Iran War Gave Little for US Stock Fund Managers to Do

Key Takeaways

• During the Iran war, stock managers have made changes at the margins by raising cash.
• They’ve rotated into cheaper international positions and added defense exposure.
• But with energy at just 4% of the US market, fund managers couldn’t take big enough positions to boost performance without straying far from benchmarks.

The Iran war gave fund managers around the world plenty to do—except, perhaps, for those who specialize in US stocks. For them, the war has meant making changes at the margins, including nudging their cash positions upward or moving out of tech names into value-heavy areas of the market, such as consumer cyclicals and industrials.

When the United States struck Iran on Feb. 28, some fund managers with discretion raised some cash and began to adjust their exposures to overseas stocks. But in the US stock market, which had just undergone a major upheaval owing to concerns about artificial intelligence, other managers sat tight, partly because of widespread concerns about war-related policy reversals. In addition, some investors say the war cemented themes that had started taking shape earlier in the year.

“The group of changes we did make were geographical,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth. Nevertheless, he adds, “we didn’t do as much as we thought we would” to portfolios after the start of the Iran war.

That turned out to be a good move, as the US stock market hit an all-time high on April 15, recovering all the losses suffered in the early weeks of the war amid hopes of robust earnings, decent valuations, and expectations that the conflict would be resolved soon. Here’s what US stock fund managers have been doing with their portfolios since the war’s outbreak.

Some Managers Rushed to Cash

In the early days of the war, many investors who could raise cash did. In its April survey of global fund managers, Bank of America found that cash levels were at 4.3%, the highest since May 2025, when the Trump administration announced sweeping tariffs. In addition, surveyed fund managers’ global equity allocations dropped to a net 13% overweight on average from 37%, their lowest level since July 2025.

A couple of weeks into the Iran war, Richard Bernstein, global head of macro investing at investment manager Janus Henderson, raised cash in his all-equity portfolio of ETFs to 8% of assets. Normally, it is 2%. “The uncertainty was massive,” says Bernstein. “We kind of said, ‘If now is not a good time to raise cash, when exactly would you raise cash?’”

Similarly, the multi-asset portfolios of investment manager David Schassler at Van Eck reduced equity allocations by 1% by selling US large-cap core stocks. The Van Eck Wealth Builder Plus Moderate Strategy is currently just 54% in equities and has a 60% equities/40% bonds benchmark.

Other Managers Sat Tight

Other money managers were reluctant to adjust their positions because of potential policy reversals, such as when President Donald Trump imposed sweeping tariffs in April 2025, then reduced them. “The market’s confidence in this administration whipping up a TACO that avoids an ugly energy shock remains high,” said Phil Segner, co-portfolio manager at Leuthold Group, on March 16. The so-called “TACO trade”—“TACO” stands for “Trump always chickens out”—refers to the market’s belief that the president will reliably back down from his threats as economic pain grows.

“Ultimately, we couldn’t pull the trigger because markets were reversing too quickly,” Pappalardo says about changing Morningstar Wealth portfolios in response to ripples from the Iran war. “Unless you’re daytrading, it’s hard to make significant adjustments.”

Waiting to act may have been smart. From Dec. 31 through March 30, the Morningstar US Market Index lost 7%. When word of the ceasefire began spreading at the end of March, the year-to-date loss shrank to 4.2%.

The Stock Market’s Rotation Continues

Before the war, the market was already on a downswing because of concerns that AI advances would disrupt software and a wide range of other industries, including legal and information services and cybersecurity stocks. Lightening up on the expensive Magnificent Seven stocks and moving more toward industrials and cyclicals helped during the software apocalypse and positioned investors better for the war.

Betting on smaller companies also worked. From Feb. 28 to the end of March, the Morningstar US Small Cap Index returned 12.4%, versus 11.1% for the Morningstar US Large Cap Index. Over the same period, the Russell Magnificent 7 Index lost 8.8%.

“We were able to weather the storm a lot better than if we were purely heavily weighted towards tech or heavily weighted towards large caps,” says Chris Zaccarelli of Northlight Asset Management, which has assets under advisement of $960 million.

Shifting Allocations in Response to Oil Price Spikes

To protect their portfolios, some investors made geographical changes. For example, Morningstar Wealth sold European developed markets to add Latin American exposure, on the theory that Brazil, Mexico, and Colombia would benefit from the spike in energy prices as other emerging markets suffered. And five weeks into the war, Northlight’s Zaccarelli left his US exposure intact but rotated into more cyclical international investments from defensive names.

Energy was the top-performing sector during the first quarter, with a 38.1% gain. Northlight held energy stocks because “we were worried inflation would be stickier,” Zaccarelli explains. “We were not expecting war in Iran, nor were we expecting oil to go to $100 a barrel.”

But energy accounts for just 4% of the US stock market, as measured by the Morningstar US Market Index. That made it difficult for active fund managers to boost performance without straying far from their benchmarks. Meanwhile, others found that energy provided the steady free cash flow yields they sought during uncertain times.

For example, investment firm Westwood added natural gas producer EQT EQT. “It offers differentiated exposure to natural gas, lowers correlation to broader equity indices, and has a strong fundamental story as the lowest-cost producer in the Appalachian Basin with meaningful leverage to growing liquefied natural gas exports,” says Adrian Helfert, chief investment officer for alternative and multi-asset portfolios at Westwood.

The war also cemented themes that had already gelled. Consider defense, which had strong prospects because the world was increasing defense spending. Westwood began increasing exposure to drone-related companies, including Lockheed Martin LMT.