Gyrostat Capital Management: Blending Managers - From Style Diversification To Scenario Diversification

The Limits of Traditional Diversification

For decades, portfolio construction has been anchored in style diversification: growth versus value, local versus global, defensive versus cyclical. Yet markets do not operate in styles; they operate in scenarios: inflationary spikes, liquidity droughts, policy reversals, or exuberant risk rallies. But scenarios often defy the stylistic boundaries that advisers rely on.

Today's challenge is not simply to hold a variety of managers, but to ensure that each one performs a role in distinct market conditions. Diversification by scenario is not about holding more funds - it's about holding funds that respond differently when markets change regime.

The market Scenario Framework

Every investment portfolio ultimately faces four dominant regimes:

1.  Calm and Range-Bound Markets - Low volatility, narrow leadership, income strategies thrive.
2.  Expanding Bull Markets - Broad participation, growth bias rewarded.
3.  Volatility Spikes/Corrections - Correlations converge, liquidity vanishes, behaviour dominates.
4.  Prolonged Bear Markets - Capital preservation, cash flow stability, and psychological resilience determine outcomes.

Each of these environments rewards a different type of manager. Instead of blending by factor exposure, advisers can design portfolios that breathe - each sleeve contributing to defense or growth as regimes evolve.

Manager Archetypes Across Scenarios

Table "Diversification for all market scenarios" recognises that no single manager excels in all regimes - resilience comes from complementarity, not duplication.

Table is a simple matrix showing four market regimes and three manager archetypes:

-            Growth/Beta managers

-            Income/Option managers

-            Risk-Managed/Defensive managers

From Style to Scenario Diversification

This framework reframes diversification from a static mix of styles to a dynamic alignment of roles. Each manager type contributes differently:

- Growth/Beta managers capture long-term compounding in expansion phases.

- Income/Option managers provide cash flow stability and smoother participation during moderate volatility.

- Risk-Managed/Defensive managers preserve capital, control drawdowns, and support reinvestment capacity after stress events.

By understanding the interplay between these archetypes, advisers can construct portfolios that retain intent across regimes, instead of relying on luck or timing.

Behavioural Implications - Matching Strategy to Investor Psychology

Loss aversion peaks when portfolios are in withdrawal mode. Sequencing risk converts volatility into permanent capital loss. In that stage of the investor lifecycle, protection is not optional - it is structural.

Scenario diversification helps advisers map the investor's emotional cycle to the market cycle:

-            Accumulation         volatility tolerance                      growth exposure

-            Transition                 anxiety rising                   balanced exposure

-            Retirement              loss aversion dominant             structural protection

Conclusion - Designing Portfolios That Breathe

Traditional diversification assumes markets move linearly. They don't - they pulse. Scenario diversification accepts that every market environment has its own winner, and that true portfolio mastery lies in anticipating the shift between them.

"The future of portfolio design lies not in choosing the best manager - but in blending the right ones for the next scenario."

Closing reflection:

For advisers seeking to evolve beyond static model portfolios, scenario-based blending offers a way to integrate structure, psychology, and performance - transforming diversification into design.

Gyrostat Capital Management prepared this document and it is intended only for Australian residents who are wholesale clients (as defined in the Corporations Act 2001). To the extent any part may be perceived as financial product advice, it is general advice only and has been prepared without taking into account of the reader's investment objectives, financial situation or needs. Anyone reading this report must obtain and rely upon their own independent advice and inquiries. Investors should consider the Product Disclosure Statement (PDS) relevant to the Fund before making any decision to acquire, continue to hold or dispose of units in the Fund. You should also consult a licensed financial adviser before making an investment decision in relation to the Fund. One Managed Investment Funds Limited ACN 117 400 987 AFSL 297042, is the responsible entity of the Fund but did not prepare the information contained in this document. While OMIFL has no reason to believe that the information is inaccurate, the truth or accuracy of the information in this document cannot be warranted or guaranteed.