilience becomes the real story.
Resilience is embedded in how we evaluate opportunities and construct portfolios
Let’s take it one step further and think about how we can deliver alpha in portfolio construction with another example, a company whose non-cyclical business model and deleveraging trajectory were identified as catalysts for spread tightening by our analysts.
Through advanced analytics with our Opti-FI toolkit, analysts were able to stress-test the bonds against various risk metrics and help portfolio managers to model a portfolio switch (sell an existing bond holding to purchase this one) that is volatility-neutral, as well as scenarios on the impact of the switch.
The result? While the trade requires selling a larger position in single-A corporates to maintain risk parity in the portfolio, the upside from potential spread tightening, linked to the company’s deleveraging story, makes it compelling.
Conclusion
For investors seeking long-term success, resilience isn’t optional. It’s essential. Markets today are shaped by uncertainty – credit cycles, geopolitical tensions, inflation surprises, and liquidity shocks. In such an environment, efficiency alone can leave portfolios vulnerable. A highly efficient portfolio might look great on paper but may crumble under stress if it lacks resilience.
Building resilient portfolios isn’t about predicting the future. it’s about preparing for it. By combining efficiency with resilience, we create portfolios that not only perform well in normal conditions but also stand firm when markets turn turbulent.
