It was summer or autumn as the sun dipped into a rare flat ocean behind the curved glass wall backdrop of the Napier War Memorial Conference Centre earlier this month.
John Horrell, Makao Investments, told delegates at the Wealthpoint annual symposium that it was summer again in May after a brief plunge into autumn near the end of March.
Under the four-season framework Makao has built for tactical asset allocation (TAA) purposes, autumn and spring signal “high conviction” moments for portfolio risk tilts down or up, respectively.
By contrast, summer and winter offer more subdued opportunities to either take profits during the hot times or increase risk a tad as the market temperature chills, Horrell said.
The Makao seasonal modelling, defined by multi-dimensional metrics including valuation and sentiment, has been designed to “manage risk” rather than “take large bets”, he said.
But if climate change is disrupting seasons across the planet, the current geopolitical and economic environment has proved challenging for TAA practitioners, too.
Noah Schiltknecht, Makao co-founder, told the Wealthpoint crowd that the boutique investment advisory firm models performance probabilities of all asset classes through different economic and market scenarios to help guide risk management decisions.
Schiltknecht said the consultant also applies the process to the discretionary investment management service (DIMS) multi-manager portfolios Makao runs for the Wealthpoint group.
And while mapping out scenarios based on historical asset class performance in various economic circumstances is hard enough, he said gauging “how the market reacts” adds another order of difficulty.
For example, Schiltknecht said the Makao model includes market events that have perhaps a 1 per cent chance of happening.
“We saw three of those in the last five years,” he said.
Despite reality throwing up more out-there outcomes than predictive models deem as probable, the mean irons out extremes over time.
“Asset classes have performed generally as expected,” Schiltknecht said.
In another Wealthpoint session, Alan Clarke, Nikko Asset Management NZ portfolio manager for diversified funds and external managers, also pointed out the complexity of second-guessing market reactions to seemingly momentous global events.
Clarke showcased a succession of apparent geopolitical crises over the last 60 years, of which “some happened, some didn’t”.
He said successfully managing portfolios based solely on macro-factors required investors to know what and when something happens as well as how markets will react – a task rated from extremely difficult to impossible.
Investment market environments, Clarke said, have changed a little over time.
For instance, volatility is slightly elevated now compared to the post-WWII period up to the mid-1990s while global growth has been a touch slower over the last 75 years or so.
Even the current heightened concerns over Trump tariffs, global conflicts and overvalued stock markets don’t necessarily flash crash warnings, he said.
Clarke also blew-off bubble worries, noting the lack of “excessive leverage” despite clear evidence of the two other defining factors of past market mad-times – a new potentially world-changing technology (artificial intelligence) and “massive” structural economic problems.
Investors needed to follow three core principles whatever the backdrop, he said, including: have a forward-looking, adaptive stance but “think long term” while “valuation will always matter”.
“And macro uncertainties will never go away but they will provide investors with risks and opportunities.”
Outside the sun sat on the line where the sea met the Napier sky like an air bubble in a level; perfectly flat for the day.