Category: 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.

Executive Summary

• Swift changes implemented by the Trump administration have led to increased market volatility and uncertainty.
• Recent tariffs imposed by the US on Canada, Mexico, and China have created significant economic uncertainty and negatively affected markets as we approach the April 2nd reciprocal tariff announcements.
• Economic indicators have weakened, with GDP growth expected to slow down and inflation predicted to rise, suggesting a challenging economic period may lie ahead.
• The administration’s focus on deregulation, including a regulatory freeze and efforts to rescind existing regulations, is expected to lead to legal challenges and further market unpredictability.
• Despite all this uncertainty we highlight the importance of maintaining a long-term investment focus amidst short-term volatility and avoiding hasty decision-making; stay focused on your investment goals.
• With that in mind, we are maintaining our strategic asset allocation with 65% in the All Country World Index (ACWI), 20% in hedge funds, and 15% in the Bloomberg Aggregate Bond Index (AGG).

Fast and Furious

In previous letters, we’ve mentioned a quote attributed to Vladimir Lenin:

“Sometimes nothing happens for decades, and sometimes decades happen in a week.”

We were referring to the rapid impact of AI on our world. Since Donald Trump’s re-election and return to the White House, events seem to be accelerating faster than ever.

Every new president promises change, but none has delivered as swiftly as Trump has in his second term. It is worth noting that he signed 26 executive orders on his first day back in office and has reached 92 as of March 20, 2025, in addition to the 220 he signed during his first term. For comparison, Biden signed 160 executive orders in four years, Obama 276 in eight years, and Franklin Roosevelt holds the record with 3,721 over 12 years. Keeping up with these changes has been challenging and exhausting for most.

There is significant debate among intelligent and honest people about the effectiveness and potential outcomes of most of Trump’s ideas. As new ideas emerge and are debated, they naturally create more questions and uncertainty. We anticipated significant change under Trump, but the pace of change has been dizzying even for us.

Let the Chaos Begin

On March 4, 2025, Trump’s first tariffs on Canada and Mexico took effect, along with an additional 10% tariff on China. The reasons given for these tariffs were sometimes economic and sometimes to punish a country for allowing fentanyl and other harmful agents to come into our country. Canada and China retaliated, and Mexico was expected to announce retaliatory tariffs. Markets are reacting negatively. Many were surprised that Trump went through with the tariffs on Canada and Mexico, who seemed to be calling his bluff. Similarly, the February 28 Zelensky conflict at the White House cast doubt on the Ukraine/Russia peace process, as Trump temporarily halted US aid to Ukraine and upset our European allies. A few weeks later, most of these tariffs have been changed (and will be again on April 2), and Zelensky and Trump seem to be back on the same team, depending on the day. The apparent chaos of recent weeks is causing concern both domestically and globally and has increased market volatility. This is likely to continue as tariffs increase and negotiations everywhere on everything continue.

While Tariffs are Still Below Historical Levels, They are Reaching the Highest Levels Seen in Nearly 30 years

US Duties Collected as a % of Total Imports1

With the Exception of China, the US Tariffs on the Rest of the World are Still Rather Low, Meaning If the Trump Administration is Serious About Increasing Tariffs, We May Have a Long Way to Go

US Effective Tariff Rate by Import Source Country, 12-month Rolling Average2

The most important tariff day looks to be April 2, when the US government plans to announce reciprocal tariffs. As we understand this undertaking, whatever tariff (including, in some cases, V.A.T) a country charges us is the tariff we will levy back on them. Ironically, this could either result in tariff wars or in a free trade relationship, depending on what tariff a foreign country chooses to charge us. The cone of possible outcomes around this is wide, increasing uncertainty. Several economic indicators have recently weakened, compounding the impact of this uncertainty and suggesting a challenging period may lie ahead for the economy and markets. The Federal Open Market Committee recently revised expected 2025 GDP growth down by 0.4% to 1.7% and inflation (core PCE) up by 0.3% to 2.8%. They expect tariff inflation to be “transitory” and left rates unchanged, noting that uncertainty has increased.

The new administration also is focused on removing regulations. In addition to implementing a regulatory freeze pending review and halting all new regulations, they aim to keep the total incremental cost of all new regulations in fiscal year 2025 to “significantly less than zero.” Agencies are directed to identify and rescind regulations inconsistent with Trump administration policies, and for every new regulation proposed, 10 must be identified for repeal. This leads to many de-regulation efforts being challenged in court, slowing their impact and likely sending some to the Supreme Court. It is a busy, unique, and chaotic time in Washington. The desired changes could lead to significantly better or worse outcomes, keeping markets on edge.

The Department of Government Efficiency (DOGE), which we hope can reduce the US government’s annual deficit by eliminating waste, fraud, and abuse within the Federal government, is off to a mixed start. While the website “polymarket.com/doge” suggests they have already identified $115 billion in annual savings, the media focus has been more on Elon Musk and the number of jobs potentially impacted. A respected research service recently increased their estimate of government worker layoffs before July 4, 2026, to more than 10% of current employees. This adds to current economic concerns and raises questions about the follow-on impacts, further exacerbating market uncertainty.

US stocks have accordingly fallen, dropping over 9% from peak year-to-date gains of nearly 5% to now sit near -4% for the year. Meanwhile, ten-year treasury bonds have rallied in price by about 3%, pushing the yield from 4.6% in January down to 4.2%, near the lowest since last September. This performance combination usually suggests a weakening economy and slowing earnings, ultimately pulling inflation down. Interestingly, while President Trump and his team believe targeted countries will pay the tariffs, most economists view tariffs as a tax that US businesses and consumers will pay through higher prices. Stocks could decline in either case, but if inflation rises rather than falls, the current decline in bond yields may be temporary.

S&P 500 Pulled Back to Pre-Election Level Following Strong Market Growth

S&P 500 Net Total Return (12/31/2023 – 03/31/2025)3

A Word of Caution

Before we get into what we are doing about this elevated uncertainty, let us tell you what we aren’t doing: we aren’t getting swept up in the short-term day-to-day uncertainty. When investors start making major decisions based on short-term changes in macro numbers, we think that is risky. We’ve recently read that the most important decisions one needs to make today include whether the US is going to become partners with Russia, how the Middle East will end up, how much tariffs will increase inflation, how badly the DOGE layoffs will impact the economy, whether US exceptionalism is dead and US equities should be underweighted, etc. We don’t profess to know the answers to these questions. Yes, we have hunches and opinions like everyone else, but we also have enough experience to know that we don’t know nearly enough to correctly predict any of these outcomes let alone the preponderance of them.

Making too many decisions is usually harmful to long-term returns. I’ll briefly share my first lesson on this. On Black Monday, October 19, 1987, the Dow Jones fell by 22.6%, the largest one-day percentage return on record. Many people believed this signaled that the US was entering a depression ala 1929, the previous largest one-day percentage decline (-13.5%). As a 20-something-year-old, how could I disagree? I read all the “analysis” of the day, which was very lopsided, suggesting it was a fait accompli. My then CIO, Dick Huson, admitted that he didn’t know but strongly encouraged us to appreciate that nobody else did either, and so we should stay the course. He noted that the drop was many standard deviations above average, and it was a poor time to sell (it turned out to be a 28 standard deviation event, equivalent to a man who is 300 miles tall!). One month later, the S&P 500 returned 7%, and three months after that, it appreciated 18%. There was no depression; instead, we had elevated volatility and attractive returns.

Another event worth mentioning is the Global Financial Crisis of 2008, the biggest peak-to-trough loss since the great depression. The S&P peaked on October 11, 2007, before the US housing bubble-inspired credit crunch brought the financial world to its knees. As the world watched, the Fed let Lehman Brothers collapse, and financial contagion threatened further collapses. Markets fell precipitously before cooler heads finally prevailed, but not before the market had fallen nearly 57% by March 9, 2009.  Four years later, the S&P had gained 150% (nearly 26% per annum) to recover to its previous high. Ten-year returns from the pre-crash high in 2007 were 104%, equal to 7.4% per annum.

Timing the exact moment to get out of and then back into the markets is very difficult. This is why we partner with some of the very best managers in the world and why we try to limit the number and size of decisions we make. The stock market can be volatile and can go down. Nevertheless, we have not found a liquid asset that can provide better, reasonably consistent, above-average long-term returns to hold in our portfolios. This is why we are careful not to get underweight equities and will only modestly overweight them if we believe a significant opportunity exists. When asked, we counsel others to do the same if they are trying to generate above-average long-term results.

Enough, what are we doing?

For now, we assume mainstream economists are correct in believing tariffs will negatively affect the US economy. Estimates are changing quickly, but aggregating estimates from different sources suggests that the US GDP is expected to slow down by 0.5% – 1% due to the expected newly implemented tariffs. This could lead to job losses of up to 200,000 on top of those laid off by DOGE, and consumer prices could rise by 1%. Combined with immigrant deportations and strict border control, this should reduce aggregate consumer spending. On the flip side, the current tariffs could raise $1.5 trillion over the next 10 years. A 10% universal tariff could raise $2 trillion, and a 20% universal tariff could raise $3.3 trillion over that period. However, these estimates do not account for potential retaliatory actions by other countries or the duration of the tariffs. Our economic future is murkier than it seemed three months ago.

Are we trimming our equity holdings, you ask? Not yet. Looking forward, we see continued productivity gains in the US and globally from the adoption and incorporation of AI within businesses. Some early adopters are experiencing radical productivity improvements, as noted in ARK Investments’ “Big Ideas 2025” report. They highlight how AI software engineering contributions have risen from 4% to 72% of work. In new drug development, the number of new hypotheses a research scientist could test in one year rose from 20 hypotheses tested in 2023 to 200 tested in 2024. ARK expects technological breakthroughs like these, and others in AI, Autonomous Mobility, and Humanoid Robots, to turbocharge economic growth over the next 5 to 10 years, potentially to as much as 7+% per annum. While this view is uncommonly bullish, AI is a very unique technology, and early adoption will accelerate productivity gains, living standards, and possibly markets.

One other area we are exploring is Europe. While the US is experiencing tremendous change, Europe is in the throes of generational change. We believe Europe’s newfound focus on self-reliance, more rational energy and fiscal policies, reduced austerity, less regulation, and more defense spending (much of these changes have been foisted upon them by a now undependable US) may allow Europe to emerge from what many perceive to be a self-induced 15- to 20- year malaise. The internal debate continues about whether Europe presents opportunities for additional investment in our portfolios.

Wrapping it Up

We have strayed further than intended in this letter. Our main point is that things are moving very fast. Volatility is likely to remain elevated for a time and will cause some investors to lose focus on their long-term goals and instead make unnecessary decisions that will likely need to be reversed. We try to avoid making too many decisions with poor information during these times and instead continue to look forward and stay focused on what the future world might look like. Skating to where the puck will be is always our goal.

Rather than make decisions under uncertainty, we believe now is a good time to look over the potential valley and ask ourselves how AI might impact the world in the next 3-5 years and what could that mean. We don’t know if markets will pull back as they did after the internet bubble or if the advancements this time are so significant that technology’s full valuation has not yet been realized. Combining an expected more volatile short-term period with a brighter long-term view, we will navigate this period by owning more hedges designed to capture market unease while partnering with the best managers globally and remaining invested for the long term. If the economy weakens and inflation decreases, bonds may perform better. Bonds could perform better still if the DOGE succeeds in cutting the budget deficit.

Equities are expected to experience increased volatility this year as the political environment seeks a new equilibrium and tariff uncertainties get answered. While tariffs may slow economic growth and boost inflation—potentially triggering stagflation fears—the expected productivity gains and growth benefits from AI adoption should help temper any excessive market pessimism.  This period should be temporary. Subsequently, we can imagine a scenario where conflict fatigue leads to a calmer global environment. In this scenario, the potential success of the DOGE combined with lower taxes, less regulation, and more efficiency may allow the US to ease its tariff program, creating a more favorable cycle for both global GDP and equity markets. As we move forward, we will continue to share our thoughts and insights with you. For now, we are staying close to our strategic asset allocation targets: 65% in the All Country World Index (ACWI), 20% in hedge funds, and 15% in the Bloomberg Aggregate Bond Index (AGG).

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

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.

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.

The Hard Part

This quarter, we aim to address a topic that will likely elicit a range of opinions: the fiscal trajectory of the United States, the impact of the newly formed Department of Government Efficiency (DOGE) on that trajectory, and their implications for the markets. Driven by our concern over the nation’s unsustainable fiscal path, we are committed to offering a hopeful and constructive perspective, with the goal of providing a balanced and thoughtful analysis.

This is an excerpt from a longer commentary. Please Download the PDF to read the entire 4th Quarter 2024 CIO Commentary.

Not So Fast, My Friend

Lee Corso was born in 1935 in Cicero, Illinois, the son of immigrant parents. After a long career playing and then coaching college football, he was hired by ESPN in 1987 as an analyst for its Saturday “College Game Day” program where he has been a fixture ever since. Lee Corso may have seen more college football than any person alive. At the end of the show each week, analysts predict which team will win different games. When it’s Lee’s turn to make a pick, and he disagrees with someone ahead of him, he will often say, “Not so fast, my friend,” and then explain why the other team will win the game. He isn’t always right, but he always has good reasons and is usually worth watching and listening to.

As we observe markets today, the persistent climb through the end of August is beginning to give us that “Not so fast, my friend” sense. Make no mistake, we have been bullish for quite some time, even up to and including last quarter’s letter. What is changing for us is the level of the market versus our perception of the increasing level of uncertainty. Markets do not like uncertainty. This is why we often see them make most of their election year gains in the fourth quarter, particularly when the incumbent party wins. The uncertainty of the outcome constrains the markets. Investors are not sure if the stocks to own are the ones that would likely benefit from one party’s proposed policies. Until the outcome of the presidential race becomes more apparent, investors often sit on the sidelines. Once clarity returns, markets usually benefit. It is also worth noting that, seasonally, the October–December period is the strongest of the year.

This is an excerpt from a longer commentary. Please Download the PDF to read the entire 3rd Quarter 2024 CIO Commentary.

The Times, They Are About to Change

Every quarter for nearly nine years we have sent this CIO Commentary with the goal of sharing our view of what is happening in the global capital markets and how we are incorporating that information into the portfolios we manage for you. We will do a little of that this quarter before sharing with you some comments from Jensen Huang, Co-Founder and CEO of NVIDIA. Mr. Huang’s company makes the fastest and most sought-after graphics processing units (GPUs) in the world. These chips are in high demand to run artificial intelligence (AI) workloads and applications. Whether we like it or not, we are all likely in for more change than normal as we are only in the first few innings of AI development. The chart below highlights the growing focus on AI on recent earnings calls. As you can see, AI mentions are prevalent across companies within every sector.

Record Number of Companies Within S&P 500 Citing “AI” in Q1’24 Earnings Call, Extending Beyond IT Companies1

Before going any further, here is a quick rundown on what’s going on in the markets. It was another mostly positive quarter with global and US equities up and hedge funds also advancing— both despite seesawing interest rates caused by fears of inflation being stickier than anticipated. As you might imagine, this does not surprise us. And we are increasingly beginning to think that whether the US Federal Reserve (Fed) eases in the third quarter, the fourth quarter, or sometime next year is unimportant. Blasphemy, you say! Of course, the timing of the first easing will impact individual quarterly performance. But a year from now, we believe it won’t really matter to ultimate returns, other than their timing. In the meantime, we will continue to try to take advantage of opportunities created by other investors who react to each of the latest changes in expected timing. For example, we may further extend duration in fixed income if interest rates push high enough.

Of course, it bears noting that if the Fed actually raises rates due to reaccelerating inflation or unhinged expectations — or, if the central bank lowers rates precipitously due to a material economic slowdown or dramatic increase in unemployment — the Fed (and the whole economy!) would indeed matter. In either case, we might need to rethink our positioning.

For now, we expect stocks will rise and fall with rate cut expectations (up when expectations for easing rise, down when they fall). But in the end, we continue to believe the economy is healthy and that stocks will finish the year higher than they are today. Corporate earnings in Q1 were strong, with 81% of S&P 500 companies beating estimates, supporting the view that the global economy remains firm. Yes, valuations are still somewhat elevated, but as mentioned in earlier letters, firm earnings growth this year can support both modestly higher prices and some moderation in valuations. We remain near our funds’ strategic asset allocation targets (65% global equities/20% diversifiers/15% fixed income).

Geo-politics remain messy, but within the range of expectations. We continue to believe that by this time next year both the Middle East and the Russia-Ukraine wars can reach a negotiated settlement (especially important for humanity’s sake). The US elections will be over, and our country will have another chance to come together behind whomever wins. In our view, either candidate will spend too much, keeping pressure on the US budget deficit. From that perspective, we’re rooting against consolidated power where one party controls both the House and Senate in addition to the oval office.

Finally, yes, we did sort of skim over the possibility of inflation remaining too high. We read JPMorgan Chase chairman and CEO Jamie Dimon’s suggestion that the 10-year Treasury could reach 6%, and we take comfort knowing that the Fed read it too. Nobody wants inflation to get out of control again, and the Fed is paying attention. That is why, in our view, they haven’t cut rates even after suggesting it was likely. Like the rest of us, policy makers experienced what 9% inflation feels like; they don’t want to move back there. Accordingly, we believe that rates may stay higher for longer, but won’t need to be raised. To us this implies that the “rules of the investment game” aren’t about to change as they did in 2022, and markets can continue to improve. The biggest long-term concern for us remains the US budget deficit. We recently saw one Wall Street firm publish projections for net coupon supply, specifically what non-Fed investors have to absorb in 2024 by quarter: $340bn, $520bn, $540bn, and $460bn. That’s $1.86 trillion in new coupon debt that investors will need to choose to buy. The good news is that the same firm estimates that US households are now receiving $3.7 trillion per annum in interest and dividend payments. All of these are the biggest numbers we’ve ever seen and may continue to rise for many years to come.

On to Mr. Huang’s Comments

Bill Gates believes AI is a brilliant tool that will provide the biggest productivity advancement in our lifetime. Elon Musk has said AI is more dangerous than nukes and, that someday, it will take all of our jobs. Maybe these opinions are correct or maybe not — time will tell. We do believe that AI will have a material impact on society and the future direction of markets, companies, and individuals. We are already seeing the impact of increased demand for semiconductor chips to support the AI revolution. Accordingly, we thought that this quarter it would be good to share with you a bird’s eye view of what the CEO of NVIDIA, the leading AI “arms dealer” in the world, said on his recent conference call, during which the company reported Q1 revenue up 262% year over year to $26 billion. This has not gone unnoticed by investors, as shown by this chart:

NVIDIA’s Market Cap has Reached $3.1 Trillion in June 20242…

…Which has Exceeded Key Semiconductor Companies’ Market Cap Total of $2.4 Trillion3

Jensen Huang on NVIDIA’s May 22, 2024, Q1 Conference Call with Investors:

“The industry is going through a major change. Before we start Q&A, let me give you some perspective on the importance of the transformation.

“The next Industrial Revolution has begun. Companies and countries are partnering with NVIDIA to shift the $1 trillion installed base of traditional data centers to accelerated computing, and build a new type of data center, AI factories, to produce a new commodity, artificial intelligence.

“AI will bring significant productivity gains to nearly every industry, and help companies be more cost- and energy-efficient, while expanding revenue opportunities. CSPs [cloud service providers] were the first generative AI movers. With NVIDIA, CSPs accelerated workloads to save money and power. The tokens [bits of information] generated by NVIDIA Hopper drive revenues for their AI services, and NVIDIA Cloud instances attract rental customers from our rich ecosystem of developers.

“…accelerating demand for generative AI training and inference on the Hopper platform propels our data center growth. Training continues to scale as models learn to be multi-modal, understanding text, speech, images, video and 3D, and learn to reason and plan. Our inference workloads are growing incredibly.

“With generative AI, inference, which is now about fast token generation at massive scale, has become incredibly complex. Generative AI is driving a firm foundation up full stack computing platform shift that will transform every computer interaction. From today’s information retrieval model, we are shifting to an answers and skills generation model of computing. AI will understand context and our intentions, be knowledgeable, reason, plan, and perform tasks.

“Token generation will drive a multi-year build-out of AI factories. Beyond cloud service providers, generative AI has expanded to consumer internet companies and enterprise, sovereign AI, automotive, and healthcare customers, creating multiple multi-billion-dollar vertical markets.”

In the Q&A session that followed, Mr. Huang answered numerous questions and we highlight one here:

Q: “Jensen, what checks have you built in the system to give us confidence that monetization is keeping pace with your really, very strong shipment growth?

A (Jensen Huang): “The demand for our GPUs in all the data centers is incredible. We’re racing every single day. And the reason for that is because applications like ChatGPT and GPT-4o, and now it’s going to be multi-modality and Gemini and its ramp, and Anthropic and all of the work that’s being done at all the CSPs are consuming every GPU that’s out there.

“There’s also a long line of generative AI startups. Some 15,000, 20,000 startups that, in all different fields, from multimedia to digital characters, of course, all kinds of design tool application, productivity applications, digital biology, the movement —the moving of the AV industry to video, so that they can train end-to-end models to expand the operating domain of self-driving cars, the list is just quite extraordinary. We’re racing, actually.

“And the reason for that is because the computer is no longer an instruction-driven-only computer. It’s an intention-understanding computer. And it understands, of course, the way we interact with it, but it also understands our meaning, what we intend that we asked it to do, and it has the ability to reason, inference iteratively to process a plan and come back with a solution.

“And so, every aspect of the computer is changing in such a way that instead of retrieving pre-recorded files, it is now generating contextually relevant, intelligent answers.”

There is much more from this call that humbles us to read. Technology always moves faster than most of us can imagine. Today, it appears to be accelerating at an even faster pace. The importance of AI and the chips it is built on is not lost on countries either. This chart shows the importance most every country is placing on improving their onshore capabilities in the production of semiconductor chips.

Country’s Rate of Growth in Fab Capacity
US fabrication facility (fab) capacity as measured by wafer starts per month (WSPM) is projected to triple over the next decade, increasing by 203%, the largest projected percent increase in the world4

What this portends for each of us and for the entire world is hard to predict today, but change is coming in many areas.

It is hard to have a strong opinion about the impact of AI, because we are so early in its evolution today. Asked to share our thoughts at such an early stage is condemning us to future embarrassment. We are constantly trying to catch up with the latest advancements and expect this will continue for many years to come. Therefore, it is with great humility that we share our early thoughts on how we believe AI might shape the future.

How will AI Shape the Future?*

The future will be much faster paced than most people are accustomed to. The success of AI will enable those with mastery to change the direction of existing or new firms with a few keystrokes rather than the long and laborious time required to change hearts and minds of co-workers, bosses, and boards. This acceleration of pace will require each of us to adapt and to change much faster. Some will excel in this environment, but many will likely be replaced by machines that can do their jobs faster, better, and cheaper, and without the coddling required to maintain harmony within an organization.

Many try to compare this to the internet bubble in the late 1990’s/early 2000’s. True, there are similarities, including the prospects of AI breaking out of the tech space to become a productivity and growth enhancer across many industries. The breadth of possibilities has encouraged us to be more understanding around current valuations. New technologies with universal application do not arrive on the scene very often, so properly valuing the most exposed companies today is more difficult than valuing a more entrenched and understandable business. There are also differences from the internet period, some of which make forecasting valuations even more difficult. First, the companies leading the charge today are the best and biggest in the world, locked in an existential fight to lead the AI charge. NVIDIA, the preeminent pick-and-shovel provider, grew its $26 billion Q1 revenue from $19 billion three months earlier, and from just $7.2 billion the year before. The company’s customers are essentially the Magnificent Seven, each spending billions to lead in the creation of new revenue streams. Those who can build those revenue streams and fund continuing innovation have the potential to lead technology advances for many years to come. That deep-pocketed corporate spending differs greatly from the internet age, which largely relied on private or other finite pools of capital.

In the early days, AI will most likely find uses in more prosaic tasks, such as operating call centers and writing the most basic portions of software and first drafts of often-written letters and emails. In time, life-extending medical breakthroughs in gene editing and molecular biology, quantum computing, fusion research, and a deeper understanding of what humans really want when they ask for something will all likely see AI applications. Elon Musk postulated that if the number of workers times productivity-per-worker = gross domestic product (GDP), then combining AI with the robots Tesla intends to deliver this year could remove the limit on GDP by essentially making the number of workers limitless.

Less optimistically, this could prove a tricky time for humanity, especially if capable robots can be fitted with the intelligence of a machine that knows everything that has come before it and can process new data with extreme speed. Some suggest that successful people will gravitate away from trying to compete with AI on an intellectual level and focus more on social skills where they will be dealing with humans and emotions. If AI does displace humans as the smartest entities on earth, we will need strong global AI governance policies and enforcement mechanisms to ensure a fair and just transition. Managing this new world for the betterment of all mankind will be hugely important and likely difficult with global guidelines that can be adhered to and enforced. If a rogue actor enlists AI for nefarious purposes, it could become very difficult for those playing by the rules. We suspect other resource constraints will develop and could be contested by those willing to break the rules.

How Are We Incorporating AI at TIFF?

A core component of our job at TIFF is to deploy your capital based on our best estimate of future economic conditions. When a breakthrough technology emerges that could change the future, it is important for us to incorporate that development into our assessments. Because we believe the recent AI advances represent such a breakthrough, we have made three early adjustments to business at TIFF. First, we started to incorporate elements of AI into our workflow and processes to enhance productivity. Second, we shifted some capital within our portfolios to managers we believe are best positioned to make use of this new technology in their processes. Third, we have been careful not to be too far underweight the mega-cap stocks that are most directly involved in leading the AI charge. It is inevitable that some of our assessments will be wrong and that we will need to learn and adjust, but that’s OK. As Woody Allen once said, “90% of life is showing up.” We will keep learning and trying our best to keep our investments aligned with our best judgments of the future.

The economic trend toward “winner take more,” which we are seeing in the hyper scaling of some large tech companies, will likely continue and may even accelerate. Warren Buffet’s shift from buying OK companies at great prices to buying great companies at OK prices will likely be rewarded more than ever. It may be that buying great companies at any price becomes a common practice for a period of time. In the end, of course, history has shown that if this sort of stock market behavior gets taken to an extreme it can end badly.

The AI shift could happen faster than we imagine. Over the next several years it will be important for each of us to understand how AI is evolving and being incorporated into both business and people’s daily lives. We all want to hand off the boring, mundane, or difficult parts of our jobs and keep those bits we like. In a perfect world that may be possible. If you enjoy a thinking job, it may be harder to achieve. Nevertheless, we remain optimistic that harnessing AI for good is what lies directly ahead, and any potential downsides will be farther off in the future.

As always, we very much appreciate the opportunity to help manage your capital and to help you achieve your organization’s goals. We are here to assist you in any way possible, so please reach out and let us know how we can help.

Your TIFF Investment Team

*With great thanks to Oliver Bardon, Brad Calder, Trevor Graham, and Zhe Shen for their help and insights in thinking and writing about how AI might shape our future.

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.

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.