Category: Insights

Year-End Review and 2022 Outlook

2021 Reflections
It has been another extraordinary year for the world, our country, our Members, and TIFF.  It has been remarkable for us all to have experienced the frequency and magnitudes of the highs and lows of the past year.  A quick reflection recalls the optimism over vaccines, the messy transfer of power in the United States, the all-too-brief periods of bipartisanship in Washington, the successive waves of COVID variants and consequences thereof, and the vigorous debates around schooling, diversity, opportunity, and intergenerational fairness, including around the national debt and the environment. As we write this letter, the omicron variant is returning us to a semi-locked down state, with gatherings and travel canceled by companies and families. It has been a tumultuous and exhausting year that potentially has changed forever the society in which we live.

Similar to the overall societal environment, the markets experienced an interesting mosaic of events, including the full-throttle emergence and subsequent fading of SPACs, the emergence and fading and re-emergence and re-fading and re-emergence, of meme stocks, cryptocurrencies, high-flying “EV” stocks, and growth/value differentials.  The market also saw for the first time in generations the return of inflation and the consequent Federal Reserve and other central bank “pivots.”  Yet through this turbulence, stock markets generally scaled new heights and rewarded patient investors.

As always, we tried to keep a steady head and a steady hand on the portfolios throughout these volatile periods.  As we conclude the year, we have several things for which to be grateful and several things of which to be proud.  Top of that list is our gratitude for your partnership and trust in allowing us to manage your assets.  We intend to continue to earn your trust.  Below, we set forth some of this past year’s developments and offer some perspectives on 2022.

Investment Highlights
Our main mission is to provide strong risk-adjusted investment results to help our Members to achieve their unique organizational goals.  By and large, we think the markets and our team delivered on that mission.

• The equity markets continued to be driven materially higher by accommodative fiscal plans and central banks, and a recovering economic picture. These factors helped our Members achieve strong absolute returns. You can read more about the markets in our most recent 4^th Quarter 2021 CIO Commentary.
• TIFF generally delivered on behalf of our Members outperformance in most strategies against their respective benchmarks. Relative performance was remarkably strong through the first three quarters of the year, before giving back some excess returns in the fourth quarter.
• Our asset allocation decisions, including generally underweighting bonds and staying fully- or slightly over-invested in risk assets, were strongly additive.
• Our portfolio construction decisions, including the types of managers and strategies we chose, were generally beneficial to overall relative returns.
• Our long-only equity managers had a more modest year with much of their year-to-date excess gains relinquished in the fourth quarter. The last few months of 2021 proved difficult for active managers focused on mid-cap and small-cap equity names, as well as certain high growth names, versus well-known large-cap indices.
• Our private equity portfolio had its best historic overall returns, with numerous tremendous exits and distributions. The overall PE program distributed 40% more capital in 2021 than in any single prior year and had historically strong annual returns.
• We continued to expand our private equity program, both in custom implementation as well as in new Member commitments. We believe that our private equity manager access and returns compare well with the market, and we are pleased that many agree with this view.
• As in prior years, our team and our Board of Directors held vigorous debates on a myriad of topics throughout the year, including Chinese government bonds, access to venture capital managers, long-term expected returns from asset classes, and blockchain technology impact, among many others.

Service Highlights
While investment results remain our primary mission, we also believe that our Members greatly value customized advice, proactive service, and a culture that places Members first.  We made significant efforts to improve our exceptional service to our Members:

• We eliminated entry and exit fees for the Multi-Asset Fund “MAF” mutual fund, and we helped our clients transfer assets from the Short-Term Fund “STF” to more efficient cash management solutions.
• We expanded our Member call series, covering topics such as Private Equity Education, Board Governance in an OCIO World, and Public Relations and Internal/External Communications for Nonprofits.
• We developed an educational training program for Members, addressing fundraising and development techniques. A number of you have chosen to join this program, which launches in full in January 2022.
• We completed a comprehensive Member survey and are pleased to report the overall results were strong. While we have several capabilities to enhance based on your input, we are excited to relay that 100% of respondents were satisfied overall with TIFF as their OCIO, 98% were satisfied with TIFF’s service, and 96% were satisfied with TIFF’s investment results.  We will continue to strive to meet or exceed your expectations.
• We continued to add customization capabilities in the areas of analysis and strategic asset allocation advice, private equity implementation, and impact investing.
• A series of new Members joined TIFF throughout 2021. New Members, together with existing Members, added approximately $500mm in assets including committed capital for TIFF’s management. We are thrilled with this vote of confidence in our team, and we look forward to working hard to deliver on our mission for both our new and existing Members.

TIFF Organizational Highlights
TIFF continued to evolve as an organization to serve our Members well and to fortify our culture and stability.  We added a number of new talented individuals to our staff and Board.  We also focused on re-energizing a series of internal initiatives that we believe position TIFF for the future, and which include:

• We continued to add to our investment team, including hiring Zhe Shen (hedge fund senior investor, formerly of The Portland House Group), Julia Zhan (ESG and long-only equities, formerly of Marsoft), and Aanya Parikh (private equity, promoted from TIFF summer intern). These individuals deepen our investment team and allow for more customization of managers and exposures.
• We added a series of client-facing team members, including hiring Matt Hoehn (formerly Senior Director in Blackrock’s E&F OCIO group), Ellen Lieberman (formerly Managing Director at Clearbrook Global Advisors), Jerrol Charles (formerly Vice President of Institutional Investment Solutions at Truist), and Samantha Gross (formerly Senior Associate in Goldman Sachs OCIO group). Similar to the 2020 hiring of Jessica Portis, these new client-facing team members bring a wealth of experience and knowledge in working closely with Members on strategic asset allocation and customized portfolio construction.
• We added Bola Olusanya to our Board. Bola has deep investment experience and is the CIO of The Nature Conservancy.  We look forward to our Members benefiting from his expertise in investing and environmental matters.
• We bid farewell to Pam Peedin after four exceptional years of stewardship as a TIFF director. Pam has decided to return to full-time work in the industry and thus chose to step down from our Board.
• We developed a series of internal processes which are critical to TIFF’s future and supportive of our team’s ongoing development, such as the refinement of our intern program, our diversity initiatives, the development of staff affinity groups, and the introduction of “state-of-the-art” personnel review and incentive schemes. We also celebrated our 30^th year anniversary and welcomed back numerous former Board Members to thank them for their role in shaping TIFF’s mission and organization over the last 30 years.
• We helped advance diversity in our industry in numerous ways, including through our internal policies, as well as our sharing of diversity checklists for 3^rd party managers with the industry.
• We returned to the office in October. Like you, we continue to attempt to balance the safety of our team with our desire to inculcate a strong esprit de corps. It is a challenge these days, but we are pleased to have gathered the team over the past few months.
• We simplified our Mission Statement to better capture the motivations for our organization. Please see the end of this document for our revised Mission Statement

Our Focus in 2022
We are excited about the possibilities in 2022.  We believe that we strengthened an already strong team in 2021.  We expect the team, to accomplish much in 2022, including:

• Continuing strong investment outperformance. We hope to continue to design portfolios with capable underlying managers, to beat benchmarks. We will continue to use our Board as a resource in this effort, even as we expand our own team.
• Systematize a number of processes around customization for our Members. Those processes include research, thought leadership, and investment frameworks.
• Exercise a louder voice on important matters to our Members and society at large, including the environment, diversity, and other public policy issues, such as education and fiscal responsibility.
• Enhance our Member experience, particularly vis-à-vis technology. Notably, we do not expect to expand our call series much further beyond its current breadth as we have heard from you that the current offering roughly strikes the appropriate balance between being useful and not overwhelming.
• We are looking forward to rolling out the TIFF Fundraising Symposium alongside the University of Maryland’s Do Good Institute. This four-part symposium begins in February 2022 and will wrap up in May 2022.
• We are also hopeful that many of our Members, partners, and friends of TIFF will join us at our 2022 Investment Forum planned for November 9-10, 2022 in Boston, MA. More details to come.
• Expand:
  • Our pension advice capabilities. A number of organizations that manage nonprofit capital also have pension assets, and they have requested that we manage both.  We expect to be able to do so this more fully this year.
  • Our private asset capabilities. We continue to believe that private markets provide some of the best opportunities for long-term capital appreciation. We acknowledge that similar to public markets, private market prices have appreciated in the last few years, but we believe the sectors in which we predominantly invest have stayed less efficient, in relative terms. We also believe that we have excess capacity in certain hard-to-access managers and are excited to allow our Members to benefit from this access.

As we enter 2022, we acknowledge some things are in our control and some are not.  We expect to be able to continue our strong investment results – this is the number one focus of the investment team each and every day. We also will continue our focus on our service and advice capabilities.  But, we are merely hopeful that 2022 brings some break in the COVID virus and that we will be able to once again engage with you in person and bring our team together.  We wish you a safe, prosperous, and meaningful 2022.

C. Kane Brenan

TIFF’s Mission Statement

TIFF seeks to be the best OCIO to the nonprofit community by:

• Assisting endowments and foundations in constructing custom investment solutions that support expenditures while preserving long-term purchasing power
• Delivering strong and transparent investment returns that exceed client-specific benchmarks
• Providing investment-related services and broader support services to nonprofits to help them fulfill their organization’s mission
• Aligning our culture with that of the nonprofit community and broadening our impact on society

Past performance does not guarantee future results.

All investments involve risk, including possible loss of principal.

Not all strategies are appropriate for all investors. There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

This communication is for general informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security or a guarantee of future results. This communication also does not constitute an offer to sell or a solicitation of an offer to buy interests in any particular security, including interests in any TIFF investment vehicle. This communication may include “forward-looking statements,” such as information about possible or assumed investment returns or general economic conditions. Actual results may differ materially from the information included in this communication and no information in this communication will be updated to reflect actual results or changes in expectations.

Executive Summary:  The Inflation Outlook for Non-Profit Portfolios
Fall 2021

Please click on the Download PDF button to read the full whitepaper.

For the first time in decades, year-over-year US inflation is meaningfully exceeding the Federal Reserve’s 2% target, a notable departure from the low and stable inflation regime that the US has enjoyed since the early 1980s.  We would argue that this regime, and the associated lower interest rate environment, has been instrumental in a variety of strong economic and financial market outcomes.

Over the last few months, a variety of market participants, journalists, policy makers, and others have engaged in a spirited debate as to where inflation will head in the coming quarters and years. The key question is whether this recent spike in prices is transitory as the Fed and Biden administration have suggested, or emblematic of a move away from this highly desirable, low, and stable regime.

Our view is that while inflation may be a bit higher than what we have become accustomed to and persist at higher levels for longer than what was originally suspected, we do not believe that the economy will depart the low and stable regime. We have identified and then examined five key dynamics that we feel strongly will be instrumental in dictating price levels in the coming years. Below is a summary of our views on these dynamics:

It’s worth pointing out that even if inflation does drift into a higher range (e.g. 2%-4%), but remains stable, we do not think that will be overly problematic for the economy or financial markets. Indeed, over the long term, equities have earned strong returns as long as inflation remains below 6%.

In terms of our positioning, we are still overweight equities and underweight fixed income markets. At current interest rate levels, bonds are quite unattractive, and the risk of higher inflation only amplifies this. While equities are certainly not inexpensive from a valuation standpoint, we do think that the combination of strong earnings growth and low interest rates give equities a good chance of delivering solid returns.

The last 18 months have represented uncharted territory in markets, economies, and policy making, creating a series of fascinating dynamics that we continue to watch play out. While we certainly have a view on inflation and where it is headed, we are acutely aware of how quickly and meaningfully things can change. As the world evolves, we will be clear-eyed in updating our views on inflation and markets more broadly.

Please click on the Download PDF button to read the full whitepaper.

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. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

The enclosed 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.

TIFF aims to serve the private equity investment needs of our nonprofit members.  We recently developed a Private Equity Primer as a guide to understanding the basics of private equity.  You can access the primer by clicking on the Download PDF link above.

Evolution of TIFF’s Chinese Equities Investments
Fall 2021

Background
As many of our investors know, TIFF has had a material investment in Chinese equities for over five years.  While our exposure has never been more than 15% of our equity portfolios, it has represented a larger percentage of our tracking error and overall risk over the past few years.  As a result, we receive many questions about this part of our portfolio.  Therefore, we thought it would be timely to provide a brief update on our positioning and thoughts on the market.

First, Principles: why did we invest in China in the first place?
China became a research priority for us in mid-2015 due to our observations that 1) its economy was growing quickly, and 2) the stock market (represented by the CSI 300 Index) declined over 40% in the two months ending in August 2015 and might represent good value.  We spent almost two months in the country doing on-the-ground research, and we ultimately made multiple investments throughout 2016.  We found the Chinese equity opportunity attractive for several reasons, including:

1. Investing in China presented an unusual combination of many inefficiently priced businesses and very high liquidity. Usually, we find inefficiently priced securities in niche parts of the markets that are not liquid and do not support large investments.  This situation was an exception.
2. We perceived that institutional capital could do well in light of heavy retail participation – with roughly 75% of the trading volume being generated by retail investors. Institutional investors often have research advantages versus individuals.
3. China was (and still is) underrepresented in the various global benchmarks compared to the percentage of global GDP. We felt that eventually, index vendors like MSCI and FTSE would adjust, and the subsequent inflow of passive capital would provide a tailwind.  Additionally, not only was China underrepresented in various benchmarks but also many investors were underweight by even that modest index percent.  We thought this dynamic could represent an ongoing bid as investors potentially added to their exposures and as China grew in terms of index representation.
4. The onshore China stock market, partly because it can be complicated to access, exhibits a relatively low correlation to the US and other major markets. We believed that within the realm of equity opportunities, this investment would provide some valuable diversification for our portfolios.
5. We found three outstanding partners who we felt had a high probability of outperforming their benchmarks. We debated whether it would be possible for the identified managers to outperform by 2-3% per year.  Our most optimistic case was they might generate up to 6% alpha annually.  To date, they have outperformed their benchmark since inception by 6.8% per year as of August 31, 2021.

2020 Adjustment
Between 2016 and 2020, our China investments exceeded our expectations.  Over that period, the market nearly doubled, and our active investments there almost tripled.  TIFF’s China investments handily outperformed the S&P 500, one of the best performing major market indexes in this period.  Despite this good outcome and our continued confidence in our manager partners, we decided to reduce the position at the end of 2020 from 12-13% of equity portfolios to roughly 8% at year-end.  Our decision to reduce our position was the result of several key observations:

• China was the first country to experience COVID and the first large economy to gain control over the spread of the virus. We have described this dynamic as “COVID FIFO” (first in, first out) in several meetings and letters.  We felt that China’s outperformance in 2020 reflected this development and other countries that were a bit further behind in the process were better places to deploy capital in 2021.
• We also worried that China’s “zero tolerance” policy towards COVID outbreaks could, absent other material offsetting policy decisions, negatively impact the Chinese economy and stock market in the event of future outbreaks.

In addition to our macro-observations, many of the basic pillars of our original thesis have weakened slightly. MSCI has increased the onshore China weights in their various benchmarks, although we expect more to come.  The China stock market has become more efficient in our view.  Foreign investors’ percentage ownership of Chinese equities has increased, and many of the various peers that we talk with seem more comfortable deploying capital there.

2021 Observations
Reducing our China position at the end of 2020 has been beneficial to our 2021 performance as the Chinese markets have underperformed ACWI by roughly 20% through August.  However, this outcome is part skill and part luck.  The skill we think was making the various observations discussed above and acting.  The luck portion was reducing the position in advance of regulatory adjustments that have hurt the profitability of a variety of Chinese businesses and caused increased uncertainty.  Examples include converting multiple education-focused businesses into nonprofits, applying banking regulations to non-traditional finance companies, cracking down on anti-competitive behaviors of several large tech businesses, forcing delivery businesses to guarantee minimum wage and offer social security to their workers, and implementing a three hour per week max on playing video games for minors.  It is not clear whether these adjustments are good or bad over the long run.  While maintaining a more equitable society could create a stronger, more durable economic expansion, many of these adjustments either limit revenue growth or increase expenses for some of China’s largest companies.

Given the power that the Communist Party has in China, periods of regulatory adjustments are not new or surprising.  We identified this issue as one of the major risk factors associated with investing in China in our original memos from 2016.  However, the extent and speed of the reform in 2021 was a negative surprise that we did not expect.  With the benefit of hindsight, we would have been better off reducing our position even more – at least in the short term.

Current Thinking
We continue to be overweight relative to our equity benchmark, the MSCI ACWI, but just not as much as in the past.  China continues to experience higher growth and more attractive valuations than much of the rest of the world.  We continue to expect our managers to be able to outperform their benchmarks.  For example, while the Chinese markets have underperformed thus far in 2021, our managers on average have outperformed their benchmarks by over 450 bps through August – essentially right on track with the annual alpha we’ve experienced over time.  While the correlations to other markets have increased as we expected they would, they are still low in absolute terms.  The trailing three-year correlation to the S&P 500 is only 0.60 versus 0.90 and 0.83 for Europe and Japan, respectively.  China’s path to becoming a major market and major player in the global economy has become clearer.  We believe that we are heading toward a bipolar world with China as the major economy in the East and the US as the major economy in the West.  We wouldn’t have a global, forward-looking portfolio without material exposure to both markets.  While the recent reforms have caused some mark-to-market losses, it is hard to argue that the new regulations are unreasonable public policy decisions.  The Communist Party has a track record of making mostly good economic decisions.  According to their statistics, they have not had a recession in over 40 years.

Finally, the recent bout of volatility and uncertainty may just be another case of conditions that play to the strengths of active management.  For example, a potential default by Evergrande, a large Chinese property developer, has caught the market’s attention over the past few days.  While this is a fluid situation, based on discussions with some of our manager partners we think the Chinese government has the resources and the incentive to prevent an Evergrande restructuring from becoming a broader systemic problem.  If our assumption is correct, we may look back on this period as an attractive entry point.  Some of the businesses that we still find attractive are cheaper than they used to be.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. The specific types of assets that each manager holds will vary over time. The managers discussed above invest capital for one or more TIFF portfolios and do not invest on behalf of all TIFF portfolios. Both the aggregated manager return (which is net of fees) discussed above and the aggregated benchmark return discussed above are based on an equal weighting of returns by manager. The benchmark return is a blend of each manager’s benchmark (in certain cases, the manager benchmark is itself a blended return). The relevant indices are the MSCI China Index (large and mid cap offshore Chinese stocks and large cap domestic Chinese stocks), the Shanghai Shenzhen CSI 300 Index (tracks the 300 largest and most liquid domestic Chinese stocks, or A-shares). ACWI is the MSCI All Country World Index (large cap stocks worldwide).

All investments involve risk, including possible loss of principal. Not all strategies are appropriate for all investors.  There is no guarantee that any particular asset allocation or mix of strategies will meet your investment objectives.

Diversification does not ensure a profit or protect against a loss.

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. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

The enclosed 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 global market for “sustainable” fixed-income securities is estimated at over $1 trillion[1] and growing.  It includes corporate, municipal, sovereign, and securitized bonds issued to finance businesses, infrastructure and projects designed to have positive environmental and social impact.  The purpose of this paper is to explain TIFF’s approach to sustainable fixed-income and how we are tapping into this opportunity set.

TIFF launched dedicated sustainability strategies in July of 2020.  The dual mandate of these sustainability strategies is to seek investment returns in excess of CPI + 5% over market cycles while maximizing positive environmental and social impact.  These strategies employ the same time-tested investment process that TIFF has used to manage capital for non-profits for thirty years, relying on superior manager selection across public equities, diversifying strategies, and fixed income.  There are some modest but important differences in how we construct the sustainability portfolios, relative to TIFF’s other comprehensive solutions, including how we manage fixed income.