So, You Are Considering Changing Your Spend Rate

Executive Summary

  • An institution may consider changing its spend rate for various reasons, such as facing financial challenges and wanting to increase budgetary support or experiencing financial success and aiming to grow the endowment more quickly.
  • When considering a change in spend rate, it is important to understand how it affects the endowment’s future purchasing power and budgetary support.
  • Spend rates require careful balance: they cannot be so low that the institution lacks support, nor so high that maintaining inflation-adjusted principal becomes challenging, as the endowment must earn a return to offset spending plus inflation.
  • Two main trade-offs to consider when changing spend rates:
    • Timing of value: Higher spending today versus more spending dollars in the future due to asset compounding over time
    • Impact to endowment strategy: Rate changes may require adjustments to target return requirements, risk level, and asset allocation

The Decision Framework

Whether driven by financial pressures or strategic opportunity, spend rate adjustments represent one of the most significant decisions an endowment can make. The process requires careful analysis of both quantitative impacts and qualitative institutional factors. As a reminder, spend rate is the percent an institution withdraws from its endowment on an annual basis. Please refer to our Spend Policy 101 for a foundational overview.

Balancing Mission Support and Purchasing Power

At its core, spend rate decisions involve balancing competing institutional priorities. These dual endowment goals—supporting today’s mission while preserving tomorrow’s purchasing power—create a natural tension that requires careful balance. Rates too low fail to adequately support institutional needs, while rates too high make it challenging to maintain real value over time.

Key Trade-offs in Changing the Rate

Timing of the Value

A key consideration in determining if a rate change is appropriate is identifying when the institution would benefit most from its endowment funds.

For example, funds left in the endowment will grow and compound creating a larger spend in the future, while funds taken from the endowment will provide an immediate budget impact today.

Case Study

The example below highlights the trade-off in a $100M endowment of raising a 3-year trailing average spend of 4% to 4.5%. The numbered commentary corresponds to the charts that follow.

  1. There is an immediate impact on spend to support the budget, which continues for several years.
  2. However, all else being equal, this larger spend reduces the size of the endowment.
  3. At a certain point, the spend to the institution is now less at 4.5% than 4%, because the endowment size has been reduced over time.
By the Numbers: Trade-off between Increasing the Rate
Source: TIFF analysis; assumes 3-year annual trailing spend methodology and a 7% annualized return.

Factors to Consider

When having these discussions, pairing quantitative analysis with collaborative discussion is important. Here are some key factors worth considering:

  • Value of the change: Consider the net present value of the marginal budget support
    • For rate increases, determine whether they support long-term value or address one-time, short-term uses
  • Duration of spend rate change: Spend rate changes are not permanent and can be changed again in the future
  • Spend methodology: How the institution calculates the spend will impact the trade-offs
  • Endowment portfolio construction: Consider target returns, long-term expected real returns excluding spend, and risk level
  • Inflation expectations: These impact target returns as well as budget and potentially spend methodology
  • Institutional factors: Evaluate current and future funding requirements, and the organization’s broader financial situation (revenue sources and stability, debt, etc.)
  • Industry trends/perspective: Peer comparisons on both endowment and institutional factors exist to help contextualize each institution’s circumstances

Potential Impacts to the Endowment from Changing the Rate

Changing the rate can also have implications for the endowment, either providing more flexibility to grow or creating challenges to maintain principal. Most institutions maintain their investment strategy when lowering the rate, hoping to compound assets faster and build the endowment’s asset base for the future. The challenge arises when an institution increases its spend rate: can it adjust its risk or asset allocation enough to maintain the inflation-adjusted corpus?

Potential Impacts to the Endowment from Changing the Rate

Conclusion

Changing an institution’s spend rate requires careful consideration, input from a multitude of stakeholders, and thorough analysis of both qualitative and quantitative trade-offs. It is not a decision to be made without robust dialogue with key constituents. If your institution is considering a change to your spend rate, TIFF is ready to help navigate the various considerations and determine the right path for your institution.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

OCIO Solutions for Nonprofits: How TIFF Balances Scale and Focus

Jessica Portis, CFA, Chief Client Officer at TIFF Investment Management, spoke with Pensions & Investments about how TIFF’s size allows it to be meaningfully resourced while remaining focused on serving nonprofit clients. She emphasized that TIFF, founded by a coalition of nonprofit foundations in 1991, has evolved alongside its clients to deliver OCIO solutions attuned to the complex needs of nonprofit endowments and foundations.

Read the full article

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Interpreting OBBB: New Tax Law Implications for Nonprofits and Philanthropy

Summary

  • One Big Beautiful Bill (“OBBB”) was signed into legislation on July 4, 2025, by President Trump.
  • OBBB contains various components that impact nonprofits and philanthropy at large. While the impact varies by type of institution, OBBB might have the unintended consequence of leaving nonprofits with a greater need to fulfill their mission in support of the community and smaller budgets to do so.
    1. Tax Impact: Broadly neutral, except for large, private higher education institutions with large endowments, who will receive a tax increase. No other tax increases were included.
    2. Charitable Giving Impact: Negative. Positive changes to encourage giving for small donors such as an increase in nonitemized giving are offset by large donor changes (an increase in corporate deduction floor and reduction in itemized giving for top individual taxpayers via 0.5% floor).
    3. Philanthropic Need: Increasing. For higher education, OBBB broadly looks to reduce federal loans and grants, increasing the need for financial aid. For other nonprofits, OBBB has broadly decreased entitlements and services, potentially creating a larger need for nonprofit services and aid.
  • For over 3 decades, TIFF has helped nonprofits align their investment portfolio with institutional priorities. During these times of change, TIFF serves as a resource to clients to ensure their portfolio continues to serve the institution in the best way possible.

Overview

One Big Beautiful Bill is now One Big Beautiful Law. President Trump officially signed OBBB on July 4, 2025. Within the almost 900 pages of OBBB, there are a number of changes that directly and indirectly impact nonprofits – particularly through tax changes, charitable giving rules, and reductions in public services.

While the impacts will vary by institution, OBBB is likely to increase the demand for nonprofit services at a time when many organizations are facing tighter budgets.

TIFF has summarized major elements of OBBB and how it broadly impacts nonprofits and philanthropy:

Major Elements of OBBB and Impact to Nonprofits and Philanthropy
Source: TIFF Analysis.

1. Tax Impact

Endowment Tax

OBBB increases the excise tax on private higher education institutions with more than 3,000 students and large endowments per student. All else being equal, this tax would reduce the available budgets to impacted institutions at a particularly challenging time, as other revenue sources are also being cut.

Endowment Tax
*2017 student exemption was <500 full time students. OBBB exemption has been raised to 3,000 full time students. Source: OBBB.

Additional changes within the new legislation are:1

  • Expansion of net investment income definition to include:2
    • Interest on institutional student loans
    • Royalties on federally-funded intellectual property (IP)

Considerations from prior drafts that were not ultimately included:

  • Any changes to definition of “students” for tier determination (e.g., exclusion of international students)
  • Exception for religious institutions

Implications:

  • For some higher ed institutions, there is a fear this tax will disproportionately impact typically unrestricted budget categories, including financial aid, faculty and university maintenance and infrastructure.3, 4
  • Joint Committee on Taxation estimates these changes will increase taxes by an additional $761 million over the next 10 years5 ($380 million was raised in 20236).

Other Taxes

Fortunately, the final OBBB did not contain any tax increases on nonprofit investment pools outside of the endowment tax increase.

2. Charitable Giving Impact

OBBB makes four major changes to charitable donation / giving rules for both individuals (three changes) and corporate entities (one change). While these changes broadly represent a reshuffling of incentives with an overall negative estimated impact, the law negatively impacts large donors—wealthy individuals and corporations—and helps smaller, everyday donors.

A new universal deduction is reinstated for small donors (previously unavailable post 2021). However, individual and corporate itemized givers must now clear a threshold before deductions apply: 0.5% of adjusted gross income (AGI) for individuals and 1% of taxable income for corporations. In addition, high-income filers face a cap on the deduction benefit at 35% the gift’s value.

Charitable Giving Impact
7  8  9  10  11  12

Implications:

It will be important for nonprofits to understand their donor base to see how they might be impacted and how they will need to shift their fundraising strategies going forward to align with these new tax rules. Large donors have become important to many nonprofit organization budgets, so these shifts could be detrimental.

3. Philanthropic Need

While OBBB added some services and eliminated others, it has generally led to a reduction in services across various sectors of the U.S. economy and social system. Below are some of the highest profile services that were reduced which may ultimately lead to an increase in services and aid provided by nonprofit organizations:

  • Medicaid: Single largest OBBB spending cut ($1 trillion over 10 years) and estimated increase of uninsured people by 11.8 million. OBBB impacts Medicaid by tightening eligibility for ACA-expansion adults—requiring 80 hours of verified work a month and eliminating Biden’s “simplified enrollment”. On the provider side, it bars new or higher hospital/MCO provider taxes in expansion states and trims existing ones, and caps state-directed supplemental payments. Finally, states must re-check adults’ eligibility twice a year instead of annually, with additional documentation for income and residency.13
    • Impact: Healthcare
  • SNAP: OBBB cuts an estimated $186 billion over 10 years and CBO estimates 3 million to drop out or lose benefits from the program. The changes reduce funding, shifts a portion of its cost to states (up to 15%), and changes work and documentation requirements.14
    • Impact: Food security
  • Student Loans: OBBB had a major overhaul for government student loan, with loan options decreasing, in particular for graduate students, and repayment plans becoming less generous. OBBB cuts back how much students can borrow from the government, with the sharpest reductions for graduate and professional programs and eliminates popular options entirely (Grad PLUS). Only two repayment plans remain, monthly bills will generally be higher, and forgiveness now comes after 30 years instead of 20–25. Finally, borrowers can pause payments for just 12 months total over the life of the loan.
    • Impact: Financial aid

There are some notable positive service additions, including:

  • Child and Family Policies: A number of changes to help families with children, including permanent Child Tax Credit under TCJA, permanent increases to Child and Dependent Care Tax Credit to 50%, increase of dependent care FSA and “Trump Accounts” for sub 8-year-olds savings.15
  • Tax Relief for Seniors: $6,000 standard deduction for individuals over 65 for the next 3 years. Phaseout for those earning over $75,000 (or $150,000 joint filers).16

Implications:

  • TIFF has identified several key areas within OBBB where service reductions could significantly affect community needs. These cuts may leave your nonprofit constituents with fewer resources, potentially increasing their reliance on your organization’s services and support.

Preparing for Change: Nonprofit Action Steps

What steps can nonprofits take to effectively respond to the anticipated changes resulting from OBBB?

Understand impact to budget:

Endowment Tax: If you are a higher education institution, understand your tier and tax implication to your budget. It will also be important to understand tier management if you are near a breakpoint.

Change in Giving: For all institutions, evaluate donor profiles to anticipate shifts in giving patterns. Your fundraising staff may need to alter its strategy to help donors maximize their giving.

Understanding impact to your institution’s focus areas:

Look at how the OBBB impacts your service areas and how the need for philanthropy may change. It may increase or evolve from where it is today. This may require a refresh on grant making strategy or broader budget approach.

How Can TIFF Help

For more than three decades, TIFF has been helping institutions fund their missions through their investment portfolios. We collaborate closely with organizational leadership and Investment Committees to ensure that portfolio construction is thoughtfully aligned with institutional priorities. In times of change, TIFF has helped clients understand if changing institutional priorities impacts their Strategy Asset Allocation. We also have helped our clients work through scenarios planning on how to best utilize the investment pool’s annual withdrawal (if other than 5% for private foundations) and how changes in gifts may impact withdrawal size in the future. We look forward to helping our clients navigate these changes.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Footnotes

  1. https://www.ropesgray.com/en/insights/alerts/2025/07/senate-tax-package-includes-major-changes-to-endowment-and-executive-compensation-excise-taxes

  2. https://www.crowe.com/insights/how-obbb-could-affect-tax-exempt-organizations

  3. https://www.thecrimson.com/article/2025/6/18/senate-finance-committee-endowment-tax/

  4. https://provost.yale.edu/news/actions-anticipation-federal-legislation

  5. https://www.jct.gov/publications/2025/jcx-35-25/

  6. https://www.nonprofitissues.com/article/university-endowment-tax-receipts-rise-again

  7. https://www.ropesgray.com/en/insights/alerts/2025/07/senate-tax-package-includes-major-changes-to-endowment-and-executive-compensation-excise-taxes

  8. https://cof.org/page/one-big-beautiful-bill-impact-philanthropy

  9. https://www.councilofnonprofits.org/files/media/documents/2025/chart-tax-legislation-2025.pdf

  10. https://www.jct.gov/publications/2025/jcx-35-25/

  11. https://independentsector.org/wp-content/uploads/2025/06/Lilly-Family-School-of-Philanthropy-Impact-of-Tax-Proposals-on-Charitable-Giving-June-2025.pdf

  12. https://independentsector.org/wp-content/uploads/2025/06/Ernst-Young-Study-on-1-Floor-on-Corporate-Charitable-Donations.pdf

  13. https://www.kff.org/medicaid/issue-brief/allocating-cbos-estimates-of-federal-medicaid-spending-reductions-across-the-states-senate-reconciliation-bill/

  14. https://theconversation.com/big-legislative-package-shifts-more-of-snaps-costs-to-states-saving-federal-dollars-but-causing-fewer-americans-to-get-help-paying-for-food-260166

  15. https://familyenterpriseusa.com/wp-content/uploads/2025/07/7.3.2025-SPB-Summary-The-One-Big-Beautiful-Bill-Act.pdf

  16. https://familyenterpriseusa.com/wp-content/uploads/2025/07/7.3.2025-SPB-Summary-The-One-Big-Beautiful-Bill-Act.pdf

2nd Quarter 2025 CIO Commentary

Executive Summary

  • Q2 saw significant market volatility, including an 18.9% S&P 500 drop over 49 days—comparable only to COVID-19, the Lehman collapse, and the 1929 Crash—though markets have since rebounded as investors price in more optimism than media and expert commentary suggests.
  • The U.S. fiscal outlook is deteriorating, with the “One Big Beautiful Bill” projected to increase the federal deficit by $2.7 trillion over the next decade, and a sustainable path will require multi-pronged, gradual deficit reduction over many years.
  • Foreign investors are beginning to question U.S. exceptionalism due to expensive markets and a strong (but weakening) dollar.
  • Despite negative headlines, economic fundamentals remain solid: Q2 GDP is forecast at 3.4%, job creation continues at 120k/month, inflation has eased to 2.4%, and wage growth exceeds inflation—suggesting resilience and room for cautious optimism.
  • Tariffs remain a risk with Trump’s planned July 9 actions, but TIFF anticipates they will be diluted and resolved by year-end.
  • Proposed endowment tax changes (raising the rate to 8%) could force institutions to seek greater liquidity and rebalance portfolios, creating short-term buying opportunities and increased access to top-tier private equity and hedge fund managers.
  • TIFF’s portfolio remains close to its strategic allocation (65% equities / 20% hedge funds / 15% fixed income), with neutral regional and sector exposures and a strong focus on manager alpha to drive returns.

It’s Not Over Yet

We have been expecting above-average volatility, and we got it this quarter. DOGE appears to have ended with very little actual budget impact and Trump’s proposal for next year’s budget has done nothing to help the deficit trajectory. The Congressional Budget Office (CBO) estimates that if enacted, this would add $2.7 trillion to the federal deficit over the next 10 years. Most other reputable forecasts are somewhat higher than this estimate, but when the baseline is $21.1 trillion, the increments seem less significant. The US remains on an unsustainable path unless meaningful steps are taken to address rising debt and persistent deficits. We have been numbed from the exorbitant levels since the Great Financial Crisis. The largest ever annual deficit before 2008 was -$413 billion (a huge number itself!) with a median deficit of ~-$200 billion. The smallest annual deficit since 2008 was -$438 billion, with a median of ~-$1.1 trillion (2024 is estimated at -$1.9 trillion). That represents 6.5% of estimated GDP—in a decent economy! But comparing the deficit to the overall GDP mixes an “income statement” loss (deficit) to a related, but merely referential, total economic number (GDP). A fairer comparison is to compare the deficit to the actual revenue of the government of roughly $5.0 trillion in 2024. On that basis, the US is spending roughly 40% more per year than it receives in receipts.

The Congressional Budget Office Estimates a $2.7 Trillion Deficit Impact by the One Big Beautiful Bill Act, as Passed by the House of Representatives on May 22, 20251

We need to take action to try to get off this path, potentially soon. Time is running out. Getting out of this will be like shortening a 3-legged stool. You can’t cut one leg off, or the stool tips over. The only way to do it is to shorten one leg by two inches, another by two inches, and finally, the third by two inches. You repeat this process as many times as needed to achieve the desired height. It will likely take a decade or more for our country to return to something that can be sustained for future generations.

Success for the US economy will look something like 3% GDP growth, a budget deficit of 3% of GDP (so that as a percent of GDP, the debt quits growing—similar to how each of us can handle more debt as our income and assets grow). Throughout this, we need to keep productivity high, which means inflation must also remain under control. This is a tall task, for sure, but one we must attempt to tackle. The sooner the better; the later, the more painful. Markets can move quickly and violently to impose discipline, as observed in 2022 in the United Kingdom.

The big question, then, becomes whether the proposed budget, if passed, will enable us to achieve this target. We don’t know. Will it break the proverbial stool? Can we stay on track and not give up along the way if it (or something else) can get us there over some number of years? This is the challenge of our times. Whether it’s this or some other plan, we need to become unified in our goal of improving our financial situation. If we don’t, the capital markets will, and possibly in a much less comfortable way.

The continuing deficit is one of several reasons that the markets today are asking if US exceptionalism is over. Other concerns include expensive US capital markets relative to other countries and a potentially overvalued dollar. Believers are speculating that this means the US is, therefore, a less attractive investment destination for foreigners, who may be starting the process of bringing some of their capital back home. If true, this could be a long, slow process that pushes the US share of global stock markets (65%) down toward something closer to our share of global GDP (25%). It won’t happen all at once, and it won’t likely push our share of markets that low, but directionally, it would mean that other markets will mostly outperform ours for years to come. If the USD also loses global purchasing power, then Americans planning a European vacation will need to save a little more than they do today. As believers in the US and our economy, we remain adherents to Warren Buffett’s suggestion to “Never bet against America.” As global investors, we also have an ever-changing benchmark and will therefore not get too far out of step with whichever path proves correct in the coming years.

US Dollar Index Against a Basket of Currencies Has Shown Strength Since the Great Financial Crisis but Has Recently Dipped2

What Next

As for things more near to hand, the last quarter was the most volatile in a while. From its February 19 high to its April 8 low, the S&P 500 sold off 18.9%. According to Perplexity.ai, this has only happened in fewer days three times—during COVID-19, the Lehman collapse that punctuated the GFC, and the 1929 Crash that started the Great Depression. Not the sort of company one wants to keep. This may be why most TV news commentators, economists, and market prognosticators all sound so negative. Every night, we hear that a recession is coming along with higher inflation.

Why, during this time, are equity markets doing so much better? As we’ve said before, the stock market is a forward-looking, discounting machine. It dispassionately takes account of what is happening in the economy, politics, geopolitics, and other relevant areas, and estimates how that will ultimately impact the forward earnings of companies whose stock is traded on the exchanges. Investors are looking forward and seeing a brighter future than the prognosticators. We, too, are more optimistic.

Despite all the naysayers, the economy continues to hold up, at least so far. Real quarterly GDP growth was -0.5% in Q1 this year, primarily due to US businesses purchasing much more from abroad than they exported (likely looking to get ahead of tariffs), thus contributing -4.8% to Q1 GDP. Happily, the latest Atlanta Fed Q2 GDP forecast (based on data through June 18) is for 3.4% growth. US GDP forecasts for the year 2025 range mostly between 1.4% and 1.9%. Similarly, the number of jobs created this year continues to surprise to the upside, averaging 120k per month. This is just enough to keep the unemployment rate roughly stable around the 4.25% level. And finally, CPI inflation recently came in just 2.4% higher than last year, down from 2.9% at year-end. Meanwhile, year-over-year personal income growth through April 2025 is 2.94%. We are trying to stick to reading the numbers and not listening to more qualitative assessments. So far, at least, our read is that the economy and job creation continue to be solid, and the markets agree.

Lastly, regarding the Middle East war, our take on direct US involvement is balanced. As we write, the direct hit on Iranian nuclear facilities appears to have been successful at minimizing (still no IAEA confirmation) their potential nuclear threat for quite a while. This would be good (US stocks rose 2% in the two days after the strikes). World leaders are nearly unanimous that Iran should honor the treaty it signed and not become a nuclear power. This could portend a very positive future for the Middle East if it leads to Iran becoming a peaceful country, working to improve its citizens’ lives as most other countries in the region seem to be doing. In the short run, however, we don’t know if Iran or its proxies have cyber capabilities, sleeper cells, ballistic missiles, or anything else up their sleeves that could be used in a scorched-earth effort to remain in power. The next few months will be very important for the entire region. The good news seems to be that Russia and China are not coming to Iran’s aid (nor is anyone else), suggesting this could be the start of a brighter future for Iran and the entire Middle East.

Looking Ahead

Following his 90-day pause on “reciprocal tariffs,” Trump plans to enact specific new tariffs on 57 countries starting on July 9. If the administration’s use of current statutes is declared illegal, it will likely try other legal approaches to pursue the administration’s goal of imposing tariffs (note: we’d generally prefer not to have tariffs—as we consider tariffs to be taxes, and taxes slow the economy). For this reason, we aren’t yet out of the tariff woods. We are, however, starting to see that tariffs are very unlikely to remain anywhere near the levels Trump announced on “Liberation Day.” This is good. While July 9 may bring short-term market volatility and is unlikely to mark the end of the story, we remain confident that tariff negotiations will conclude by year-end. We also believe that in the second half of this year, Congress will pass a budget (the “One Big Beautiful Bill”) that keeps taxes low and will begin to reduce regulation. Both of these will be welcomed by markets in our opinion. As the uncertainty and, hopefully, the volatility subside, we expect to see more investors becoming optimistic about the future and stock prices working their way somewhat higher. Longer-term, AI will accelerate growth and improve the efficiency of almost everything. Self-driving cars (try a Waymo in San Francisco and you’ll love it) could become common this year, and in another few years, humanoid robots will break onto the scene. We may not all like these advancements, but businesses that embrace them will become more productive and profitable than those that don’t. This could improve GDP growth and help us get our deficit under control. We keep looking for hopeful ideas on this front, and for now, this seems to be our best remaining hope.

On the fixed-income side, our views on the deficit picture probably gave you a good idea that we still prefer hedge funds. Hedge funds should continue to perform better as a group than the Bloomberg Fixed Income Aggregate, and they provide much better alpha opportunities than fixed income. Our duration remains just short of 5 years vs. our benchmark at approximately 6 years. We would love to trim duration if yields on the 10-year Treasury get to 4.25% or below. Conversely, if yields get to 4.75% or so, we expect to add duration. We continue to anticipate the 10-year will trade in a 4.25% to 5% yield range this year. We will likely buy at the higher yields and sell at the lower yields. Interest rates will be impacted by the US budget and deficit progress (or lack thereof), as well as inflation changes—whether higher (as most expect) or lower (as a few expect). Nevertheless, there is better value in fixed income today than in many years.

Meanwhile our hedge fund portfolios continue to do well for us, and we like our manager roster. The proposals to raise the tax rate that “wealthy endowments” pay (to as high as 8%) could create opportunities for TIFF. While the opportunity is smaller now than it would have been at the originally proposed 21% rate, affected endowments may still look to reduce their tax burden. This could lead them to (1) move away from high-turnover hedge funds or (2) sell private investments now to avoid future gains taxes and create liquidity for rebalancing their private book.

Our eyes are wide open for opportunities to upgrade already strong manager rosters across all our portfolios.

For now, we remain very near our strategic asset allocation targets of 65% global equities/20% hedge funds/15% fixed income. We are also quite neutral relative to geographic and stock market sector weights, relying heavily on manager alpha to drive positive relative performance. Fingers crossed; this strategy has been beneficial so far this year, and today, we don’t see a compelling opportunity that would cause us to change from this positioning.

Where’s the Big Opportunity of the Future?

A number of people have started asking if the current chaos is creating opportunities that we believe could prove helpful in coming years. We mentioned some possibilities above when discussing how the proposed endowment tax changes could create access to new managers. Below, we will address the question in greater detail. TIFF will have our own favorite approach to tackling this potential opportunity, but our goal here is to outline which asset class/assets could generate better-than-average returns over the next 3-7 years. Let’s dig in.

Over the long run, different assets provide generally different returns. Money markets, for example, usually provide the lowest returns with the least risk and lowest volatility of annual return. Next up are bonds, where returns are usually a bit higher than money markets but they can be more volatile and you can lose money from time to time. Hedge funds are riskier and, in our opinion, higher returning investments. Public equities typically provide even higher returns, while private generally equity offers the highest return, but also carries the most risk. One of the features that makes private equity riskier than public equity is its lack of liquidity. When events conspire against the capital markets and you want to step aside, it’s only possible if your holdings are liquid. You might be able to sell your illiquid private equity holdings, but usually only at a steep discount.

This is why we own some illiquid private investments, but we try to limit our ownership to 1/3 or so of a portfolio. We like the higher expected returns but understand and incorporate the higher risk that comes with illiquidity. Others are willing to take much higher illiquid exposure than this and that could be presenting an opportunity today.

The Proposed One Big Beautiful Bill (OB3) Endowment Tax

The OB3 proposal introduces a progressive, tiered tax schedule on private higher education endowments (up to 8% from current 1.4%). We’ve written an overview of the latest Senate draft tax proposal [here] for the details. The proposal represents a substantial change in higher education taxation that, when coupled with possible modifications in other higher education governmental funding and student eligibility, could impact private markets in both the short and long terms.

In the short term, impacted investors may look to increase liquidity and rebalance portfolios. In the long term, impacted institutions may look to (1) increase their expected returns to offset the tax drag and/or (2) look to defer any potential tax liability by seeking long-hold assets.

We anticipate two possible short-term outcomes from these:

  1. Increased use of secondary markets as institutions:
    • Rebalance portfolios in light of the tax
    • Manage the increased financial burden on endowment
    • Create potentially interesting buying opportunities on the other end of those transactions
  2. Availability of capacity at some previously closed PE (and HF) managers as impacted endowments augment liquidity to new higher levels reflecting the new higher annual draw.

If this happens, we will try to add attractive managers to our roster, which we already like a lot.

Over the longer term, we expect affected endowments will find the right level of illiquidity for the new endowment environment. They will likely attempt to stay toward the higher end of target illiquidity levels by:

  1. Tilting asset allocation toward return-enhancing alternatives like private equity
  2. Preferring longer-hold assets aligning with private equity’s time horizon
  3. Minimizing annual taxes by overweighting those that generate long-term gains taxed at lower rates, rather than consistent taxable short-term gains

In addition to the long-term role private equity will play in E&F’s, the “democratization” of PE is very likely to bring retail investors into this market as new buyers. New products that allow for smaller investors to invest in illiquid assets are emerging both in the US and Europe as regulations and structures increase the range of potential investors in this space. Over time, some estimates are that up to half of illiquid demand will come from this new source. We tend to believe that retail capital will flow to larger PE firms with more fundraising resources, which could further compress returns in larger cap PE strategies. However, this should provide a boost to smaller PE managers, who will eventually sell their portfolio companies into this market and be able to capture greater levels of multiple expansion at exit.

Our main conclusion here is that traditional PE investors may right size now, but they likely won’t abandon the consistently highest-returning asset class. Meanwhile, new investors who are gaining access could become a big source of demand in the future that will benefit returns in some parts of the private markets. In our view, private equity still benefits from some structural advantages, such as the ability to align interests, add value to portfolio companies, think more long-term than many public companies, get term leverage, and choose when to be fully invested. Private equity is thus likely to remain the best performing asset class in the future.

We started by highlighting that PE generates the highest and riskiest return stream. Below is the other factor that causes us to believe that now may be a better-than-average time to invest in PE. The chart below shows the annual PE return (blue bar) and the rolling 10-year performance vs. public equities (green dots). You can see both the excellent long-term performance and the uniquely poor last two years—the worst back-to-back returns in the last 22 years. In previous episodes of poor performance, subsequent years were recovery years. So far, that hasn’t happened this time.

1 Year and 10 Year Excess Return of Cambridge Associate PE & VC Index vs. MSCI ACWI3

We are not forecasting a monster year, but we do expect that the inherent advantages of PE noted above should continue to prove valuable to returns.

There are many nuances that our private markets team incorporates into their efforts to exploit opportunities that we’ve mentioned. However, we want to go on record suggesting that we believe today is as good a time as we’ve seen to consider increasing PE exposure if it fits your plan. In our opinion, we may look back on this period in 5-7 years as an unusually good opportunity. We also note that despite our views, timing PE is notoriously difficult due to the impossibility of knowing the investing environment for the next 4-5 years and the exit environment for the subsequent 5 years or so.

As always, we greatly appreciate the opportunity to manage your capital and help you achieve your organization’s goals. We are here to assist in any way possible, so please feel free to reach out to us with any questions or needs.

Your TIFF Investment Team

These materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.

Footnotes

  1. CBO.

  2. Bloomberg. Based on DXY, which is a measure of the international value of the U.S. dollar relative to a basket of six major world currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

  3. C|A PE&VC Index, Bloomberg. C|A PE&VC Index utilized IRR while MSCI ACWI is shown in time weighted returns.
    Notes. Represents TIFF’s view of the current market environment as of the date appearing in this material only. CY 2024 C|A PE + VC is estimated at 6%. Past performance does not guarantee future results.

Senate Republicans Nix House’s Foundation Tax Increase, Reduce Endowment Tax Tiers

Overview

  • The Senate Committee on Finance released its draft of the One Big Beautiful Bill (OB3), which reduces or eliminates changes to the taxation of endowments and private foundations compared to the House-approved bill.1
    • Reduces the endowment tax tiers, dropping the top rate from 21% to 8%.
    • Removes any proposed increase or modification to the private foundation tax.
  • Reminder: Bills are revised frequently before becoming legislation, and OB3 is likely to undergo further revisions.
  • Legislative Process: This draft is the beginning of the negotiations within the Senate, which still needs to vote on the revised bill. In the Senate, Republicans have a 53-47 majority. If approved, the bill will return to the House for another vote. The final step is obtaining President Trump’s signature.
  • Timing: President Trump has requested Congress to finish OB3 before July 4th.

Endowment Tax Tiers Reduced

The Senate Finance Committee has reduced the tax rates within the tiers, dropping the top rate of 21% to 8%. The current rate is 1.4%.

Endowment Tax Tiers Reduced

Both the Senate and the House bills exclude2:

  • Religious institutions (e.g., Notre Dame University) from taxation.
  • International students in the tax tier calculation (e.g., assets per eligible student). Without the inclusion of international students, higher education institutions with larger international student populations will be more likely to be pushed into a higher tax tier.

The investment impact at Senate tax tier levels is well below those of the House tax tiers, which will influence how much impacted endowments adjust their investment strategies and budgets.

Estimated Excise Tax Impact on Net Returns
Source: TIFF Internal Analysis.

No Private Foundation Tax Changes; Remain at 1.39%

Unlike the House version, the Senate Finance Committee has removed any proposed changes to private foundation tax.3 As a result, all private foundations would remain at the 1.39% excise tax on net investment income.

While the private foundation tax has received less media attention than the endowment tax, it is actually more financially meaningful ($15.9B vs. $6.7B in 10-year revenue4) as it is applied to all private foundations vs. the endowment tax which applies to a select number of private universities. This would be a benefit to private foundations to maintain their current tax rate, allowing these nonprofits to focus on funding their philanthropic missions.

Summary

These changes are a meaningful departure from the House-approved OB3 and are beneficial to both endowments and private foundations. For impacted endowments, the tax burden at the highest proposed rate of 8% is more manageable and under the Senate’s new language, private foundations will be subject to no change to their current tax obligations.

TIFF remains committed to closely monitoring these developments and advising clients accordingly.

The materials are being provided for informational purposes only and constitute neither an offer to sell nor a solicitation of an offer to buy securities. These materials also do not constitute an offer or advertisement of TIFF’s investment advisory services or investment, legal or tax advice. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

These materials may contain forward-looking statements relating to future events. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other comparable terminology. Although TIFF believes the expectations reflected in the forward-looking statements are reasonable, future results cannot be guaranteed.