On not responding to events

The war with Iran has once again placed geopolitical risk as the major topic in most investment discussions.

At times like these, some investors try to move opportunistically — buying asset classes or sectors that they expect to benefit while shedding those that look set to lose. Others aim to time the market. Others, still, seek to make a series of binary bets on this or that eventuality.

The surprising stability of US equities since the start of the war may serve as a lesson in the potential peril of each of these approaches. Excess confidence in a hunch can sometimes be a bad thing.

At MDT it might seem that our primary response to geopolitical events is to not respond. Perhaps a better way to put it, though, is that we stick to our process, which is, after all, our core competency.

Managing risk

While we do not subjectively react to the minutiae of news flow, we do take risk management seriously and it’s a core component of what we do. Diversification constraints, tracking error forecasting and cross-company correlation analysis are all part of the portfolio construction process to help ensure our portfolios are not overly exposed to unintended risks.

Human oversight is important too: Each morning, our team carefully reviews model trades to verify they are based on the most current information. Experienced research analysts assess the model’s recommendations and, if trades appear to be based on incomplete or outdated data, we intervene.

When intervention is necessary, we follow a structured process that includes cross-checking data sources and discussing the potential impact of overriding or not overriding a trade before making adjustments. This disciplined approach helps ensure we’re not making trades that the model may likely have reversed the following day.

Past dislocations

Thus far, the war in Iran has not been the catalyst for the wild swings in US equities we’ve witnessed during previous crises. But our model does have extensive experience of navigating market dislocations: the Covid pandemic, changes to US tariff policies, and the recent AI disruption trade to name a few.

During Covid, for instance, the model prompted us to purchase multiple cruise lines, due to depressed prices and strong quality signals. Similarly, in recent years, our portfolios have been underweight some of the largest AI stocks, yet the model has identified several “indirect” AI stocks.   

In practice, our response to changes on the ground is driven by the model itself. We know from past experience that the most reactive factors tend to be technical, price-based or based on analyst conviction. In earlier dislocations, there were substantial drawdowns that presented oversold opportunities for the model; we are yet to see that in the market response to the current war in Iran.

Discipline matters

One thing we’re not doing is overriding trades. Nor are we strategically allocating to cash based on changes to the macro environment. In other words, our portfolios stay fully invested.

Our approach is also sector neutral, which keeps our sector exposures closely aligned to the index in times of upheaval. We diversify portfolios across different types of companies — with the goal of outperforming in any market environment.

For investors, the takeaway is simple: in periods when headlines are loud and emotions run high, a systematic, repeatable process can help keep an equity allocation anchored to a disciplined decision framework. That consistency can make it easier to stay invested, maintain intended exposures, and focus on long-term objectives rather than short-term narratives.