Using our proprietary risk model and third-party portfolio optimisation software - ‘the optimiser’ - we systematically blend three complementary drivers - Value, Quality and Momentum. The aim is to reduce reliance on any single return source and improve stability through different market regimes.  

Crucially, we pair this factor-based approach with dynamic risk management to target portfolio resilience across market environments. This process monitors emerging – and sometimes fast-moving – macro and geopolitical risks and, where relevant, neutralises unintended exposures so outcomes remain driven by the intended factor mix, not by unrewarded shocks.

Recent Middle East developments have heightened uncertainty, increased volatility, and sharpened sensitivity to energy, inflation and interest rate expectations. Against this backdrop, we’ve demonstrated dynamic risk management in practice. We’ve been able to deliver encouraging performance for clients along with significant factor-based diversification benefits (visit our Enhanced Index webpage to get the details on our performance). 

So, what is dynamic risk management and how does it work?

Dynamic risk management – a steady discipline

Dynamic risk management is the quiet force that keeps an enhanced index portfolio aligned with its purpose. It operates continuously in the background, adjusting exposures as markets shift so the strategy remains intentional. In today’s fast-moving equity markets, this steady discipline is as important as any single factor model or signal.

Why risk must be treated dynamically

Markets change shape quickly. Volatility breaks out, correlations collapse, factor leadership rotates and macro conditions turn without warning. A portfolio that is well-balanced in one environment can become misaligned in another. As we can see from the graphic below, the overall level of geopolitical risk is now higher than ever. 

A dynamic framework: 

The goal is not to forecast the next turning point. It is simply to avoid using stale information.

Why systematic investing still needs judgement

Signals can steer the optimiser toward exposures that look reasonable on the surface but feel fragile in reality. Value signals, for instance, can cluster in inflation-sensitive sectors during uncertain macro conditions. Momentum can attach itself to short-lived narratives that inflate active risk.

Dynamic oversight identifies when these influences begin to build by monitoring short horizon return data for shifts in dispersion, correlation and sensitivity to macro or geopolitical news. The intention is not to override the systematic process, but to shape the final portfolio into something that reflects the underlying philosophy rather than a temporary market quirk.

Risk budgeting with purpose

Enhanced Index strategies operate within modest tracking error ranges, which makes the risk budget a scarce resource. Dynamic controls - explicit constraints in the optimisation process that are sized to neutralise unintended exposures without diluting Value, Quality and Momentum – help ensure it is spent wisely. They do so by:

This protects the portfolio from drifting into areas that add noise rather than return.

How dynamic risk management quietly supports returns

Adjustments driven by dynamic risk management rarely appear dramatic, but they matter. They help avoid unnecessary losses when a factor weakens, reduce slippage by monitoring turnover and liquidity, and maintain alignment with intended style exposures. These small corrections accumulate into a smoother and more reliable pattern of performance over time.

Dynamic risk management in action

The recent Middle East conflict is a good example. Equity markets initially went risk-off, with low beta and defensive stocks leading, before reversing sharply as fears of wider escalation eased. Standard risk models were slow to pick up the change in correlations. Using short horizon return data, we built a bespoke conflict factor and brought it into our risk framework alongside our usual factor exposures.

We then looked at the factor’s style profile, how this interacted with our core factors, and how much it was contributing to tracking error. The question was simple: was the exposure big enough to act on? Where it was, we added a constraint in the optimiser to neutralise it. Value, Quality and Momentum stayed intact, and the multifactor framework kept doing its job.

Why it matters more today

Passive ownership continues to grow, thematic flows behave like fast-moving weather, and geopolitical events influence sectors once considered stable. Static assumptions cannot keep up with these pressures. Investors who choose enhanced index strategies generally want steady, repeatable outperformance with minimal surprises. Achieving that outcome requires a process that adapts as the market evolves.

Dynamic risk management provides exactly that. It keeps the portfolio intentional, ensures the optimiser expresses the actual investment philosophy and delivers the calm, predictable return profile that defines successful enhanced indexing.