Category: Insights

Executive Summary

• Investors considering timing equities should proceed with caution
• Forecasting returns, particularly over short-time horizons, is very difficult
• Underweighting equities often results in unattractive opportunity costs
• Successfully timing the decision to return to a normal long-term allocation requires extreme fortitude

The past few months have been a period of very high volatility in equities due to several factors. Items weighing on investors likely include a combination of President Trump’s decision to increase tariffs on imports, continued tensions between the US and China, unclear resolutions to the armed conflicts in Gaza and Ukraine, and uncertainty from the DOGE initiative, which could either help balance the budget resulting in a more efficient US government or weaken a variety of strategically important social services and government programs. We have started to receive some questions from clients about the merits of underweighting equities relative to their long-term strategic targets. In general, we do not recommend that course of action for several reasons:

1. Forecasting Challenges

It would add material value if we could avoid the very worst months or quarters in equities. Unfortunately, forecasting in investments is unlike forecasting in most other fields. Predicting outcomes over the next month or year is not that difficult in most industries. Most owners and operators of businesses have a good idea of how their company will perform over the next month or quarter. However, forecasting business outcomes over the next ten years is much more difficult, if not impossible, for most sectors. For example, many publicly traded companies provide guidance for the next year but very few provide detailed guidance beyond that. Forecasting in investments is exactly the opposite. The range of annualized returns for monthly or quarterly data points is very wide. If we instead looked at rolling five-year outcomes and annualized those results, the range of IRRs would be considerably tighter. In investments, the longer the time horizon becomes, the easier it is to accurately predict the rate of return. The table below illustrates that shorter periods show a wider range of outcomes, with a 72% spread between the best and worst months. In contrast, longer periods, like five years, have a much narrower range, with approximately a 10% spread.

Range of Annualized Returns at Different Measurement Intervals, 1945-20241

We observe the challenges in short-term forecasting when evaluating managers. One of the methods we use to evaluate equity long/short hedge funds is to decompose the sources of excess returns into three categories: longs, shorts, and value-added from variance in net exposure. Across a growing library of several hundred different managers, we have seen very little evidence of statistically significant value-added from short-term variance in the net by equity-oriented hedge fund managers. We utilize a similar strategy for long-only managers who prefer to hold cash. It is very rare for the managers’ actual realized results to outperform a pro forma portfolio that grosses up their holdings such that they would have been at least 95% fully invested at all times. Even among trend-following managers, who are much more focused on market timing, we have seen mixed results. Short-term forecasting is very difficult.

2. Opportunity Costs

If we instead rely on longer-term forecasts, which are typically more accurate, we encounter a different problem. For an institutional portfolio, the meter is always running. We do not get to call capital when interesting opportunities arise and give it back when there are less attractive options. When we reduce equities, the capital must go somewhere else. The most obvious alternative to stocks when people are concerned about the risk of losing money is bonds or cash. The problem we face as investors is there are not many periods when bonds or cash outperform stocks over reasonable forecast horizons. We have used the S&P 500 and the benchmark 10-year Treasury bond for our analysis below.

Average Relative Results: Stocks vs. Bonds2

Even if the next five or ten years will in fact turn out to be one of these unusual periods when the return on equity is disappointing, it is important to evaluate the alternative use of capital. Revisiting the first chart and assuming the next five years will generally be a bottom-quartile return period for stocks, we can roughly estimate a 5% annualized return. The problem is that the yield to maturity on the 10-year Treasury bond is only 4.2%3. Selling something with an estimated return of roughly 5% to buy something that we should reasonably expect to return 4% is still a long-term expected performance concession. As outlined in Jay Willoughby’s Q4 2024 CIO Commentary and given some of the fiscal challenges the US faces, we think a much higher starting yield to maturity on bonds would be required for investors to consider materially underweighting equities in favor of bonds.

3. Psychology and the Pattern of Returns

For an equity market timing strategy to be successful, investors need to get two calls correct, not one. Those who underweight their long-term strategic targets will eventually need to decide when to return the equity allocation to its normal level. This second decision is key because, in equities, the big days are very important. Since 1945, the annualized return on the S&P 500 is roughly 7.9%4. If we exclude the top 1% return days, the annualized return would be a loss of -1.8%. Market prices tend to overshoot the changes to long-term fundamentals. As a result, equities are often undervalued at the bottoms of drawdowns. Also, markets discount anticipated economic conditions. When sentiment finally improves at the bottom of a drawdown, prices can move back up very quickly. The tables below show the best single day returns for the S&P 500 since 1945. All of them occurred during points in the cycle when uncertainty and volatility were very high. Because the absolute best days and worst days tend to cluster together, mistiming one of the two decisions, even by a day, can be very damaging. The best time to add to equities will often be at the point in the cycle in which doing so feels the most uncomfortable. The average investor who tries to time the market is highly likely to miss at least the first part of the recovery. Missing these big days often locks in long-term underperformance.

Highest Single Day Returns for the S&P 500, 1945 – 20245

Conclusion

While equity market volatility can be unsettling, maintaining a long-term perspective on equities is crucial for achieving optimal investment outcomes. Predicting short-term market movements is highly challenging, and the costs of missing key recovery days can be significant. By sticking to a long-term strategy around equities, investors can avoid market-timing pitfalls and benefit from the growth potential of owning stocks. Our tactical adjustments to equity exposure tend to be small because we understand how difficult it is to do this well. We tend to be biased to overweights because that improves our odds of generating good returns.

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.

Restricted Funds – Why the Endowment Can’t Save a Budget – Johns Hopkins University Case Study

Following federal funding cuts, Johns Hopkins University (“JHU”) announced that they will repurpose a portion of its existing spend from their $13.1B endowment to help fill their c. $1B research funding gap. The cuts hit JHU particularly hard, as JHU is the largest recipient of NIH (National Institute of Health) grants, and over 50% of its revenue comes from federal funding.1 JHU has already lost over 100 federal research grants and cut 2,200 jobs following the USAID cuts.2

Why can’t JHU take more out of the endowment to support the gap? Why can it only repurpose existing funds?

JHU’s endowment, which has 78% of its AUM in donor-restricted funds, highlights the nuances of endowments that add a layer of complexity when trying to solve budget issues.

What are restricted funds?

Endowments are often made up of many underlying gifts. A portion of these gifts are unrestricted, meaning the institution can use those funds for any purpose it sees fit. However, there are also restricted funds, which occurs when the donor provided stipulations about how those funds can be spent. Examples could include financial aid for specific criteria (e.g., geographic focus, major focus), faculty support (e.g., endowed chairs), specific school funding (e.g., library books only), among a number of other purposes. An institution can decline any gift with overly stringent stipulations. These stipulations are legally binding and therefore not easily changed.

To change a restricted fund stipulation, institutions either need the original donor to change the legal document, or, if the original donor is now deceased, the institution can petition its state’s Attorney General to change it. A revision is likely a broader application of the original intent, not to unrestricted purpose.

Why can’t restricted funds be used to fill any funding gap?

Restricted funds can only be used for their designated purpose, meaning the endowment is not a carte blanche savings account for the institution. Only unrestricted funds can be used for these emergency purposes, reducing the funds available for special appropriations.

Johns Hopkins University: A Case Study on Restricted Funds

JHU has a $13.1B endowment, 78% ($10.2B) of which represents restricted funds. JHU notes that its endowment is comprised of approximately 4,700 individual funds, including both restricted and unrestricted funds. JHU’s endowment supported 6% of its budget in FY24, while federal contracts represented more than 50%. JHU withdrew 4.2% from its endowment in FY24.3

JHU’s high allocation to restricted funds provides the university with less flexibility in how the organization can use its endowment. Of those restricted funds, only 7% are designated for research and the stipulations may be too narrow for funding cut-related projects.  To entirely replace lost funding, JHU would be required to use one-third of its unrestricted funds ($2.9B). Covering the entire funding cuts would deplete all of the unrestricted funds in 3 years. Because endowed funds must exist in perpetuity per the Uniform Prudent Management of Institutional Funds Act (UPMIFA), this solution is not feasible, which is why JHU ultimately repurposed the existing endowment payout instead of taking more from the endowment.

Johns Hopkins University Endowment Details

The Baltimore Banner reported on JHU’s statement on the issue of restricted funds: “It’s a common misconception that universities can simply “use the endowment” in moments like this. The reality is that most of our endowment is made up of legally restricted funds designated by donors for specific purposes. The principal of the endowment must legally be preserved in perpetuity — to support Johns Hopkins’ mission now and for future generations — and cannot be drawn down like a reserve fund. That said, we are using flexible resources — some of which are tied to endowment earnings — to help sustain critical research in this moment of uncertainty.”4

Conclusion

Higher education institutions face many challenges today with federal funding cuts. The nuances of endowments make it hard for institutions to utilize just the endowment to solve budget issues. In addition to the “in perpetuity” requirement for endowed funds (meaning taking out too much continuously will ultimately drain the endowment), the restricted vs. unrestricted funds dynamic is another factor institutions contend with.

For its clients, TIFF is focused on ensuring each client’s Strategic Asset Allocation, in particular, liquidity, is tailored to the unique circumstances of each institution. Understanding the structure of your endowed funds, and broader institution’s financial circumstances, can help any institution weather a challenging time such as we are in currently.

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.

Nonprofits in the United States are facing unprecedented financial hardship. Swift federal policy changes have left organizations in a state of urgency and confusion as the government grants and contracts they have regularly relied on have been canceled or held in limbo. How does the changing policy landscape impact nonprofits’ ability to deliver their services? What can fundraisers do to ensure they can secure funding to continue to deliver their services?

How did we get here?

The federal government has used the nonprofit sector to provide services to address poverty and social issues since the Johnson administration. The sector has also seen tremendous growth over time, with the number of nonprofits increasing by 60% between 1998-2023. The government’s investment in the sector is critical: as an Urban Institute report shows “[i]n every state, every congressional district, and more than 95% of counties in the United States, public charities receive government grants” which totals to $267B.  As the Trump administration moves away from providing government grants to nonprofits, fundraisers are left with a huge gap to fill.

How can fundraisers address this moment?

While the sheer size of this funding gap is daunting, there are strategies leaders can take to educate their teams, engage existing supporters, and secure funding to maintain services:

• Stay up to date: Organizations like the National Council of Nonprofits regularly provide updates and resources on policy changes that impact nonprofits. By finding similar resources for your industry, fundraisers can keep abreast of changes without overwhelming themselves.
• Mobilize your donor base: If organizations are transparent with supporters about the financial risk they face, donors may step up to invest in your organization in new and meaningful ways. Consider how you can solicit your individual donors differently to fund programs or build up your corporate partnerships.
• Connect with fellow fundraisers: No individual or organization should address uncertainty in isolation. Find avenues to connect with professional development groups and attend conferences to both learn from and support your peers.
• Access emergency funding: Foundations and philanthropists are providing emergency funding to nonprofits during this turbulent time. The Chronicle of Philanthropy is regularly updating its website with information on the different funds available to organizations

To learn more about how you can help your organization navigate financial uncertainty, register for the webinar Fundraising in a Time of Uncertainty on Wednesday, May 7, 2025, from 10-11AM ET. This webinar will feature Jessica Portis, Chief Client Officer at TIFF in conversation with Ebonie Johnson Cooper, Faculty Director, Do Good Institute at the University of Maryland’s School of Public Policy and Martin Sanders, Adjunct Faculty at the University of Maryland’s School of Public Policy.

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.

Yale’s Potential $6B Secondary Sale and its FY26 “Constrained” Budget – Could They Be Related?

News broke this week that Yale University is seeking a secondary sale of up to $6B of private equity interests from its $41.4B endowment.1

While this action is historic, it is part of a broader narrative about the challenges higher education faces and the strategies institutions employ to manage uncertain budgets. As noted in a previous article, in the face of lower revenue due to federal funding cuts or endowment taxes, these institutions must carefully balance supporting their mission while maintaining the endowment in perpetuity. Yale’s drafting of a “constrained” FY2026 budget in response to funding cuts highlights the reality that there is no easy, single answer to managing these uncertain times. Institutions must look at their budget as well as at the endowment to come up with a solution. TIFF anticipates that other schools may need to adjust their budgets, and Yale’s secondary sale is likely not the last.

TIFF reminds its clients that having a liquidity profile and Strategic Asset Allocation that meets an institution’s unique circumstances is key during periods of uncertainty. Misalignment between an institution’s endowment strategy and its overall goals often leads to actions such as this.

Why this sale is historic for Yale

Yale literally wrote the book on endowment model, with late Yale CIO legend David Swensen’s “Pioneering Portfolio Management” becoming the penultimate guide to utilizing alternatives in portfolio construction. Yale is one of the largest private equity investors in the world, with over $20B in private equity and venture capital, and an additional $5B in real assets2. This sale represents a significant transaction for Yale, potentially involving more than 20% of its private equity holdings and nearly 15% of its entire portfolio. Finally, this is reported to be Yale’s first time selling any of its private assets.3

Why could Yale be doing this?

Secondaries Investor notes Yale is attributing the sale to its portfolio management needs. TIFF estimates this move is aimed at adjusting asset allocations and potentially creating liquidity.

1. Asset allocation shifts: Yale’s 3-year performance is a modest 2.7%, which is 5.5% below its long-term target of 8.25% (spend rate target + inflation). Similar to many other large endowments with substantial private allocations, Yale has underperformed due to its significant private markets allocation. While Yale’s 10-year return remains above target at 9.5% due to those same private asset classes, recent underperformance may be pushing Yale to reconsider its asset allocation weights or the expected returns of existing investments. Yale explicitly stated it continues to believe in private equity: “We remain committed to private equity investment as a major part of our investment program and continue to make new commitments to funds.”4 Yale may believe the outlook is better for new capital deployed (in private equity or elsewhere) vs. the existing assets, despite the costs of transacting a secondary.

   Yale has shown its willingness to shift its target allocation year to year. The last time Yale shared its asset class targets in FY2020, privates were 55%, up from FY2019, with allocations shifting towards buyouts and venture capital and away from real assets.

   

2. Increase liquidity to provide optionality for Yale budget support: Yale may want to increase the liquidity in its portfolio to support potential budgetary needs, despite stating that this sale is for portfolio management purposes. If executed at $6B, this sale would increase liquidity dramatically. TIFF estimates Yale’s current level of illiquidity at c. 50%, which is the lowest level of privates in six years. Post-sale, illiquidity would decrease to an estimated 36%.

Yale Endowment Private Allocation Over Time

What it says about challenges higher ed face and how this impacts endowments

Despite the comment that this sale is for portfolio management needs and has been underway for months, recent federal policy proposals and actions could also be influencing the need to increase liquidity.

Yale is already planning for lower funding and will be drafting a “constrained” budget for FY2026. In a letter to the larger Yale community, the Yale administration noted the budget would include reductions in spending on faculty raises, faculty and staff hiring, campus construction, and general non-salary expenditures.5

Federal funding cuts: In FY24, Yale received $899 million from the federal government for academic research and training.6 While Yale has not yet received any letters from the Department of Education, its Ivy League peers Columbia, Harvard, and Cornell have, setting the likely stage that Yale is close behind.

Increased endowment tax: Yale relies heavily on its endowment, which was the single largest source of revenue at 34% in FY24.7 Yale is already subject to the existing 1.4% endowment tax. An increase to the endowment rate would decrease the dollar amount available to support the budget.

Other federal proposals that would impact funding: Harvard has been threatened with the loss of its tax-exempt status and ability to enroll foreign students, both which would tremendously impact revenue. Yale could potentially encounter similar challenges.

Conclusion: Yale – A Canary for More Budget Cuts & LP Secondary Sales?

Higher education is facing a multitude of challenges in a changing federal policy landscape, prompting institutions to adapt through budget and endowment adjustments. TIFF anticipates that other impacted higher education institutions may need to adjust their budgets to address these evolving financial pressures.

TIFF also believes Yale won’t be the last to clean up its endowment, shoring up liquidity and rightsizing asset allocation, through secondary sales. Following the Global Financial Crisis, we saw a large increase in LP secondary sales as many nonprofits were overallocated to private investments. We haven’t seen the same phenomenon post-COVID, as many institutions learned their lesson and better managed their portfolios to avoid significant overallocation. However, current federal policy pressures on budgets may force overallocated nonprofits to finally take action and enter the secondary market.

All this being said, TIFF reminds investors that Yale may not represent the average endowment. It is crucial for institutions to have a liquidity profile and Strategic Asset Allocation that meets their unique circumstances, especially during periods of uncertainty. Misalignment between an institution’s endowment strategy and its overall goals often leads to actions such as this. The average private higher education institution has 41% in illiquids, with smaller endowments having even less (average 17%)8, far below Yale’s 50-60%. These institutions generally have more liquidity to navigate changes without restoring drastic actions like Yale’s. TIFF emphasizes the importance of each institution adhering to its own Strategic Asset Allocation, as overallocation is a primary reason for secondary sales.

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.