We won’t spend this entire letter on inflation, as we may seem to have done for several quarters now, but we will give you a brief update. Inflation remains the biggest driver of financial markets, for good or ill. At their Jackson Hole meeting in late August and again in late September, various Fed members spoke strongly about the need to contain inflation, capped off by Jerome Powell’s clear message that the Fed will raise rates until inflation falls, and keep them there until it’s back toward the 2% target rate. His remarks were shorter, his focus narrower, and his message more direct – we will bring price inflation back down to 2%: “A failure to restore price stability would cause more pain than restoring it will cause.” The market took this to mean that short rates are going up more than most had anticipated and may stay there for longer too. Longer run, 2 to 2.5% short rates may be appropriate once inflation comes back down toward target, but not now.

The notion that a restrictive monetary policy stance will be needed for some time has been repeated by several Fed members, including Powell in numerous speeches.
Central banks are responsible for delivering low and stable inflation – price stability – and the Fed seems to now be all in. Inflation expectations have not yet become
ingrained, and the Fed wants to make sure they don’t become ingrained. “We must keep at it until the job is done,” says Powell.

Markets are starting to price in higher rates for longer. This likely makes equity market rallies shorter and setbacks faster. Good economic news will be interpreted as “bad” because it will suggest the Fed’s inflation battle will take longer. We’ve long believed a recession was likely (soft landings are hard to achieve) and remain believers. The sooner the Fed can cool inflation, the shallower the recession is likely to be. As most of you know, we generally view markets with a glass half full approach. Over time, markets move up and to the right. Yes, we try to be realists too, but few
truly successful investors bet against progress very often. That’s what makes times blike these so difficult. It is easy to find someone who thinks the clouds are about to part and now is a good time to invest (which it may be, though we think it’s still too early). As an example, as Fed policies have morphed over the last year or so, so too have Wall Street expectations. Paraphrasing one recent Wall Street forecast we read, the new higher expectations for Fed Funds (from a peak of 3.5% by 12/31/22 to a new peak of 4.25%) is causing this firm to make several adjustments to its expectations, including lowering its GDP growth forecast for next year to 1.1% from 1.5%, unemployment to 4.1% from 3.8%, and 2024 unemployment to rise to 4.2% from a previous expectation of 4.0%. We are not economists but suspect that if next year’s GDP growth is only 0.4% weaker and unemployment only 0.3% higher than previously forecast, we will not see a rapid reduction in inflation.

Until a decline in the future path of inflation becomes much clearer, we expect markets will remain volatile as investor sentiment pushes markets back and forth. There are many factors which can drive inflation – supply side factors, the US dollar, overall financial conditions, fiscal policies, geopolitical developments, COVID, employment participation rates, among many others, and so we would be wary of anyone who submits he or she knows the path with certitude. We continue to be cautious in the face of still elevated inflation dynamics.

We’ll leave our inflation discussion with a reminder from our Q2 quarterly investment update. These graphs demonstrate that stock market declines usually occur before recessions arrive, by an average of five to six months. Stock markets tend to bottom by an average of three to four months before recessions end. And the rally off the bottom before the economy turns up averages about 20%.

1 Michael Cembalest, Eye on the Market, “Dearly Beloved,” JPMAM, June 7, 2022. US GDP measured in real terms.

Keeping this in mind will hopefully help us buy low (lower) and sell high (higher) as the market goes through its normal economic and profit cycles.

Several of you have asked how Private Equity (PE) returns can be so much better than public equity market returns during a bear market. It’s a good question with no simple answer, but we’ll offer a few observations. First, PE valuations always lag by a quarter or more as managers go about updating their valuation models. Because public markets zig and zag every day, the PE folks tend to cut off expected tops and bottoms of public markets. Second, in this valuation effort they use multiple factors including public market comparables; but also, private market comparables and transactions; recent private market fundraising valuations, and growth of revenue and cash flows plugged into a discounted cash flow model. What matters most is the valuation they get on exit: the “what would you sell it for” value. In private markets, assets only get sold when the owner wants to sell. This is why private market transaction volumes shrink so much during stock market declines. It’s also why long-time PE investors say to us, “What makes you think a short-term price where only a few percent of a company can be purchased is the right price for the entire
company? The right price is the one at which you can buy the whole company.” If public market prices continue to fall, we expect PE values will also fall. However, as opposed to public markets, we would expect private markets to slowly adjust with small reductions in value over many quarters as general partners adjust to the new reality, and as the operations of the underlying companies are affected by the same macro factors as public equities, namely a cooling economy and relative scarcity of capital. The uncertain nature of how prices are determined, and illiquidity of private investments are two reasons they may not be for all investors.

We wrote about crypto 18 months ago and concluded then that it was not worth investing in. Specifically, we were referring to Bitcoin at that time. Since our letter, many really smart people have totally disregarded our advice and continue to pursue careers in this still new (in our minds) area. Many of these people are creative and talented software engineers with designs on changing the future for the better. We’ve continued to monitor the space and we are still looking for a crypto asset that “earns a profit” or the equivalent thereof. Although we haven’t found a profit generator yet, there is so much smoke today in the crypto world that we suspect there will at some point be a fire. Not that crypto will become as successful or important as the internet, but something in that direction seems more likely than the entire crypto ecosystem just disappearing in the next 3 to 10 years. There is one recent development worth a short explanation, Ethereum’s most recent upgrade, known as “the merge,” which has been many years in the making and successfully occurred on September 15, 2022. Ethereum, the second largest crypto asset by market cap, transitioned from a proof-of-work to a proof-of-stake consensus mechanism. This upgrade has at least two major expected benefits. First, it will reduce Ethereum’s energy consumption by more than 99%. Second, “the merge” upgrade is intended to only be a part of Ethereum’s long-term road map of core upgrades, which collectively will greatly increase the number of transactions it can process per second from 15 to 100,000. Exponential increases in transaction processing speed combined with exponential decreases in power usage and other applications written on top of Ethereum are expected to encourage a jump in new consumer and industrial applications that utilize Ethereum. This should be a good thing for the crypto/blockchain ecosystem in general and may ultimately even lead to an application that “earns a profit.” We believe this “merge” could be a catalyst for crypto currencies and blockchain work. In the meantime, crypto prices are off about 60% to 80% over the last year. Low prices with a possible catalyst are always much more interesting than the converse. In the quarterly update where we discussed crypto extensively, careful readers may recall we also discussed meme stocks. We, focused on Gamestop (GME), concluding similarly to avoid it. GME has since declined 47% or so, but with several excellent trading opportunities for its fans along the way. We plan to continue to avoid meme stocks. These stocks may be entertaining to watch and likely provide some insights to the level of ebullience in the marketplace overall, however, we don’t believe them to be good long-term investments.

A few of you have asked us about the recent strength of the US dollar (USD). On a trade weighted basis, the USD hit a 20-year high this month. Prognosticators attribute the rise to a combination of several things. First, our economy seems to be holding up better than most any other in the world – the so called “cleanest dirty shirt.” Second, our interest rates are higher than most any other major country, making our bond returns relatively more attractive – to own them you first have to buy USD that you can then use to buy US bonds (or stocks). Third, most oil trades in USD, so as oil prices rise, so does USD demand (although at some point the causality does appear to reverse, whereby a high USD puts a cap on rising oil prices). Fourth, the Fed’s quantitative tightening program has kicked in, whereby the Fed is selling treasuries and mortgages off its balance sheet and receiving USD back from the buyers. These transactions may at the margin be shrinking the supply of USD in the market as well. Finally, some investors also view the USD as a safe haven during times of war. Several things happen when the USD rises significantly versus other world currencies. The USD value of foreign investment holdings declines. Similarly, foreign goods become less expensive for US consumers, potentially making now a good time to for Americans to visit Europe or American companies to import foreign goods, etc. US goods also become more expensive to foreigners, in exactly the opposite way, encouraging them to find cheaper alternatives. After a brief interval, we should therefore expect the US trade deficit to rise. This trade imbalance pushes more USD into the world, producing a moderating influence on the USD rise. Many argue that
for countries that handle inflation responsibly (most do, but perhaps not places such as Turkey and Argentina), currency fluctuations are only just that, fluctuations. In time, the value of currencies should revert to some sort of normal, suggesting now might be a great time for you to pick up that Gucci bag you’ve always wanted.

We have spoken about greenflation in previous letters. We believe the transition to cleaner, greener energy sources will be expensive and take time. We won’t argue here for or against but will try to add dimension and offer some sense of the magnitude of this transition, as reported by consulting firm McKinsey in January of this year. McKinsey estimates additional global spending of $150T, or $3.5T per annum (on top of the current annual energy spend of $5.7T), will be required to achieve netzero carbon emissions by 2050 (see chart below).

3 Source: “Inconvenient Truths,” Pickering Energy Partners Investments, October 19, 2021.

Crunching through some rough estimates, this incremental spend represents an increase of 15% to 20% above current taxes domestically and globally. These numbers are 50 to 100 times larger than the cost of the Dot-Com Bubble or the Shale Boom and will, we believe, keep upward pressure on inflation as we pursue both current energy and build out the infrastructure of our green energy future. The alternative of not reducing carbon emissions is estimated to result in destructive temperature increases, with 2050 global GDP estimates being reduced by the current size of
the entire US economy. (The current size of the US economy is one-eighth of the projected 2050 global GDP). Recently, the oddly named Inflation Reduction Act (the Act) passed into law, which
many call a game changer. The $369B earmarked for energy security and climate change is small compared to what’s needed, but the framework the Act creates (we want to build critical infrastructure like batteries here in the US) and the potential funding it can help provide/augment are important signposts for entrepreneurs as they plan new enterprises to meet these challenges. The Act also seems to encourage entire green energy supply chain construction here in the US and suggests that practical solutions to current energy challenges could be met with US
sourced energy. Whether you are for or against the clean energy transition, the world is heading in that direction. Many huge new industries and companies will be created. If the Act helps the US get ahead of other countries in the race to develop the best, lowest cost clean energy solutions, then it helps create or replace millions of US jobs in the future. It may also create some fabulous investment opportunities along the way. Our country has always been a leader in new technologies and we’re hoping this Act, wrongly named, can jump start us toward doing just that.

Summing up, we think it is still too early to increase equity exposure, but we are heartened to see the Fed going all in to fight inflation. Inflation is the arch enemy that must be defeated before markets can return to their traditional winning ways. The sooner this happens the better. In the meantime, we are likely to remain very near our target asset allocation weights. We are looking for opportunities to increase exposure in equities, as always, and starting to debate whether there may finally be an opportunity to extend duration in our fixed income holdings too. This is the first time in many years that we’ve seriously entertained that idea! While we are not there yet, the idea of actually earning a positive real return from the fixed income portion of our portfolio is encouraging (though getting to today’s yield levels has cost holders of 30-year Treasuries 30% of their principal this year). To be clear, on balance we still like hedge fund prospects better than bond prospects. Lastly, similar to fixed income, other assets have materially declined in price and/or their growth prospects have improved, making the go forward investment landscape begin to
appear more appealing.

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

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 forwardlooking 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.

Pretty much the whole world has been wrong about how high inflation would go – including us. As investors’ views have changed, they have sold fixed income securities, pushing prices down and driving the Bloomberg Barclays US Aggregate to its worst quarter in 40 years at -5.93% in Q1 2022, followed by -4.69% in Q2. This -10.35% year-to-date loss is the worst first half of the year ever for the index. Results this poor don’t tend to occur when investors anticipate and are properly positioned for what lies ahead.

We believe the single most important investment question today is whether the Fed will – or won’t – get ahead of inflation. Typically, the Fed must balance the dual mandate of full employment and low inflation. Because inflation has been low for most of the past 40 years, the Fed has historically been able to respond quickly to economic or market events by easing rates. With inflation today above 8.5%, that calculus has changed: We expect that until inflation comes under control, the Fed will be talking tough and raising short rates, even if stock and bond prices are falling and even if the economy appears to be slowing. Until the Fed proves their mettle in taming inflation, they have lost the option of easing rates. We believe that only once the Fed has shown they can get inflation under control will they regain the ability to provide liquidity when markets require. This suggests a more difficult and volatile market backdrop in the short term, with the end of this term dictated by the path of inflation.

In the interim, we don’t expect a gut-wrenching recession, but we do expect a recession simply because soft landings are extremely difficult to achieve. Our belief is based on fewer excesses and stronger balance sheets than is typical at this stage of the economic cycle (for example, banks, corporations generally, and consumers in total are much stronger than when we entered the 2008 to 2009 recession). If we are right, this can create opportunities for investors who are looking for them. Once the market sees inflation coming down and the prospect of a hard landing decreases or becomes discounted – which will be right about the time that current market reports are near their worst – we believe the market can improve.

Bulls Versus Bears

With stock and bond markets pulling back, we find our inboxes filled with more negative market commentary than normal. Sifting through all the supposed reasons for the market’s behavior is always a laborious – but necessary – chore. Most of what you read is Monday morning quarterbacking. But occasionally you read something that makes you think. A recent paper by John Hussman made us think. His is a complicated, math-heavy argument that concludes with the idea that investors in stocks won’t make any money investing in the S&P 500 over the next decade. We’d note that Mr. Hussman seems to have a reputation as a bear.

Market Valuations Measures Presented as Multiples of Their Respective Historical Norms (Log Scale)1

A more familiar framework to most investors (which we’ve written about before) is the Jeremy Siegel view. His model suggests a more normal 6+% real return over the next decade. For the record, Mr. Siegel has a reputation of being bullish. “Siegel vs. Shiller: Is the Stock Market Overvalued?” provides a good short recap of his thinking. The main difference between the two is that Hussman uses sales as the correct denominator, and Siegel uses operating earnings. Essentially, Hussman’s model assumes above-average margins will revert, compressing future multiples, whereas Siegel’s model does not.

Historical PE Ratios S&P Index (1955 to Present)2

Who’s Right (Right Now)?

Times like today are what create (at some point) the best opportunities to establish new equity positions at prices that in a few years’ time will look very attractive. We will remain cautious as we remain vigilant in our efforts to uncover the really good investment opportunities ahead.

As always, we want you to know we very much appreciate the opportunity to help manage your capital and to help you achieve your organization’s financial 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

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.

One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses.

This article is being provided for informational purposes only and constitutes neither an offer to sell nor a solicitation of an offer to buy securities. Offerings of securities are only made by delivery of the prospectus or confidential offering materials of the relevant fund or pool, which describe certain risks related to an investment in the securities and which qualify in their entirety the information set forth herein. Statements made herein may be materially different from those in the prospectus or confidential offering materials of a fund or pool.

This article is not investment or tax advice and should not be relied on as such. TIFF Investment Management (“TIFF”) specifically disclaims any duty to update this article. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

This article 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. Except where otherwise indicated, all of the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof.

So Many Questions, So Few Answers

Rarely has the investing environment been as murky as it is today. We are making history – but in all the wrong ways. War in Europe for the first time in 75 years. Inflation hitting a 40-year high. US politics as divisive as they’ve been since the Vietnam War (some would say Civil). The emergence of China as a global economic powerhouse creating a new and uncertain geopolitical calculus. The first pandemic in 100+ years, easing haltingly into an endemic. The US reaches record-level peacetime debt-to-GDP. And, as if all that weren’t enough, we may be nearing a planetary tipping point with carbon intensity.

As we noted in our last letter, doing nothing in response to new information is an active decision. We take the same counsel that we give our clients: In times of uncertainty, be disciplined in adhering to policy and process. Rather than being reactive, lower your center of gravity and exercise patience as you prepare to be opportunistic.

Below, we share our thinking on some of the more dramatic current events and their possible investment implications. We also summarize portfolio adjustments we have made to date to strengthen our – and your – positioning in the face of such unpredictability.

Geopolitics

Past Russian aggressions into Crimea, Georgia, and Chechnya resulted in short-lived public outrage, yet no NATO counteraction. The same held true when Russia intervened in the Syrian civil war that ultimately displaced half the Syrian population. None of these events had a lasting impact on markets.

Following Russia’s invasion of Ukraine, however, President Volodymyr Zelensky soared from an approval rating in the low 20%s to a renowned war time leader compelling an unexpected and comprehensive response from all Ukrainians as well as Western nations. Russia has been ostracized in an unprecedented manner, with government sanctions freezing – or seizing – Russian assets, cutting off demand for Russian oil, and banning Russia from the SWIFT global financial system. A surprising number of corporations voiced dissent by exiting Russia. The international price of oil rose from $74.50 at year end to a high of $130.50 on March 7, 2022. With Russian and Ukrainian exports representing 12 percent of the food calories traded in the world, wheat prices have spiked from $7.74 to as high as $13.63 over the same time period. We watch for secondary effects of hunger and civil unrest globally, as well as the impact of higher oil and gas prices on those who are most dependent (yet least able to afford it).

While events in Ukraine dominate the news, the big geopolitical question many investors are asking themselves today isn’t about Russia and Ukraine, but about China and Taiwan. Most of the conversations we have and commentary we read suggest China is unlikely to be emboldened by what is happening in Ukraine. The West has become more unified in the last month than at any time in the last decade or more. The level and swiftness of sanctions against Russia has surprised most. The tenacity of Ukrainians fighting for their country has likely surprised both Russia and China, raising doubt about the ease of conquest. Military experts pretty unanimously believe that an amphibious assault (China into Taiwan) would be much more difficult than a ground assault – which China surely knows. Japanese leader Abe has suggested Japan should break a long-standing taboo and hold an active debate on hosting US nuclear weapons. None of these developments appear to hasten a Chinese move to take Taiwan, especially as China views time as its friend in efforts to reincorporate Taiwan back into China. We do not anticipate a war between China and Taiwan and therefore are not presently positioning our portfolios for one.

Less ominous, but more painful economically, would be the decoupling of China and the US as global economic leaders. In 2021, China launched its common prosperity drive and forced private (many publicly listed) companies to change business practices to benefit the average Chinese citizen, often to the detriment of shareholders. In some sectors such as education, public company valuations have fallen by as much 98%. The Chinese government now has homeownership and data security in its crosshairs, with names like Ant Financial (and parent company Alibaba) and DIDI Chuxing (UBER in China) suffering. Concern grows over the prospect of delisting Chinese companies traded in the US. This ongoing effort by the Chinese is hurting investor confidence. We reduced an overweight in China at the end of 2020, but with hindsight should have cut our weight even more. For 2022, we expect China’s easier monetary policy (countercyclical vs. the rest of the world) and a softening of the common prosperity measures will support a better Chinese equity market.

Inflation

We have been concerned for years that inflation could cause the next stock market correction. It typically pushes up interest rates, reducing bond prices and making bond yields relatively more attractive vs. stocks and at the same time devaluing expected corporate cash flows. Accordingly, we have: 1) kept approximately 20% of our capital invested in hedge funds where we anticipate better reward-to-risk possibilities; 2) remained underweight fixed income; and 3) kept the fixed income we do own below benchmark duration. Initially, this positioning faced a few headwinds that flowed through to returns. To date, however, this long-term strategy has both improved our returns and protected capital in periods of stressed equity markets. As our concerns about inflation come to fruition, we face a new paradox: as expected, the rise in inflation is hampering stock markets – but bonds so far have seen only modest rate rises. Yes, yields have risen – the 10-year Treasury has gone from a low of 1.35% in December 2021 to 2.35% today – but year-over-year CPI inflation is now running at 7.90%! The real yield on a 10-year Treasury remains at nearly -6%. To us, this is very surprising. Nevertheless, the Bloomberg Barclays AGG had one of its worst quarters ever, losing 5.93%, before yields have risen anywhere close to inflation.

Source: Bloomberg

US National Debt

Some believe that higher debt levels incentivize the Fed to keep rates low, making interest payments more manageable. In addition, as interest payments rise, less capital is available to spur growth – and the GDP. Others worry that excessive debt deters foreigners from buying US debt, drying up a vital source of capital. Modern Monetary Theorists (MMT) dismiss these cares about the size of our national debt, suggesting we can always print more money as needed. Our view? We remain concerned about any situation that would cause the rest of the world to question the US’s ability to repay our debt, thereby potentially sending the dollar into decline. However, we do not believe that we are there. We are not afraid to own Treasuries, and most of our portfolios are exposed significantly to US dollar-based investments. We are prepared, nonetheless, for a materially reduced fiscal stimulus over the next decade.

Greenflation

If rising national debt is the evil twin of low interest rates, “greenflation” is the sibling of rising energy costs. When carbon-based energy supply is reduced faster than green alternatives are brought online, fossil-fuel energy costs rise too far, too fast. Eliminating Russian oil brought this phenomenon to life. The resulting relatively lower cost of greener alternatives makes them more attractive, but if providers can’t rise up to meet the massive demand spike quickly enough, then the world could enter a recession. A global recession might then limit the capital available to invest in new alternative energy sources. Regrettably, this could slow our transition at a time we need it most, both economically and from a conservation standpoint.

Can the world remain rich enough to make the green transition as planned? Best case scenario is that green supply can meet energy demand, paving the way for a permanent path to clean energy. We have selectively made a very modest investment in fusion energy although this technology is likely a decade away from being realized. We continue to view greenflation as a threat today and will invest in green transition opportunities when and where we see attractive potential in the space.

Pandemic

The pandemic is transitioning into an endemic. Although we could encounter more mutations of COVID on par with Omicron, we anticipate a seasonal COVID bump in developed countries that could be offset by annual shots as with the flu. We also hope that vaccine access and uptake in less developed countries accelerates, allowing for equity in pandemic recovery.

The TIFF Portfolios

As we stated above, we have been disciplined about adhering to our strategy as we navigate this large current spate of geopolitical and economic events. This discipline of sticking to our strategic allocations, however, does not pre-empt us from taking advantage of near-term inefficiencies created by all of this disruption. “Opportunistic” is often thought of as a dirty word – or worse, a synonym for “impulsive” or “spontaneous.” Hopefully you know from our history, that we are thoughtful in anticipating possible outcomes from current events and use “opportunistic” to refer to the deliberate expressions of these views in our portfolios, primarily tilting away from perceived risk and toward opportunity. We remain committed to the financial Hippocratic oath – before making significant changes in the portfolios we always try to ensure that what we are proposing to do will be neutral to beneficial under most circumstances. Now, we believe, is a particularly important time to be thoughtful and deliberate.

So how are we positioned this quarter, when faced with so many types of events, each with such a wide range of possible outcomes? We have slightly trimmed equities back to benchmark (-1.5%), we remain about neutral to our hedge fund benchmark weight, and slightly underweight fixed income. The Russian invasion has greatly complicated the inflation outlook and also complicates global growth assumptions. Coupled with a late March equity rally, we viewed this as a good time to remove some equity risk from the portfolio. Because Europe seems most in harm’s way, we have trimmed our prior slight overweight to Europe to a slight underweight (-2% to -3% in most cases) to Europe. We shifted this exposure to Australia where financial and materials stocks – both expected beneficiaries of higher inflation and interest rates – comprise a larger portion of the benchmark. We executed this move in the passive portion of the portfolio, so it was quick and painless. For now, we are resigned to living with higher volatility than last year and we believe that, as usual, equities will earn a higher return for accepting this volatility. We also remain vigilant in searching for more inflation protection. Lastly, we turned our attention to high-quality financial equities that we believe have unusual upside and limited downside. Other than these shifts out of harm’s way and into potentially higher prospective return areas, we have done little except to continue to scour the landscape for opportunities.

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

Your Investment Team

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.

One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses.

This article is being provided for informational purposes only and constitutes neither an offer to sell nor a solicitation of an offer to buy securities. Offerings of securities are only made by delivery of the prospectus or confidential offering materials of the relevant fund or pool, which describe certain risks related to an investment in the securities and which qualify in their entirety the information set forth herein. Statements made herein may be materially different from those in the prospectus or confidential offering materials of a fund or pool.

This article is not investment or tax advice and should not be relied on as such. TIFF Investment Management (“TIFF”) specifically disclaims any duty to update this article. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

This article 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. Except where otherwise indicated, all of the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof.

What happened?

Since the beginning of the year, the world’s major stock indices are down, and the United States indices in particular have suffered losses. From their early January highs, the All Country World index and the S&P 500 had fallen ~10%, while the Nasdaq composite had fallen ~15%, before each recovered slightly on January 28, 2022.

Although the downward moves are not severe within the context of normal stock market volatility, they appear so for two reasons. First, 2021 was particularly calm following the turbulent market events of 2020. As shown on Chart 1 below, the S&P 500 rose or fell more than 2% only seven times in 2021 versus 44 times in 2020. Moreover, Chart 2 shows that while realized volatility in 2021 was slightly below the 10-year average, it was significantly below the market volatility experienced in 2020. More broadly, the stock market tends to fall 10% every 1.5 to 2 years, so these recent moves only are unusual when comparing the stock market to particularly calm times. Second, underneath the headline indices, there is a notable rotation happening and pockets of truly astonishing capital destruction. For an example of a rotation, the S&P 500 Energy index has gained ~18% YTD while the S&P 500 Consumer Discretionary index has lost ~13% YTD, compared to the last five years when energy stocks generated annualized losses of 2% and consumer discretionary stocks generated positive annualized returns of 16%. For examples of capital destruction, there are many, including meme stocks, SPACS, recent IPOs, retail favorites being cut in half, or worse. On the Nasdaq composite, the number of companies making 52-week lows versus 52-week highs currently has only been exceeded in March 2020 and late 2008 over the last 25 years. See Chart 3 from Citi.

Chart 1

Chart 2

Chart 3

Why Has This Happened?

It is always hard to pinpoint the cause of market moves, and there frequently is no one single cause. Nonetheless, our succinct perspective is that the market’s risk appetite has changed. There is little chance that the earning or cashflow prospects of many of the individual stocks have dropped 50-80% in the past few weeks. (One also can query whether their prospects had gone up 5-10x from mid-2020 to late 2021 in the first place). However, the market’s perception of the adequate compensation for investing in certain high-risk stocks or similar exposures has changed markedly.

The longer perspective is that we have had a confluence of economic changes which has made the market less certain as to the economy’s future path. This fundamental change has rather suddenly made certain stocks less attractive. Exacerbating this move has been a myriad of technical adjustments, such as overall liquidity in the market, computer-driven algorithmic trading which often amplifies market moves, so-called “black-out” windows (where companies cannot repurchase their own stock), less stock interest by retail investors, and big banks’ positioning changing as a result of different option purchase patterns (i.e. when many people buy call options, banks then buy the underlying stock to hedge; when many people buy puts, banks then sell the underlying stock to hedge).

In our view, the fundamental economic change has been driven by: a) the Federal Reserve (and other central banks) becoming more hawkish; and b) a medium-term view of potential underlying economic weakness, in part driven by the lower chances of additional fiscal stimulus. Between the two changes, we think the former is largely driving markets and has led to the repricing of risk.

As you can see in Charts 4 and 5, the Fed has become increasingly hawkish as inflation has not abated (so less chance it is merely “transitory”) and employment is close to full. As the Fed gauges its dual mandate of maximum employment and price stability, it now is focusing more on price stability, in part because rampant runaway inflation can lead to skewed economic decisions and a knock-on, lowering effect on unemployment. As you can see, the Fed has “talked the market” from roughly two interest rate hikes in 2022 as of early October 2021 to 6 expected hikes during 2022 as of last week. Six hikes would be more than all of the hikes the Fed did from 2013 (the infamous taper tantrum) to late 2017.

Chart 4

Chart 5

In addition to the Fed signaling many more hikes than the market had anticipated a few weeks ago, the Fed has been accelerating its projected pace of so-called balance sheet normalization. When you put all of these changes in context, the market seemingly no longer believes that there is a near-term “Fed Put”,¹ whereby the Fed may pause on rate hikes or balance sheet normalization if the stock market swoons. Some believe the Fed Put is now at lower levels than previously thought. Some even believe that there is a Fed “sold-call” dynamic, whereby if the stock market does not adjust and help cool the economy through wealth effects, the Fed is more likely to keep raising rates, ceteris paribus (i.e., for a given level of inflation). Critically, every other recent time the Fed Put has been relevant, the Fed had more options as inflation was near or below 2%. Today is very different with inflation running 300-400bps above the Fed’s comfort level. These perceived changes and the pace of the change has caused, in our view, a lot of the market machinations we have observed over the past few weeks and months. Where the Fed relents is hard to predict. Clearly, the Fed is reacting to evolving inflationary pressures. We believe that the Fed will continue to modulate its rhetoric and actions to ensure that inflation does not become entrenched at anywhere near current levels.

What Are We Doing About This?

In short, we are doing three things: (1) we are maintaining our slight overweight to equities, (2) we are staying underweight to fixed income, and (3) we are watching our underlying managers to see if they are taking advantage of the rotation and violent trading patterns.

We are maintaining our allocation to equities because we think the odds are on our side. (Here, we will speak mostly of the United States as it is the largest position and most impactful to our clients.) It strikes us that of the three most relevant factors effecting equities, two on our side. The first is the basic construct of equities. They represent a share on the earnings of companies. We perceive that people are working hard, innovation and productivity are happening, and there is nothing fundamentally different regarding equities and that claim to company earnings than during the prior 100 years.

The second factor is our view of the economy. While we believe the economy is unlikely to repeat its epic recovery in 2021, it is unlikely to flip into recession. There is a halting reopening still going on, there is pent up

demand for various services, consumers have substantial savings (compared to pre pandemic), the Fed is still accommodative (despite the changes discussed above), and the federal government is still running deficit spending. For these reasons and numerous others, we think it is unlikely the United States flips into recession. The market seems to agree with our evaluation as there is little indication of distress in other recession sensitive asset classes, such as credit (spreads have not widened), and the Yen (has not rallied strongly). Of course, there is no guarantee that we will avoid a recession, but recessions themselves are rare, and the odds seem slightly lower now than on average due the factors noted above. Critically, when we are not in recession, the stock market usually delivers positive returns. In fact, the stock market does so more than 80% of the time. To go against these odds, one must be very confident this time is different.

We acknowledge that the third element, the Fed’s posture, is against us. No longer can the Fed be counted on to “prime the pump.” The old saw of “don’t fight the Fed” comes to mind. However, we believe the market now has digested a more hawkish Fed, and that inflation will moderate over 2022 as: (i) comparisons drop out, (ii) some supply bottlenecks ease, and (iii) labor shortages abate as (hopefully) omicron wanes. As long as the Fed stays roughly where it is now, with an expected Fed funds at ~1% – 1.5% in 2022 and ~2% in 2023, we think the economy and market can handle these increases. We do concede that the Fed could become yet more hawkish if inflation persists (as could well happen due to oil supply reductions, other goods supply constraints, or China’s zero COVID policy leading to further shutdowns). As we gauge the three critical elements, and the odds of staying invested, we continue to believe maintaining full equity exposure is prudent. This view in no way precludes additional bouts of volatility and of course the potential for even more steep drops. Sometimes sentiment becomes self-fulfilling. Based on our read of the market, we do not think this is one of those cases. But nothing is assured.

Our second view is to remain short fixed income. We have held this view and have provided our thinking around it a number of times. In short, we understand that rates can be driven lower by economic weakness, investor fear and non-economic actors (such as central banks) deciding to drive them lower. However, one of the main actors, the Fed, has just told us they will no longer be driving rates quite so low. We expect yields to trend higher at a measured pace. We do not expect the longer end of the curve to increase rapidly, but given a choice between it falling precipitously lower or jumping precipitously higher, we would choose the latter. As the Fed has indicated where they intend to drive rates, and we believe there is asymmetry in rate increases versus rate reductions, we have maintained slightly less than full fixed income exposure and less duration in the fixed income we do hold.

Finally, we note that our managers are finding interesting opportunities. There are big chunks of the markets that are down far more than 10% over the past few months. We and our manager partners believe there has been material indiscriminate selling, which is to be expected in a market that has become dominated by passive capital and ETFs. One of our largest managers tracks the required return to reach “intrinsic value” in their portfolio. It is currently at 95%, a level that it has reached less than 2% of days since their inception. Despite a modest value bias, this group has outperformed in eight out of the last nine years. We are inclined to trust their judgment about the individual companies that they own. Managers are finding opportunities in a variety of areas including payments, biotech, small/mid cap, and pieces of the energy/materials/industrials complex that are likely to benefit from decarbonization. For some but not all of these areas, inflation in the economy may actually prove a modest benefit.

Overall, we expect that the markets will continue to have bouts of volatility more consistent with historical patterns. Volatility may be even higher as the market digests a more hawkish Fed, for only the second time in the last 14 years. For now, we are maintaining our positioning as slightly overweight equities and shorter fixed income. We will continue to monitor the economy and our managers to gauge whether we should change our view, paying careful attention in particular to central banks actions and rhetoric, and the inflation dynamics. We appreciate the opportunity to manage your capital through this interesting time.

1 There are valid reasons to believe that the Fed should observe the stock market, not as its primary objective, but in so far as through the “wealth effect”, consumers and CEOs are more likely to spend and take risks when they feel wealthy than when they feel less well off. Whether the Fed Put is valid, good public policy, a skewing of capitalism, leads to excess risk-taking, or beneficial to income equality is beyond the scope of this note.

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. 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.

What Will Matter Most in 2022

Anticipating the most impactful events of each coming year is a Wall Street tradition, and one we can hardly pass up either. Every year significant things happen in the world that meaningfully impact the markets, and hence, your portfolio, whether or not you choose to specifically address these potential disruptions. For example, some believe that 2022 could see China invade Taiwan or Russia start a pan-European war. We do not expect either scenario (although Russia may indeed invade Ukraine) and so we are not currently positioning our portfolio for either possibility. Even though we are “doing nothing” about these issues, we would call that an important decision in and of itself. We are aware of the potential scenarios, but do not share a belief in their likelihood. Others will take different views and may position their portfolios either to avoid what they believe will be bad outcomes, or even attempt to benefit from such outcomes. Those who have positioned to avoid bad outcomes sometimes enable markets to end up rallying on, for example, “bad” economic numbers that are actually “less bad” than they expected, and vice versa. Ultimately, the market is a forward-looking discounting machine.

Significant issues that arise unexpectedly, often referred to as “black swans”, can dramatically impact portfolios because, by definition, nobody has positioned for a black swan. In 2020 no living investor had experienced a global pandemic. No one had a sense of how many people might be infected, might survive or die, how society would behave, or what governments might do. These uncertainties caused markets to drop precipitously in a short period of time. Nobody anticipated a global pandemic, and nobody was positioned for its arrival. History has shown that when a significant disruption occurs, after a period of chaos during which some investors reshape their portfolios dramatically to include new risks while others take little to no action, the markets rediscover an equilibrium and again begin to discount the future. If, after the initial shock and repositioning period, events subsequently evolve in a more favorable way than had been discounted, then markets will likely rise, and vice versa. We saw this in 2020 and 2021. Millions of people lost their jobs and their lives, but, frankly, not as many as originally feared. With great help from governments a global depression was prevented, and jobs returned much faster than anyone could have imagined, which led to a stronger economy and persistent market advances.

As we anticipate the most impactful events of this coming year, we acknowledge that there are many potential items we may leave off the list either because we don’t think they will occur or because they are not being considered by us or the vast majority of investors. Nonetheless, we will highlight some of the important items we think the market is broadly attempting to discount. Like everyone, if another black swan arrives, we will navigate the environment as best we can based upon our experience, our collective common sense, and the insight and input from our board and the managers with whom we partner. Here’s to a much less exciting 2022.

We think the important calls next year are:

1. Will inflation prove largely transitory and what will the Fed do?
2. Can stocks continue to move higher?
   1. Will US stocks continue to outperform the rest of the world?
   2. Will growth stocks outperform again?
3. Will China remain weak and underperform?
4. Will COVID continue to impact our daily lives or truly and finally begin to fade?

Assuredly, other issues both large and small will impact markets in the coming year, but we hope this list includes most of the significant issues we will face.

Inflation and the Fed

We’ve written about it a lot already so won’t belabor the point, but inflation is still the number one issue that investors will confront in 2022. Is it transitory or is it going to become ingrained? We continue to believe it will be “transitory”, although just recently Fed Chair Powell eliminated the term from current discussions and acknowledged that “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.”¹ Not to sound like a sore loser, but that does not change our expectation that by this time next year, the Consumer Price Index (CPI) will print numbers less than 3%.

Adding a little further insult to our view, the dot plot of the Fed now suggests three rate hikes next year, up from about one-half of one rate hike. Two facts bolster our confidence. First, the fact that three items (owners’ equivalent rent, fuels, and new and used car prices) accounted for 4.2% of the latest CPI print of 6.8%, and second, the apparent end of the Build Back Better plan by Joe Manchin. Moderating economic growth suggests to us that it will be hard for prices to increase next year as much as they have this year.

The following chart shows income vs spending going back to 2013. It suggests that the supply chain shortages may in fact be demand bulges. If that is the case, then the question becomes: “are they sustainable?” This chart should at least raise some doubt. Most economists estimate there is as much as $2 trillion of remaining excess savings, but it is being spent.

The Good News: Consumer Has Savings to Tap Into—Will it Continue?

Away from the internals of the numbers, the market is also forecasting lower inflation ahead. We have pointed this out before and share these charts so you can see for yourself.

The most recent Fed 5-year forward inflation rate is 2.19%, less than the average of the last 20 years and lower than earlier this year.

The next chart shows the going-in real rate investors earn on today’s 10-year treasury. This -5.36% real yield is the lowest on record. It’s even lower than in 1974 and 1980 during the oil embargoes that created the only two real inflation episodes in the modern Federal Reserve banking era. This real rate will, of course, change as inflation in the future rises or falls, but the nominal yield of 1.48% will not. For an investor today to earn a positive real yield, inflation needs to drop below 1.48%, and fast. If you lose 5% real per year for the first 5 years of your investment it is almost impossible to make that back in the second 5 years. We still do not believe a rational investor would purchase treasury securities at today’s prices unless she was fairly confident that inflation rates would soon be falling back to the Fed’s 2% target or lower. The following chart makes it obvious why we keep saying we think fixed income is a bad investment today. Maybe rates will rise or maybe inflation will fall, either way we think there are better places to invest.

We summarized very briefly what the Fed did a few paragraphs back. We think the reason the Fed accelerated the taper and indicated their intent to raise short rates is simple: Reputation.

Market consensus had recently moved from a $15B/month taper to $30B/month taper and from no rate hikes until late ’23 or ’24 to rate hikes beginning in ’22. The main reason for this was an exchange in late November between Powell and Pennsylvania Senator Pat Toomey who pressed Powell on whether the term transitory was still appropriate. Powell backed away from the argument and the term very quickly, though he did not say that the pre-conditions for easing were met. Most believe Americans are feeling the negative effects of inflation and that the government needs to do something to reign it in. Maybe Powell does too. Either way, a very important job of the Fed is to communicate to the market forward guidance in a clear enough manner that it remains confident in the Fed’s ability to act and react appropriately to economic changes. Not doing so creates unnecessary volatility.

So, after his exchange with Toomey, if Powell did not speed the reduction of liquidity being injected into the economy, and did not indicate rate hikes in ’22, then markets may have taken that as a confusing and contradictory sign, and we could have seen interest rates move appreciably higher. By doing both, the Fed gave the markets what they expected and in fact, long-term rates fell and stocks rallied on the day of the announcement — success. Some believe Powell will hold back from raising rates until substantial further progress had been made toward “inclusive” employment that reaches all parts of America. It may be this broader lens that got Powell re-nominated and now he needs to speak with a more hawkish tone, appealing to the other side of the aisle to ensure his re-confirmation. Our primary hope is that the Fed does not tighten into a soft economic patch and create more havoc than they are trying to prevent. This is our opinion and, of course, others believe labor markets are tight, inflation is high and rising, and the Fed is doing the right thing by raising rates. If they are correct, we expect interest rates will rise and stocks could disappoint.

The biggest risk to next year is that the Fed disappoints the market. Such disappointment could potentially happen in two ways. One way is that the Fed could tighten too fast and too aggressively, thereby causing liquidity to dry up, pushing rates higher and equity multiples lower, while also slowing down the economy. We believe the Fed tightening too fast likely would lead to bad short-term market outcomes, causing losses in both bonds and stocks. We could envision a 20-30% stock market correction in such an environment. That would hurt, but in the realm of history it would actually be a fairly “normal” episode of the Fed taking away the punchbowl. After markets adjust to the new realities, they should resume their normal course of moving up and to the right.

The second possibility is that if the Fed is too slow to reduce liquidity and nudge up short rates it risks losing the confidence of the market. This sort of Fed error could lead to a self-reinforcing cycle of higher inflation and higher inflation expectations. Such a cycle could even be exacerbated by “greenflation”, in which the effort to decarbonize the world by reducing the use of fossil fuels leads to much higher energy prices. We may find ourselves stuck between a rock and a hard place – to keep temperatures from rising by more than 1.5 degrees Celsius we need to spend more money on alternative energy sources and those costs could rise enough to help perpetuate inflation. If the Fed falls behind the curve in such an environment the inflation problem likely will worsen. This outcome could lead to underperformance in financial markets for a much longer period if the adjustment process takes years instead of quarters. To be clear, we do not believe sustained 3% inflation derails markets, but 6% just might. Regardless of the cause, this second scenario is the outcome markets most fear.

Stocks

Will the US stock market continue to outperform the rest of the world in 2022? We do not know but will share a few charts that we believe suggest it might not. We share below the Cyclically Adjusted P/E chart of major regions each quarter during our updates.

The US remains the lone region that trades well above historic CAPE levels and above its average forward- looking P/E. The last few years in particular have been pretty spectacular on a relative basis as highlighted below. After oscillating back and forth from 1993 to about 2010, the US stock market has dramatically outperformed the World ex-US market ever since. From January 1, 2010 thru December 10, 2021 the MSCI US Index is +15.2% per annum vs. the rest of the world (MSCI ACWI ex-US) at +6.1%. Very impressive except when compared to the returns of each index from January 1, 2020, through December 10, 2021, of 24.2% vs 9.3%. The US outperformance in the last nearly two years is remarkable.

Rob Arnott of Research Affiliates is a big value proponent. He recently recited the top 10 stocks in the world by market capitalization at the start of every decade. Interestingly, these stocks regularly change. In 1980, half the names on the list were energy stocks due to the oil price bubble. In 1990, only two incumbent names remained in the top 10, with eight of the new top 10 being Japanese – the Japan bubble. Then, in 2000, it was the tech bubble that accounted for half of the names, with only two of the earlier leaders still around. By 2010, only two of the tech winners remained, with eight new names again.

According to https://companiesmarketcap.com/, of the 10 largest stocks in the world today, seven are US tech (or tech enabled) companies, one is a middle eastern energy company, one is a US financial, and one is a Taiwanese semiconductor company. If pressed to identify where the bubble is today, we would point to US technology companies. At this juncture it is hard to imagine what might replace these companies, but history suggests that something else probably will. That might take care of the chart above, and the chart below, which shows the Russell 1000 Growth Index outperforming the Russell 1000 Value Index dramatically from 1978 to December 2021.

After oscillating in the 1980’s, growth stocks had a massive rally in the late 1990’s, climbing to about 2.2 times the level of value stocks before the bubble burst in 2001 and they fell back to below value stocks at .91x. More recently, tech stocks have again trounced value stocks and are back to a return level of 2.62x value stocks for the entire period. This chart covers nearly 45 years. Casual unbiased observers may not fully appreciate the quality and scalability of some of today’s great growth companies, but they would certainly notice that those companies have never traded at a higher relative level. The top 7 tech companies in the world by market cap that are based in the US include: Apple, Microsoft, Google, Amazon, Tesla, Facebook, and Nvidia. We’ll see if more than 2-3 of them can remain in the top 10 globally over the next decade. Of that, we remain skeptical.

China

We’ve covered our views on China repeatedly this year, so we will simply hit a few highlights and add a few new thoughts. China is a communist country lead by Xi Jinping who is the General Secretary of the Chinese Communist Party, the Chairman of the Central Military Commission, and the President of the People’s Republic of China. When one person holds such vast power, the decision-making process is not nearly as transparent as what we are accustomed to in the West. China’s 2021 radical policy changes favoring “common prosperity and national security”, with little to no public debate, spooked investors and caused the Chinese market to underperform. Industries and companies that have not acted as the Party requested have been targeted and their stocks have performed extremely poorly. Ultimately, the Chinese stock market was one of the worst performers in the world in 2021.

While transparency is unlikely to improve, we think the direction of change in China will be more positive in 2022. With property speculation clearly on the target list, Evergrande (China’s second largest property developer) appears headed for bankruptcy. The government appears set to allow this bankruptcy to occur but is also beginning to loosen its grip on the economy and to encourage economic growth for the first time in a year. As we move toward the 20th National Party Congress in the fall of 2022, we expect to see further Chinese governmental efforts to ensure that the Chinese people are happy, much like in other countries where politicians want to be re-elected. These efforts may include further stimulus designed to improve the economy and may also boost stock prices. This stimulus could happen when much of the rest of the world is in tightening mode. Central banks in the US and elsewhere may be tightening while the China Central Bank is easing. This policy divergence would likely help the Chinese equity markets to perform relatively better.

Finally, it is worth recalling that historically most Chinese savings have gone into bank accounts and real estate. The Chinese stock market is fairly new and not yet broadly held the way it is in the West, especially in the US. The Chinese government may be encouraging capital formation in equities to help de-lever its economy. If so, it is an unspoken objective. It could also represent a fundamental shift in the flow of funds within the second largest economy in the world, leading to much more robust equity markets in the future.

Time will tell, but either way China looks set to perform better in 2022.

This chart shows that Chinese stocks (white line) have been more volatile and fared generally better than the MSCI ACWI since we first invested in them – until recently.

Lastly, COVID

We certainly are not epidemiologists, scientists, or even doctors. We are mere students of markets, and therefore, of history. We do know that investors are now well aware of this scourge. It is global, and it is indiscriminate. Local government reactions have been different to this point, but with few exceptions most countries are learning how to cope with it better by the day. This adaptation process is in keeping with how investors and markets handle any new risk. As time passes, they become more familiar with it and investors position their portfolios to benefit from changes in the risk level (or at least to minimize harm). Over time the market gyrations associated with the new risk become more muted until, finally, they essentially disappear. Gyrations can, of course, return if something much worse than expected comes to pass, but for the most part the underlying risk becomes fully incorporated into the market. We believe that we are almost there today.

The most recent Omicron variant also seems to be doing what viruses do, which is to say they morph. Their goal, like humans, is to live and to propagate. For a virus, this means to become more contagious and less deadly. You want to spread, but not end up killing your host, taking you with them. Early Omicron data suggests that this variant may be doing both. It is outcompeting the Delta variant, but vaccinated victims’ symptoms are, so far, milder with fewer serious hospitalizations, ICU stays, and most importantly fewer deaths. The great hope is that this latest COVID chapter will soon come to a close with a plausible worst-case outcome becoming the need to be vaccinated annually along with our flu shots to minimize the impacts of the then- current COVID strain.

2022 Positioning

If these are the big investment questions of 2022, you may be wondering how we are positioned. We agree with consensus economic forecasts of above average 4% or so global (and US) GDP growth next year. We do not think inflation will get out of hand, and we do not think the Fed will need to tighten excessively to prevent sustained inflation. As the demand bulge fades and supply chain issues abate, we believe inflation will moderate back toward the Fed’s 2% target by the end of 2022. In this environment we think global equities can have another decent year. We believe earnings are likely to grow by 10% plus, allowing multiples to contract while still providing positive returns. With nothing explicit to point to (regulation and taxes?), we are more nervous about the ability of the U.S., and big U.S. tech stocks in particular, to outperform again in 2022. For this reason, we remain well diversified around the world. Our weights in the US are a little below the cyclically high ACWI weight of 60%. Elsewhere we are generally at or slightly above benchmark weights. We are looking for an opportunity to increase our weight in China as we expect it could be a much better market next year and our managers in China continue to add alpha. It’s sometimes hard to remember that in China volatility is actually our friend because our active managers are able to use fear and greed to their potential advantage.

In other asset categories, we expect 2022 could be another decent year for hedge funds. We will try to keep our hedge funds’ beta to equities at about 0.3x and we will be vigilant that our manager return streams are not highly correlated to one another. In 2022, we may even start to read about how much better hedge funds are than bonds.

Finally, we will continue to avoid fixed income as much as reasonably possible. The chart on real rates above tells you about all we think you need to know. A bond cannot grow earnings, it has a fixed coupon, and current bond prices are extremely high. Accordingly, we believe that now is a good time to borrow money to buy a productive asset you need, not lend to someone else. We are not expecting a disaster in bonds, just nothing good and maybe something not so good. So, it probably will not be as easy in 2022 as it has been (with hindsight) the last couple of years to meet your financial goals, but we do think ‘22 should be another good year to stay invested in stocks where you can make the returns needed to meet your long-term financial goals.

We do expect more volatility, but that is why equity investors make superior returns over the long run. As we said at the start of this letter, here’s to a much less exciting 2022.

As always, we sincerely appreciate the opportunity to help you manage your capital and to achieve your organization’s financial goals. We are here to assist you, so please do not hesitate to contact us. We wish you a safe, happy, and healthy 2022.

Your TIFF Investment Team

***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.

One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses.

This article is being provided for informational purposes only and constitutes neither an offer to sell nor a solicitation of an offer to buy securities.
Offerings of securities are only made by delivery of the prospectus or confidential offering materials of the relevant fund or pool, which describe certain
risks related to an investment in the securities and which qualify in their entirety the information set forth herein. Statements made herein may be
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This article is not investment or tax advice and should not be relied on as such. TIFF Investment Management (“TIFF”) specifically disclaims any duty to
update this article. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities.

This article 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
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COVID Dynamics and Evolving Market Risks

The world is currently amid a COVID Delta variant surge. Vaccines seem to be working fairly well
against this new and more virulent Delta variant, but not perfectly. Exact data has been hard to come
by, but for the most part the serious cases of infections are so far occurring predominantly in
unvaccinated people. With football starting and stadiums filling with excited fans we will really put
vaccine efficacy to the test this fall. The economic assistance programs that kept many countries afloat
during the initial outbreak are ending, causing enormous numbers of people to face the dilemma of
risking their health to work, or risking their financial well-being to stay home. Rather than reinstituting
assistance programs, many governments, including here in the US, are taking a harder line, and
implementing mandatory vaccines for workers. Mandatory vaccinations by governments and
businesses will likely remain a controversial topic this fall and winter. What we will try and do in this
letter is outline what we believe are the potential impacts of these developments on the financial
markets.

We supported the initial government fiscal support programs when COVID hit, and we believe they
saved many businesses and individuals from financial ruin and kept the economy out of what would
likely have become a depression. Without the quick implementation of these massive programs, we
might still be in a deep economic hole. Instead, the US economy today is larger than it has ever been,
having made up for the entire COVID-related downturn and moved to new record levels of output. The
US has nearly 11 million job openings posted and only about 8 million people unemployed and actively
looking for a job, the fewest potential employees per open job ever. The economic recovery has been
remarkable.

The markets have benefitted from these fiscal programs too. Stocks, which in 2020 had the fastest
decline from a record high into a bear market ever, dropped by 33% from their pre-COVID highs to a
low of 2237 (on the S&P 500), and subsequently rallied by over 100% to a new record high of 4536 in
September of 2021. There have been 53 record highs so far this year in one of the strongest and
sharpest rallies ever. Booming corporate earnings, to new record highs, have supported stock gains,
which have been further helped by the Fed keeping interest rates low and monetary policy supportive.

As investors try to value stocks, they often attempt to predict earnings out into the future and then
discount those earnings back into a present value – asking themselves, “what should I pay for $1 of
earnings in, say, 10 years?” The lower interest rates are, the higher the present value of $1 in earnings
in 10 years, and hence today’s elevated stock prices. Interest rates can be a huge influence on stock
prices and stock professionals need to worry about the level and direction of interest rates.

With the COVID Delta variant rising quickly, why aren’t markets plummeting as they did in the late
winter/early spring of 2020? We believe the main reason is that investors believe the vaccines are
good enough to ultimately beat COVID. Yes, we may need to get a booster shot every year in the
future, much the same way we get an annual flu shot, but the huge uncertainty that COVID initially
represented is now considered to be a “livable risk” for most. Many now think the days of completely
shutting down an economy due to a COVID outbreak are behind us, and thus the days of massive
declines in consumer spending and hence corporate earnings are also behind us. If so, then today’s
estimated earnings of $1 in 10 years can be at that level or higher, not on the way to $0 or less in a
future COVID lockdown.

Earlier this year some investors started to worry that the economy was expanding too fast, creating
bottlenecks, leading to inflation. This may yet happen. We have written about this topic in the past and
so will only re-state our view that there are good arguments for and against this view. The Fed
continues to believe the current spike in inflation is transitory; the markets seem to believe the Fed and
are keeping yields on 10-year Treasuries at about 1.35%, even while the CPI hovers above 5%. These
low interest rates levels certainly suggest most investors believe inflation will retreat like bonds today.

Negative real rates are not attractive to investors who believe these low inflation rates will persist.
Some smart investors who dislike fixed income today believe that rates are as low as they are because
investors are attempting to discount what the Fed will do, not what inflation will be. There is an old saw
in our business, “Don’t fight the Fed.” With the level of economic intervention that has occurred in the
last 18 months, this conventional wisdom has been as true as ever, if not more so. Some believe that if
current Fed policies begin to cause other unwanted outcomes, such as sustainably higher inflation or a
declining US dollar for example, the Fed likely will have to reverse course and raise rates to ameliorate
these “new” more important problems. The economy, they believe, will be (already is) able to stand on
its own without further economic support. Accordingly, the Fed will likely have the freedom to raise
rates to address inflation without causing a recession, though it will hurt bond prices in the process. We
don’t know if the Fed will prove correct and inflation will prove transitory, or if inflation will rise enough to
push the Fed to raise rates as some suggest. Regardless, we continue to believe that even if the Fed
is correct and inflation is temporary, real rates are negative and not attractive to long-term investors.
Higher rates would only exacerbate this unattractive investment proposition. This analysis keeps us
underweight fixed income and short duration vs our benchmark.

If we are right and the US and most western economies adopt a “live with it” COVID policy, then you
may ask what the financial implications of something like a Delta surge could be. Our best guess may
seem counter intuitive. Because markets are today concerned about over-heating and inflation, it is
plausible that the pauses or temporary economic slowdowns caused by Delta or future variants may
prove less disruptive to markets than most believe. If, of course, a very deadly and vaccine resistant
strain develops, this is wrong, but with that caveat here’s why. Businesses will have less pressure to
rebuild their employee bases and supply chains in a compressed period, allowing them to do a more
thoughtful job while not having to pay top-dollar for everything. This scenario could help to dampen
inflation and inflationary concerns, allow for higher profit margins, and keep the Fed from having to
change its focus to some new area of concern. Hence, future earnings could be higher for longer and
interest rates could be lower for longer. Both results should be good for stock prices.

You might wonder, what if we are wrong and the economy does shut down again? Our best guess is
we would see something similar to what we saw last spring. Stocks would drop, but hopefully not as
much because there will be some increased level of confidence that another vaccine can be developed.
Financial markets would not be as negative as they were, but major declines in the value of portfolios
would be likely. The Fed likely would keep interest rates low in an effort to support the system and help
prevent a depression. Assistance likely would be reinstated, though possibly not as generous because
of the growing budget deficits. To us, this outcome is difficult to forecast and presents a tail risk, though
it would not be a complete surprise as some investors (although not us) are today positioned for just
such an outcome. This is part of the wall of worry the market continues to climb.

Still, we remain concerned about the impact that rising inflation could have on bond and stock prices.
Although we do not currently see one side of the inflation argument as more likely than the other, we
are continuing to analyze the potential impacts of both. To that point, we received several interesting
pieces from TrendMacro (an economic forecasting firm to which we subscribe) that we thought worth
sharing. The charts below demonstrate why the market has performed so well since March 2020. The
top graph shows the change in analysts’ earnings estimates for the coming year over the last 30 days,
annualized. You can see on the far right that analysts have been very aggressively raising their
estimates over much of the last year plus. The improving fundamental backdrop has supported these
higher revisions. The bottom clip shows how actual S&P 500 earnings compared to the estimates
analysts had posted. Even after massive rises in analysts’ estimates, actual earnings exceeded these
estimates by the widest margins in a very long time. (You may wonder how actual earnings beat
estimates in the first and second quarters of 2020, and the answer is that analysts had marked down
their estimates below what companies actually earned. Since then, analysts have not kept up with the
enormous earnings rebound.) The stock market has been in the sweet spot of “beat and raise” for
nearly a year and a half. The big question, as always, is what comes next?

Caution: we’re going to get a little technical, but hope you’ll find it worthwhile.

Investors generally seek to compare prospective risk and returns of one asset to another as they
construct their investment portfolios. This comparison includes one stock to another, one bond to
another, stocks vs bonds, etc. This last comparison (asset allocation) is very important. One way to
make this stocks vs. bonds comparison is to compare the expected earnings yield of stocks (most use
either (1) the expected 12-month forward earnings divided by the current price or (2) the expected
earnings in dollars divided by the current market capitalization – both methods work) to the current yield
on a bond. We will use the first calculation method and a 30-year treasury bond here.

In mid-September, the S&P 500 12-month forward earnings estimate is $207.53 and the price is
4458.58, giving us an earnings yield of 4.65%. This compares to a 30-year treasury bond yield of
1.93%. The difference between these is the equity risk premium (ERP), today equal to 4.65% – 1.93%,
or 2.72%. This 2.72% is the additional return expected from an investment in stocks today vs. bonds
today. Over approximately the last year the ERP has been in a range of about 2.25% – 3.25%, so
today rests near the middle of the range (as you can see on the following TrendMacro graph).
Longer term the ERP has ranged from as low as negative -2% (in the tech bubble) to as high as nearly
7% (in the great financial crisis of 2008-9). If you pushed us, we would suggest the current ERP is within
a reasonable range of fair given the ongoing economic recovery, the fiscal and monetary support that both
abets economic and market advances and dampens their volatility, and the current very low level
of interest rates.

A few things jump out from the next TrendMacro chart, which shows how each yield has moved for the
last 40 years. First, the blue earnings yield line (for S&P 500 stocks) and the red 30-year treasury yield
line moved pretty much in tandem from the Volker era (early 80s) when inflation began to come under
control right up to about the bursting of the tech bubble in 2000. In the early 2000s investors began
demanding higher returns from their risky stock holdings than from their 30-year treasury bonds,
pushing up the ERP. Treasury yields have continued to trend lower ever since the tech bubble burst.
The earnings yield for stocks rose through the great financial crisis, but has turned lower since, moving
more in line with Treasury yields. The resultant orange ERP is shown along the lower part of the chart.

You may well ask “what’s the risk” if rates rise? Do stock prices or bond prices go down more if 30-year
rates rise to 4% in the next two years? We have two responses to that question. First, see the table
below, which shows annualized equity market returns during periods of rising 30-year interest rates.
Surprising to many, over the last nearly 70 years (based on TrendMacro data) 30-year treasury yields
rose by ~1% or more on 24 separate occasions. On 21 of these occasions equity prices also rose. That
is, when bond prices went down (yields rose 1% or more), stock prices went up. That might happen
because investors see an accelerating economy and faster earnings growth, as many forecast today,
more than compensating for an increased discount rate. Even in the instances when rates rose the most,
equities hung in better than many would expect. It was not until later, after the rise in rates began to slow
the economy, that stocks came under pressure and posted more negative returns. The takeaway here
is that usually the early phases of a rate rise are less harmful to stocks than most anticipate. (Note: We
are assuming that the rise from March 9, 2020 to September 10, 2021 was not enough to impede the
current expansion.)

The second response is harder and more specific, requiring us to look at history, to imagine how things
could transpire to push rates to 4% today, and then do some math. Here’s our summary. If in two
years it turns out the Fed was right and inflation has settled back into a comfortable 2% zone and the
economy has continued to make positive progress without having to shut down due to a more severe
COVID strain, then real returns on 30-year treasuries would likely move back into normal historical
ranges of about 1-4%, so using 2% seems reasonable. Alternatively, maybe inflation will be a little
higher than the Fed is targeting at, say, 3% and real rates peak at 1%. In either scenario, envisioning a
roughly 4% yield on 30-year treasuries is not particularly difficult.

The investment implications for holders of 30-year treasury bonds, however, are less “normal” than
investors may expect. A rise in yields today from 1.94% to 4% over two years would shave about 34%
off the value of today’s 30-year bond. Adding back two years of yield still leaves an investor down –
30%.

On the equity front, we need to estimate earnings growth and what the final ERP might be. These
estimates are hard to get right and change quickly, so we’ll outline a few different scenarios. First, let’s
assume earnings grow at a compounded 15% rate (about the current consensus estimate) and that the
ERP remains unchanged. If rates rise to 4% in this scenario, then equity prices would decline by about
7.5%, plus two years of dividends produces a total return of -5% for equities. Using 7% earnings
growth and the same ERP results in a -17% loss for equities.

The possibility that as investors flee bonds, the ERP could decline is equally plausible to us. If we use
the same earnings growth from above and the ERP declines by 1% from today’s level to 1.72%, then
equity returns in the 15% earnings growth scenario turn positive at 11.6%, and only fall to a -3% return
in the 7% growth environment. Finally, for those interested in what might cause equities to lose more
than bonds, there are lots of combinations but something like 0% earnings growth and an ERP of 3%
gets you there, as does 7% earnings growth and an ERP of 4%. While there are a multitude of
possible combinations where equities underperform bonds, we continue to believe that the risk/reward
of owning equities today is superior to that of owning fixed income.

We would make the following points as we try to summarize a fairly complex and technical letter:

1. COVID is a horrible disease that science is allowing most countries and individuals to live with.
2. Future COVID disruptions are likely to be shorter and shallower, and may extend the economic
and market cycles, becoming the economic pause that refreshes.
3. The equity market rally reflects the tremendous economic and earnings recovery, and earnings
multiples are contracting – making valuation appear somewhat less stretched.
4. Rising inflation and bond yields are a potential risk, though perhaps not as troubling for equities
as many investors fear. However, they will definitely hurt fixed income returns if they become
more lasting.
5. Future returns are unlikely to be as strong as what we’ve seen in the last 18 months but could
continue to be decent for some time longer.

As always, we sincerely appreciate the opportunity to manage your capital and to help you achieve
your organization’s financial goals. We are here to assist you, so please do not hesitate to contact us.
We hope 2021 is proving to be a better year than expected for you, your family, and your organization.

***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. One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses.
This article is being provided for informational purposes only and constitutes neither an offer to sell nor a solicitation of an offer to buy securities. Offerings of securities are only made by delivery of the prospectus or confidential offering materials of the relevant fund or pool, which describe certain risks related to an investment in the securities and which qualify in their entirety the information set forth herein. Statements made herein may be materially different from those in the prospectus or confidential offering materials of a fund or pool.
This article is not investment or tax advice and should not be relied on as such. TIFF Investment Management (“TIFF”) specifically disclaims any duty to update this article. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities. This article 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. Except where otherwise indicated, all of the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof.

A Season for Change

Happily, we can confirm that most vaccines appear to be working and that COVID appears to be on the wane in most places throughout the world. It is not over, but with some luck it will be substantially contained within the next 12 months everywhere. That means back to business as “normal” as we remember it. We will need to factor all the changes that COVID has forced onto the world into our investment thinking, of course, but at least we will not have to experience as much medical tragedy nor try to read epidemiological tea leaves (we hope) much longer. The great acceleration in technology adoption COVID forced upon the world may be a long-lasting phenomenon, we’ll see. Our first order of business in this re-opening, if you will, is to take stock of the basics.

Nearly six years ago, as we took the investment Hippocratic oath to do no harm, our first order of business was to eliminate portfolio exposures expected to underperform. The first thing we did was eliminate dedicated exposures to capital intensive sectors (commodities and REITs) from our equity portfolios. We also determined that Europe was not well positioned to produce attractive returns primarily because their equity markets were heavily skewed toward bank and other value-oriented stocks and the political/monetary structure of the Eurozone seemed destined not to work, at least not as well as other regions. While our longer-term Europe thesis may still be correct, for the next few years we think the tables may tilt back towards Europe (more later).

Next, we focused on boosting returns, and since mid-2016 have maintained a significant overweight to Chinese equities. Our off-benchmark position in US Treasury Inflation Protected Securities (TIPS) reached 50% of our fixed income holdings at year end 2019. At the beginning of 2021, we cut our overweight in Chinese equities by half, from 10% overweight to 5%. Similarly, after rising to 60% of our fixed income bond holdings in April 2020, we began selling our TIPS positions in November 2020, until we had eliminated the entire position by May 2021. Just as may be the case, over the long run, with our commodities, REITs and European equities positioning, these recent position changes could prove short-sighted. However, we would like to take this opportunity to explain the rationale for these new and fairly meaningful asset allocation changes in the portfolio and why we have transitioned away from positions we have held over the last several years. In the next few pages, we will explain our rationale, but first a little context….

The consensus view is now that the world economy will grow strongly this year. The vaccine rollout, pent up demand, government spending around the globe, and central bank bond buying are all helping to keep interest rates low and are combining to create a very favorable backdrop for economic growth. As the economy posts its strongest growth in nearly 40 years, we have expected stocks to continue to deliver reasonable gains. In fact, the first half of 2021 has already produced the sorts of annual returns we had hoped for in calendar 2021.

Inflation?

Inflation is today the great debate in markets. Strong economic growth also can bring growing pains, notably, tighter labor and commodity markets, which could produce higher inflation. Will the current burst of inflation pass as more people go back to work and produce the goods and services that a more vibrant economy demands? Or, will shortages persist, leading to higher wages and higher inflation expectations in general? Answering this question is difficult at this juncture. The Federal Reserve continues to expect the current elevated inflation readings to be transitory and for inflation to settle in a band around the Fed’s 2% target rate as time passes. The slightly higher current inflation rate in part makes up for the slightly lower rate of the last few years, resulting in about 2% average inflation, which remains the Fed’s stated target.

On one hand, we believe several factors suggest the Fed will be proven correct. Most importantly, interest rates on the US 10-year Treasury bond remain about 1.6%, well below today’s inflation readings. Rates on 30-year Treasuries similarly remain around 2.3%. No rational investor who believed inflation would exceed these levels would purchase these bonds at rates at or below expected inflation. Investors putting their money where their mouths are strongly indicates that the markets believe in the Fed’s ability to target inflation around 2%. Anecdotally, we expect that large numbers of people will go back to work, global trade will pick up, technological advances will continue, productivity will rise, and shorter-term commodity price pressures will encourage more investment, all of which will help constrain ultimate price gains. Overall, structural elements such as productivity gains, globalization and the reduction in energy intensity that are currently weighing on inflation have historically been sufficient to kept it in check.

On the other hand, we remain mindful that a few new factors could overwhelm these elements and lead to higher inflation. First on our list would be the Fed’s new inflation targeting approach. Targeting inflation of “around” 2% is very different from not allowing inflation to run hotter than 2%. This year we have already seen year-over-year CPI prints as high as 5.0%. Second is the continued massive stimulus being provided by both the Federal Reserve via bond purchases of $80 billion per month, and by the Federal government as it seeks to pass another stimulus bill in the $3-4 trillion range (with much of 2020’s fiscal stimulus still waiting to be spent!). This double-barreled stimulus effort is of historic proportions, exceeding all previous peacetime spending as a percent of GDP. We are reminded of LBJ’s “guns and butter” programs of the 1960s which were the precursor to the inflationary period of the 1970s and 80s. Should investors and consumers begin to believe inflation will become embedded going forward, the outcome could become a self-fulfilling one, with employers willing to pay more for inputs and labor, and consumers willing to pay more for the goods they buy. At the very least, we acknowledge that the chances of inflation becoming a problem are higher today than they have been for many years. Higher inflation would be a significant issue for capital markets as yields would rise and equity multiples likely would contract. Starting from today’s elevated valuations that could mean several years of sub-par returns.

So What?

So, what are we doing about all this you ask? Well, for the first time in essentially 5 years we are adding to our European equity holdings. European equities have underperformed US equities over the last 10 years by 8.2% per annum, over 200% cumulatively. Over the last 5 years they have lagged by 6.9% per annum. Today, valuations in Europe are well below other regions of the world. Europe bungled their COVID vaccine rollout causing investors to hesitate to return to the region and allowing China and the US to lead global markets higher last year. Going forward, however, we believe Europe will catch up rapidly on the vaccine front, that the Eurozone savings pool resulting from governments’ desire to protect against economic fallout from COVID is substantial, and that the creation of the European Recovery Fund with shared responsibility across nations is a step toward European integration. All of these elements could support faster European growth and attract global investor attention. Further support for broader European integration and sharing of obligations across countries could result in a faster growth rate well into 2022 and possibly beyond. We believe the sclerotic European economy and its stock markets are finally on a path to become much healthier.

The MSCI Europe Index is a significantly more value-oriented stock index than the S&P 500. On May 31, 2021, financials, industrials, and materials comprised 39.44% of the MSCI Europe Index compared to 23.84% of the S&P 500. The growthier information technology, consumer discretionary and communication services sectors are only 24.08% of Europe, compared to a sporty 49.06% of US weights. This more value-oriented composition of European stocks could benefit from faster economic growth and would also likely perform better in a rising rate world, even if the European Union fails to further integrate and therefore grows slower than it could (or should). We also believe European inflation appears further off than any potential US inflation. As a result, for the first time in the last 5+ years, we are of the opinion that European stocks may have more runway than their US counterparts on many fronts.

Turning to our China exposure, we will note that our belief in “first-in-first-out” investment benefits is a key reason that we trimmed our biggest overweight significantly. Reducing our China exposure by 5% at year-end 2020 allowed us to lock in a big part of the benefit of last year’s excellent performance. China remains one of the cheapest, fastest growing regions in the world and we believe it will likely continue to outperform the world over some reasonable period of time. In the interim, as investors position for a recovery from the pandemic, we suspected Chinese stocks may be due for a breather, which now seems to be occurring, as evidenced by the following chart that shows relative performance of various US and international equity market indices over the five years ended May 28, 2021. (The chart does not include any manager alpha.)

Returning to the inflation debate, where we acknowledged both sides of the argument and the difficulty today of maintaining a firm opinion on which direction it might head. We recently sold our TIPS and moved back into treasuries because, as with Chinese stocks, we had been well rewarded for owning them. Over the last year or so, TIPS in the 3–5-year maturity range have outperformed comparable maturity treasuries by approximately 8%. In the world of fixed income that is significant outperformance. We sold the TIPS at what we viewed as attractive prices, realizing an attractive return for purchasing these relatively low risk securities back when few investors had any interest in protecting themselves against possible inflation. If in the next year inflation moves even higher, we may wish we had not sold our TIPS because the price relative to comparable treasuries will move higher still. Nevertheless, a fair price for something we bought cheap led us to lock in the relative performance. Conversely, if secular forces push inflation lower, as we earlier contemplated, we’ll be happy we sold when we did. The chart below indicates the price change of a TIP outperforming a comparable maturity Treasury by about 8 points (after allowing for the 2% higher coupon of the Treasury) and helps to illustrate why we closed our TIPS position and moved back into nominal Treasuries.

Leaving Us Where?

So, intentionally, these moves over the last several months leave our portfolio about as evenly balanced to our benchmark as it has been over the last five years. Other than China (where we are still moderately overweight), our only meaningful tilt within the portfolio is toward equities generally, where we remain about 69% invested as we write this (4% overweight). We overweight equities at the expense mostly of fixed income. We also remain invested in shorter maturity bonds than our benchmark, so if rates rise, we should lose less than the benchmark and vice versa. Yes, we remain cautious in the fixed income portion of the portfolio. Our 20% hedge fund weighting is allocated reasonably close to our segment targets of 40% in equity long/short, 20% in macro/credit, 20% in relative value and 20% in directional. We will attempt to keep the beta of our hedge fund portfolios around 0.3x to broad equity indices so that we don’t suffer too badly in an equity downdraft and still capture a reasonable portion of the longer-term beta offered by equity markets.

Our recent strong performance has been fueled by a propitious combination of manager alpha and additive portfolio tilts. For now, we will be more heavily reliant upon our ability to continue to find and partner with the best investors in the world if we are to outperform our benchmarks. If history is our guide, that’s a good place to be.

Finally.

We are optimistic that this terrible pandemic will soon draw to a close and hope that you experienced a few silver linings. For example, an extended stay at home with your parents or your children (whatever their age) may be a lasting positive memory. Next up, as we all attempt to return to normal, everyone is wondering what the new work environment might look like. For our part, the TIFF team expects to return to the office shortly after Labor Day. That said, we are proud of how the team has performed under the stresses of the last year outside of the office. We all very much look forward to seeing our colleagues in person and to meeting some of our newer colleagues in person for the first time. In the meantime, we hope your summer is great and that the economy keeps growing inflation free!

As always, we sincerely appreciate the opportunity to manage your capital and to help you achieve your organization’s financial goals. We are here to assist you, so please do not hesitate to contact us. We hope the second half of 2021 is as fruitful as the first and a healthy and happy time for everyone.

***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. One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses.
This article is being provided for informational purposes only and constitutes neither an offer to sell nor a solicitation of an offer to buy securities. Offerings of securities are only made by delivery of the prospectus or confidential offering materials of the relevant fund or pool, which describe certain risks related to an investment in the securities and which qualify in their entirety the information set forth herein. Statements made herein may be materially different from those in the prospectus or confidential offering materials of a fund or pool.
This article is not investment or tax advice and should not be relied on as such. TIFF Investment Management (“TIFF”) specifically disclaims any duty to update this article. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities. This article 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. Except where otherwise indicated, all of the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof.

Attention Seekers: GameStop and Bitcoin

Normally in these commentaries, even when overall performance is good, we tend to lament those things standing between our portfolios and the performance that we want them to achieve. We admit to focusing more on any shortcomings in our portfolios, or why some funds or managers have lagged, or why fixed income (where we remain underweight) for the past few years has performed better than expected. We have talked about what could become the next headwind for equity performance, or if we believe the coast is clear. We have even talked about Modern Monetary Theory (aka “MMT”), a theory we would prefer not to be utilized, but which, nonetheless, seems to be slowly becoming the driving economic theory in the U.S.

Today, instead, we are going to write about two current issues that have captivated investors’ attention: GameStop and Bitcoin. We don’t usually spill much ink on popular topics, believing that by the time we comment, most people will have read or heard enough to satisfy their interest. However, we hope these next few paragraphs help you better understand how we generally address issues such as these two very different current topics.

First, though, we will report that during the last few quarters we have had good results in our portfolios. We have stayed somewhat overweight equities and our equity managers have added value, hedge funds have outperformed bonds, and our hedge fund managers have done reasonably well. We believe the rise in yields is becoming the next concern for equity prices and could cause stock price volatility. Still, by year end we expect big economic improvements resulting from successful vaccinations and the dramatic reduction in COVID cases should overcome higher yields and push stock prices higher. We hope that this is the outcome, and that our manager roster continues to perform well. We will keep you posted.

In his book “How to Win Friends and Influence People” Dale Carnegie urges us to live by the essential principles, to avoid criticizing, complaining, or condemning. Hopefully, we are not about to violate any of these principles as we share our thoughts about GameStop at its new price of ~$190 (+/- $150 or one-day’s price movement!) per share, and Bitcoin, up nearly 10-fold in the last year, at its new price of $58,500 per coin.

GameStop: Gaming Software or Gambling Stock?

For starters, we believe that in the short run the market is a voting machine, but in the long run it is a weighing machine. Prices can deviate from fair value for a whole host of reasons, and as Keynes correctly noted, they can stay irrational longer than you can stay solvent. A host of Robinhood traders have tried very hard to put this axiom into practice, led by the idea “We can stay [irrational] longer than they can stay solvent.” In a nutshell, these traders used different web sites to coordinate their efforts to drive the price of the stock up so high that anyone short would be forced to buy it back or go bankrupt. Before the saga ends, these traders may have bankrupted at least a few organizations, and maybe quite a few. The fate of some well-covered hedge funds, the biggest shorters of GameStop and presumably the main target of these traders, is still uncertain as we write.

Taking a step back, we know that capital markets were created to facilitate the raising of capital for businesses or governments seeking to make long-term, profitable investments. Investors who believe an idea will generate returns above those they might earn on their capital elsewhere with similar risk, invest in the shares (or bonds) on offer. In stocks, one becomes an owner of the business. The better the company does, the more money it makes, the more valuable the company becomes, and the stock price is likely to rise. While there are many other factors that impact stock prices, the primary driver of success or failure is the fundamental performance of the underlying business. Markets allocate capital to the best management teams and their best projects by adjusting the price and number of shares the company would need to sell to raise the extra capital for a new project. Secondary market trading of these shares allows original owners to sell a portion of their interest to new shareholders who believe investing in a particular security represents an attractive potential return. There it is – your MBA in one paragraph.

What the Robinhood crew attempted to do is not investing. It may, in fact, even be illegal. If a few hedge funds or mutual funds got together and conspired to buy or sell a particular security to make the price move to some level whereby others would be forced to unwind their positions or go bankrupt, they most likely would be prosecuted. Coordinating purchases and sales with others in an attempt to manipulate share prices has historically been considered illegal. Regardless of how the Congressional inquiry into GameStop trading turns out, this whole situation reminds us of the old poker axiom: if you don’t know who the patsy is, you’re the patsy.

We believe GameStop’s share price will eventually gravitate toward a price that reflects their future business prospects and expected cash flows. If they have important and potentially profitable new revenue streams that become visible to investors, then the stock price should go higher. If their current lines of business shrink or become less profitable, then the stock will likely go lower. This is how all stocks trade, and GameStop is unlikely to be a norm-breaking exception. Looking at analysts’ GameStop estimates on Bloomberg in early March, we saw that two dropped coverage, and the remaining 8 were evenly split between ratings of hold and sell. No analyst had a buy rating. On Bloomberg, the price target 12 months out is $45.42. To the best of our knowledge, none of our managers has a position in the stock. Knowing that the most knowledgeable, financially aware people who track GameStop stock collectively believe the share price will decline by 75+%, we would hope that any manager, who does hold it, is short.

Bitcoin: To Own or Not to Own?

Before you read the second portion of this letter it is important for us to acknowledge that blockchain and the decentralization of finance, as we’ve all known it, are incredibly important trends that will impact our future in profound ways and deserve careful attention as areas of investment focus. In what follows, we are focusing solely on one cryptocurrency, Bitcoin. Not on blockchain or “de-fi”, or anything more than Bitcoin. The Bitcoin saga shares a few similarities with GameStop, but also has a few unique causes. Bitcoin’s pricing has been extremely volatile but has soared over most periods since its introduction. Bloomberg’s Bitcoin price chart goes back to July 2010 when it started at $0.06 per coin. The journey to $58,500 has not been smooth as there have been many price pullbacks including two of over 75%. Regardless, like many others we wish we had the foresight to buy $100 worth of Bitcoin at the beginning and to hold it until today when it would be worth over $80 million! Alas, we did not. There are two reasons we believe Bitcoin (or any cryptocurrency) would have value – as a currency, or as an investment. Let’s try and briefly determine if Bitcoin has either.

Using our capital markets framework from above, Bitcoin was invented by the mysterious Satoshi. The idea was to create something with limited supply that was tightly controlled, known by all on a public blockchain, with issuance declining over time, not subject to change by the government or economic conditions, that can be used as a currency or owned as a store of value. Some number of a new Bitcoin (6.25 coins today) will be awarded to a “miner” who solves a very complicated mathematical question, creating a new block. This occurs once about every 10 minutes and is the only way new Bitcoin come into existence. The size of the reward a successful miner receives declines by 50% every four years. In total, there will only ever be 21 million Bitcoins, with the last being mined in 2140. Today, 18.67 million already exist, suggesting the future new supply will be very small.

Extracting from above, we know: (1) there was an initial owner/inventor, (2) new units (coins) are issued on a limited and regular basis for work done, and (3) all coins can be traded in the secondary market where buyers and sellers see the prices. Sounds much like a regular stock so far. So, how easy is it to use Bitcoin as a currency in a transaction? Bulls point out that PayPal, Visa, and Mastercard have recently accepted Bitcoin onto their platforms and that this development should greatly accelerate adoption. In fact, Paypal announced in the last few days that they would begin accepting crypto currency (more than just Bitcoin) for payment to their 29 million merchants, and of course you can now buy a Tesla with Bitcoin. Both developments boosted Bitcoin. Nevertheless, as of December 16, 2020 fundera.com counts just 13 “major corporations” among the 2,352 companies in America willing to accept Bitcoin in transactions. Given there are nearly 11 million employers in the US, this seems a very low number indeed. We believe the extreme volatility of Bitcoin would cause most people and businesses not to accept it as payment for services if only because in USD terms people do not know what Bitcoin might be worth when it comes time to pay the bills. Currency fluctuation risk of this sort has long been a concern for businesses operating in foreign lands, and they are quite adept at hedging these unwanted exposures. Yet for most individuals and smaller businesses here in the US, such a currency risk does not seem worth taking. At this juncture, we do not see Bitcoin functioning as a currency in any meaningful way, though it could happen if derivative markets become much deeper, more liquid, and more readily available to individuals and merchants.

From a purely investment perspective, however, Bitcoin and other cryptocurrencies are far more intriguing. The limited and known supply suggests it could serve as an inflation hedge. In fact, some believe that Bitcoin is viewed by younger investors in much the same way that gold is seen by older investors – as a store of value. This could be true. Comparing the two, we note that gold has been considered a store of value globally for several thousand years and today its ownership has been spread widely across the globe. Gold is traded freely in most jurisdictions, and most countries’ central banks hold some portion of their reserves in gold. In contrast, Bitcoin was “invented” in 2009 so it does not have thousands of years’ worth of acceptance as a store of value. Rather than being widely held, Bitcoin’s ownership base is likely quite concentrated in the hands of its early investors and true believers (suggesting that the actual liquid float may be a small fraction of the total Bitcoin outstanding) and which contributes to Bitcoin’s extreme volatility. Like gold, Bitcoin is traded freely in most jurisdictions today, but we know of no central bank that has invested any reserves in cryptocurrencies.

This analysis suggests favoring gold over Bitcoin in 3 of 4 categories, at least for now. If central banks begin holding Bitcoin as reserves, then the price would likely move much higher. Also, if over time governments do not consider Bitcoin a threat to their control of monetary policy and therefore do not restrict or regulate it in any way, investor confidence in Bitcoin would increase. On the flipside, two concerns we have are some sort of blockchain hack and potential regulation. Odds of a hack seem low currently, unless a quantum computer capable of much, much, much faster computing speeds than those available today sneaks onto the scene. We could more easily imagine another hack or technological disruption of the “wallets” or account numbers (“keys”) that owners are required to use to access their Bitcoins. Lose your keys, lose your coins. On the other hand, odds of regulation probably grow with Bitcoin’s success. However, neither of these is a new concern and the market seems comfortable today that neither is likely. Finally, possibly the most thoughtful reason for Bitcoin concern comes from Bridgewater’s Ray Dalio who argues that while the supply of Bitcoin itself is limited, the supply of other forms of cryptocurrency is unlimited. Ray didn’t say this, but if asparagus prices rise too high, maybe people will eat more broccoli. He also points out that throughout history the first mover often gains the upper hand, but does not always dominate forever, especially in technological areas. Think AOL, Nokia, Blackberry, Friendster, and many others. Success today suggests success tomorrow, but certainly does not guarantee it.

Another growing concern is that we believe Bitcoin ownership may still be very concentrated, and that recent price rises result from a few decent sized buyers simultaneously trying to establish their desired positions while the primary holders continue not to sell. If true, the result would explain extreme upside price volatility. Similarly, on the occasion when a larger holder does decide to sell, the holder may be joined by lower conviction owners and the supply/demand balance can quickly reverse. We’ve occasionally seen great stock and great private equity investments move up sharply for years and exhibit extreme volatility along the way. Each time, however, the price gain resulted from a business success inherently creating value that the price gains reflected. Unfortunately, an owner of Bitcoin won’t someday get a share of e-commerce payment profits, or of Bitcoin blockchain ledger growth, or anything else. To the best of our knowledge, Bitcoin cannot be read, turned into jewelry, and worn, framed, driven, or watched every Sunday on television. Those who seek to buy some Bitcoin and then “just sit on it” must consider that to the extent this practice is followed by many others, the result could contribute to continued Bitcoin price swings or even help make them more extreme.

The Bitcoin market does not behave like a normal market today. Bitcoin seems more like a confidence game at this point, to us. While we don’t mean to suggest anything nefarious is happening, we do think the notion of investing in something solely because it will only ever have a limited and known number of copies made, seems a narrow reason, especially as the total value of all Bitcoins surpasses $1 trillion. The level of confidence that no unexpected new Bitcoins will be minted is very high. We accept this but remind readers of Ray’s earlier caution that other cryptocurrencies (coins) will be minted. That each Bitcoin is therefore worth today’s price of $58,500 is tough for us to reconcile and, in our minds, will remain true only so long as others believe it should be. Although the same can be argued of gold, as discussed above, gold’s much longer history and broader acceptance suggests more future stability.

The most important takeaway from this quarter’s letter may be that there are always a million things that can distract you from what’s truly important. At $190 per share the total market value of GameStop is a little over $13 billion. Total US equity market capitalization on December 31, 2020 was nearly $51 trillion. In six months, most of us are unlikely to remember the GameStop saga, unless you got swept up in it. Of course, Bitcoin’s value could continue to grow, even to the point it becomes equal in value to gold as some believers suggest. To do so, Bitcoin would have to rise from merely $58,500 per coin today to as much as $600,000 per coin (assuming gold’s price stays flat). We do not think that will happen and so we do not own Bitcoin. We may be wrong, but after taking a close look at Bitcoin twice in the last two years we are unlikely to spend much more time analyzing this very difficult to forecast situation, especially at current prices. Avoiding these types of GameStop and Bitcoin distractions is essentially a daily chore, and one we commit to as we seek to grow our members’ investment portfolios, and recommend you commit to as you seek to grow your own portfolio.

On the other hand, to those who look at GameStop and Bitcoin as indicia that we must be in or near a bubble in the asset markets, it is our view that we are not. Valuations are high, with the S&P 500 trading at a P/E of 22x forward 12-month earnings compared to a long-term average of somewhere around 16x. The MSCI ACWI forward P/E stands a little above average at 19x, but not as high as that of the US. So, yes, stocks are expensive, and require earnings growth in the next 12 months, but prices are not crazy if we are exiting a recession and in the early part of a multi-year global economic rebound. We believe that’s right where we are. The road will probably be bumpy because of the high valuations, but we think stocks remain the place to commit capital. Bonds, which have sold off some in the first part of the year and will be supported as long as possible by global central banks, are still expensive trading at an effective “P/E” of 58x (1/current yield on the 10-year treasury). If the global economy picks up, we believe inflation will rise some and that investors will continue to lose confidence in low return, potentially risky bonds in their portfolios. We continue to underweight bonds at today’s valuations.

Here’s to: vaccine success, no major virus mutation setbacks, lockdowns ending, continued low front end rates and easy monetary conditions, a return of animal spirits, a global synchronous expansion and generally rising global stock prices for a few years. It can’t be that easy, can it? We’re sure glad it’s not 2020. As always, we sincerely appreciate the opportunity to manage your capital and to help you achieve your organization’s financial goals. We are here to assist you, so please do not hesitate to contact us. We hope 2021 is a healthy and terrific year for everyone.

***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. One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses. This article is being provided for informational purposes only and constitutes neither an offer to sell nor a solicitation of an offer to buy securities. Offerings of securities are only made by delivery of the prospectus or confidential offering materials of the relevant fund or pool, which describe certain risks related to an investment in the securities and which qualify in their entirety the information set forth herein. Statements made herein may be materially different from those in the prospectus or confidential offering materials of a fund or pool.This article is not investment or tax advice and should not be relied on as such. TIFF Investment Management (“TIFF”) specifically disclaims any duty to update this article. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities. This article 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. Except where otherwise indicated, all of the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that
subsequently becomes available, or circumstances existing or changes occurring after the date hereof.

The Year of Living Dangerously

We will all remember 2020 for different things.

First and worst, we will remember 2020 as the year when COVID-19 spread throughout the world and
killed nearly 2 million people globally, including nearly 400,000 Americans. Depending upon how you
count, that is the greatest loss of American life ever, except for the Civil War. The year also
experienced a number of other tragic events that sparked calls for social justice solutions to create
positive and lasting changes.

Happier 2020 memories will include more time with family, friends and relatives, those stricken by
COVID-19 who thankfully survived and recovered, renewed appreciation for our essential workers,
discovering new creative outlets and ways to binge watch TV, and saying goodbye to that dreaded
commute. Along with, and mostly due to COVID-19, 2020 produced a long list of economic anomalies,
including:

GDP swings: the largest single quarter drop in US history (-31.4% in Q2) immediately followed
by the largest single quarter gain (+33.4% in Q3)

Unemployment swings: unemployment rising from 4.4% to 14.7% in one month, and then
falling back to 6.7% over the next 7 months

Market swings: the fastest decline into a bear market from an all-time high for the US stock
market, followed by one of the greatest bull markets, and quickest recoveries, to new highs

Market firsts: oil fell to the point that investors were briefly paid $17 to accept delivery of a 55-
gallon barrel; and Apple’s market cap crossed $2.25 trillion, exceeding the entire value of the
UK index FTSE 100

Unprecedented growth areas:
o Tesla grew in value to $670 billion, (and depending upon the day, it equals the
approximate value of BMW, Mercedes, Volkswagen, Fiat/Chrysler, Ferrari, Honda,
Toyota, Subaru, Mazda, Mitsubishi, Ford, and General Motors combined)
o FANGAM (Facebook, Amazon, Netflix, Google, Apple and Microsoft) stocks now have a
larger market cap than every individual country except China
o Zoom gained 400%, Pinterest 250%, Overstock 600%, Moderna 400%, Plug Power
1000%, and Workhorse 550%, to name a few examples

Anticipated challenges: businesses that interacted directly with consumers had a very difficult
year. Bankruptcies mounted particularly in retail, restaurants and automotive, ensnaring wellknown
brands: Brooks Brothers, Neiman Marcus, and JC Penny; California Pizza Kitchen, Ruby
Tuesday, and Sizzler; Dollar Thrifty Automotive Group, Advantage Rent a Car, and Hertz

Contradictory outcomes: the US experienced record savings rates, record retail sales, but also
record unemployment – and all at roughly the same time

Modern Monetary Theory (MMT) rushed in: global governments, including the US, tried to save
their economies by printing and spending more money than ever before, and with the US
budget deficit currently around -20% of GDP we remain hopeful that MMT will prove a
temporary situation and soon the economy will be able to stand on its own two feet

Medical miracles: the world quickly developed and began to administer at least three COVID-19
vaccines, providing hope that the platforms used to create these vaccines will enable even more
rapid vaccine development for the next global scourge

For us, the key takeaways from these wildly disparate events are that some were predictable (i.e.,
spikes in unemployment and bankruptcies resulting from a recession), but many more were not.
Unpredictable outcomes keep us humble while reminding us of the difficulty of consistently outsmarting
the markets.

How Did the Portfolios Fare?

Overall, 2020 results were pretty good, and we are optimistic about the prospects for 2021. Within the
tumultuous year we all experienced in the markets, our team rose to the challenges created by COVID-
19, overcame distance, remained disciplined and had some good luck to go along with the inevitable
bad. Let’s review what worked, and what challenged us.

Some of the things that worked during 2020 in the portfolios included: generally maintaining full equity
exposure despite the market volatility and even remaining slightly above benchmark on average across
our portfolios; rebalancing into equities during the February and March selloffs (contrarian market
positions are never easy and require both a game plan and sometimes a strong stomach);
overweighting China versus well-known benchmarks due to our confidence in our investment thesis
(including our managers); implementing our direct equity investment program; and generally our
manager line-up – this was a strong year for our active returns.

Some things that worked less well during 2020 included: some modest hedging strategies we employed
when the market seemed, to us, too euphoric and / or too certain that COVID-19 would pass without
long-term effects; underweighting bonds (although recently that position has rebounded and started
working); trimming certain growth winners after strong runs; and underperforming selected managers in
certain strategies.

Back Toward Normal in 2021?

By the end of 2021 we will all know precisely what was in store for us during the year. Even without a
crystal ball in hand, we will nonetheless share a few ideas about where we have been and where we
might be going.

China and Beyond: China was both the country in which the COVID-19 virus first started, and the first
one to halt its spread. Early virus containment enabled China to experience among the best overall
2020 major stock market returns in the world. As the rest of the world struggled with the virus, and
central banks printed money for people to spend, Chinese manufacturers functioned as the world’s
factory floor. China was the first to see its GDP rebound to new highs; there are high hopes that the
US will see similar results early in 2021, with other countries to follow. We believe that an economic
recovery is priced into equities heading into the new year.

The best world is one in which we all work together, both respectfully and cooperatively. Episodes that
interrupt this cooperative environment can be destabilizing. Politically, we expect to see less turmoil
and a more “normal” level of US engagement throughout the world. This new (old) normal likely will
recognize China as a competitor, as well as a friend, while trade policies are expected to remain
tougher than they were four years ago. We expect the acceleration of China and the rebound in the US
to be joined by other countries. While there are plenty of value stocks in China and the US, these two
countries are home to most of the world’s great growth companies. By contrast, Europe, Japan, and
other emerging market countries have more value companies. If there is a rotation from growth to value
in stock performance, these countries may be positioned to perform relatively better next year.

Rate Considerations: Turning to rates, if global GDP accelerates, we could see inflation rise.
Expansionary fiscal policy coupled with easy monetary policy and a Fed that is targeting a range of
inflation around the 2% level seem like the ingredients for a back-up in yields. A rise above 2% inflation
could spook the bond market and cause yields to rise. Ironically, a stronger global economy with
declining unemployment and rising rates could be the next hurdle for the stock market. This scenario
definitely would be a back to the future moment, as it suggests the bond vigilantes may saddle up for
the first time in nearly 40 years. Students of history will recall that in the 70s and 80s, capital markets
enforced financial discipline on governments seen as too profligate by pushing up interest rates.
Replacing fixed income allocations in portfolios with something “better” will be important going forward.
Globally, the $18 trillion in debt that currently produces negative nominal yields will not help investors
earn real returns of 5% going forward.

If the Fed targets or pins 10-year Treasury yields at, say, 2%, then a decline in the value of the US
dollar is likely. As the world’s great debtor nation, some believe more US bonds may not be sought by
other nations, and the dollar could lose its reserve currency status. While we worry about this potential
scenario, we do not believe that it is likely for many years. We do think that a modest rise in inflation
coupled with expansionary fiscal and monetary policy actions will lead markets to conclude the US is
monetizing debt, which would likely cause the USD to weaken in 2021. In our opinion, however, until
there is a suitable replacement, the world will continue to hold its wealth, and transact, mainly in US
dollars.

Some near-term risks: The new year starts in a particularly precarious fashion. On January 5, the state
of Georgia holds two runoff Senate elections. Odds currently suggest a 25% chance of Democrats
winning both seats. If one or both seats remains Republican, the resulting split with a Democratic
house and a Republican Senate is, in our view, ultimately preferable for stocks. We also have the odd
juxtaposition of spiking COVID-19 cases and deaths coupled with the approval, manufacturing ramp up,
shipping, and administering of FDA-approved vaccines. If there are no glitches in the manufacturing or
supply chain, then COVID-19 could be eradicated sooner; if there are significant stumbles then the
recovery may falter at least for a period. That faltering has the potential to slow the recovery and, in the
worst scenarios, to do lasting damage as a prolonged downturn (without yet more stimulus) could lead
to permanent loss of businesses and more permanently unemployed. We are happy to see the US
government provide individuals and small businesses another fiscal boost as we exit the COVID-19 era
so that they have a chance to recover. We are closely following these various possibilities as they keep
us somewhat nervous entering the new year. That said, we expect to be mostly free of COVID-19
before the end of 2021. That result will be good for the economy and for stocks – not to mention
society overall.

US Markets and Our Managers: Okay, we will say it. Priced at 23.5x expected 2021 earnings of $160
per share, US stocks as measured by the S&P 500 are expensive. They got this way by going up
some while earnings collapsed during the COVID-19 recession. The markets recovered as nicely as
they did primarily because everyone looked forward. Had you asked, we would have been reticent to
predict such a strong bounce back for equities given the overall economic backdrop. Other stock
markets around the world are less expensive because non-US stock prices did not recover to the same
extent as those in the US.

Our discipline in 2020 of rebalancing into weakness helped make it a pretty good year. It never feels
good selling treasury bonds that are going up in price to invest in equities that are being pummeled, but
you usually get rewarded for doing so. Our rebalancing discipline also caused us to trim growth
positions and add to value positions repeatedly in 2020. This rebalancing kept a relative lid on “what
could have been” but enables us to enter the new year with continued confidence. Despite growth
stocks outperforming value stocks by the largest margin ever (35% in 2020), our manager roster is
strong and balanced, and we have more style diversity than many others. If earnings in the US do not
recover as quickly as the markets are discounting, and stocks here take a pause, we believe our non-
US managers can contribute to overall returns, and our value managers can protect against possible
rotation away from growth. Our hedge funds can help us maintain portfolio ballast and have the
potential to provide higher returns than fixed income. Until rates rise meaningfully, higher stock
valuations may become part of the new normal. Think TINA. There is no alternative (TINA) is our
argument for both the dollar’s continued strength, and for stocks globally, although the straight line up
for stocks we have experienced since mid-March is most likely over.

Progress on elements of a green new deal likely will be made. If market mechanisms are included, we
could see a new group of technology leaders in areas such as electric vehicles, wind and solar
electricity generation, charging stations, and others. We are excited to see new areas of biotechnology
research come to light, and hope some of our managers will capitalize on these and other emerging
opportunities. We do not expect the cone of possible outcomes to be quite as wide for stocks in 2021
as it was in 2020. This is important, as we expect that slightly higher equity exposure will be needed to
generate acceptable overall portfolio returns in 2021 as fixed income returns lag. If all goes well,
however, this portfolio construction should make for another successful, albeit possibly bumpy year.

To us, 2021 looks like an environment in which active management alpha will be required to achieve
5% real rates of return as we transition back into a growing global economy. We expect to maintain a
balanced roster of exposures that we anticipate will serve well in a range of market environments. For
the first time in a while, it might pay to partner with a good value manager, a good European manager,
a good Asian manager, and several good hedge fund managers. Thankfully, we have a solid head
start with managers in all these areas and look forward to the many exciting investment challenges and
opportunities to come in 2021.

We Are Excited for 2021

Like most of you, we are ready to put 2020 in the past, and we look forward to 2021 with optimism and
excitement. We are confident that our manager roster is strong, our team is fully engaged, and our
company is positioned for success. We look forward to the day when we can get off Zoom and get
back together in person with our colleagues and with you.

As always, we sincerely appreciate the opportunity to manage your capital and to help you achieve
your organization’s financial goals. We are here to assist you, so please do not hesitate to contact us.
We wish you a healthy and happy new year.

—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. One cannot invest directly in an index, and unmanaged indices do not incur fees and expenses.This article is being provided for informational purposes only and constitutes neither an offer to sell nor a solicitation of an offer to buy
securities. Offerings of securities are only made by delivery of the prospectus or confidential offering materials of the relevant fund or pool,
which describe certain risks related to an investment in the securities and which qualify in their entirety the information set forth herein.
Statements made herein may be materially different from those in the prospectus or confidential offering materials of a fund or pool.This article is not investment or tax advice and should not be relied on as such. TIFF Investment Management (“TIFF”) specifically disclaims any duty to update this article. Opinions expressed herein are those of TIFF and are not a recommendation to buy or sell any securities. This article 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. Except where otherwise indicated, all of the information provided herein is based on matters
as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that
subsequently becomes available, or circumstances existing or changes occurring after the date hereof.

On Walls and Worries

As we prepare this quarterly piece, capital markets, especially U.S. equity markets, have fully recovered – and then some – from the disastrous 1Q & 2Q economic consequences of Covid-19

U.S. stock prices move up a little bit on most days despite continuing unsettling virus statistics, intense protests, and extreme political bickering over almost everything. With the polarizing 2020 presidential election now just 5 weeks away, Americans cannot seem to agree on much of anything, except that they should buy stocks, mostly U.S. growth stocks.

An old expression coined in the 1950’s says that equity markets like to “climb a wall of worry.”

U.S. equity markets have recently been climbing a rather steep such wall indeed. We’re cautious about that climb not so much because the “worries” are unprecedented – if you think living during Covid-19 is bad, read Erik Larson’s The Splendid and the Vile and acquaint yourself with how U.K. citizens felt during the Nazi bombing campaigns of 1940 and 1941 – but rather because the institutions on which we rely to fashion solutions to the worries seem largely dysfunctional at present.

That said, we do not believe any investor with a long-term horizon should overreact (or underreact) to the problems and challenges of the here and now. Societal problems often seem insurmountable in the moment. Yet, human beings, wired as we are to overcome adversity, usually manage to find some acceptable path forward. So, if you serve on the Investment Committee or Staff of one of the many non-profit institutions for which TIFF stewards capital, we recommend that you pay careful attention to the important issues of the day and form beliefs around them. But, never conflate problematic current events with the drivers of long-term investment success.

Speaking of problematic current events, we have entered election season, when politics again assume center stage. Regardless of outcome, the results of the presidential election will influence each of us, our country, our world, and our capital markets. As was the case four years ago, this election is “the most important of our lives.” We suspect each of the next few elections will be too. That said, elections indeed are important and we do believe that the differences between candidates this year seem wider than normal. The winners will get to try and set the direction of policies that can have meaningful impact on financial asset prices, as well as the world at large.

Whomever wins will oversee an economy trying to emerge from an extraordinarily difficult period. Without belaboring the point, the lockdown in 2Q produced some of the worst economic numbers since the Great Depression. Without the extremely fast and exceptionally large bipartisan relief programs, we might have seen a spiraling into our own depression.

Fortunately, both monetary and fiscal relief arrived before that could occur. To give you a sense of the magnitude of the relief efforts, Ned Davis notes that in April 2020, government support accounted for 24.9% of personal income and three months later (July 2020) it was still 17.4%.

The good news is that over this same period, Americans’ personal savings rate rose to 33.7%, before declining to 17.8%. With support programs beginning to expire in August, some of these savings should cushion the delay in a follow-on relief bill which most believe is needed to keep the economy going. During the 2008-09 Great Financial Crisis (the “GFC”) when there was gridlock around getting bills passed, investors brought focus and discipline to the political process by pushing stock prices precipitously lower. This time, at least so far, the inability to pass CARES ACT 2.0 hasn’t slowed the stock market rise. Investors either correctly believe a second relief bill is not needed or that it will get passed shortly. If investors are wrong, they may need to assume their historic role of vigilante enforcer.

The Good

We believe interest rates remain so low in large part because the Fed is aggressively intervening in markets to purchase debt. This intervention has kept rates low, a boon not only to debt holders but also to equity holders, as the low rate used to discount future cash flows pushes up the value of those cash flows. The low rate environment has significantly benefitted growth stock valuations because their expected cashflows generally come from further in the future. We noted in an earlier letter that it would be interesting to see which would dominate the direction of asset prices, massive quantities of money or a horrible pandemic.  We have all again been reminded not to fight the Fed, particularly a creative and motivated Fed.

In addition to ample Fed liquidity, we have witnessed nearly $3T of fiscal spending so far appropriated during this pandemic. This is very different from anything we have ever experienced. Even in the GFC, fiscal spending did not come to the rescue at nearly this magnitude nor with nearly this immediacy. For the first time in several decades fiscal spending is a major part of the solution. Coupled with 2020 growth of the Fed balance sheet from $4T to

$7T, fiscal stimulus has helped the economy bottom out and recover along with financial markets.

Fed chair Jay Powell recently announced that the Fed has adopted average inflation targeting. After a decade of not being able to get inflation up to its 2% target, the Fed no longer intends to tighten in anticipation of inflation reaching the target, but rather, intends to allow inflation to overshoot 2% to offset the undershooting of the last decade. Some herald this new Fed policy as signaling low rates for many years. We are concerned this benign sounding change could be more impactful than investors currently appreciate.

The Bad

While we have seen many positive developments since our last letter, not all of them have been positive (or at least not all in the long-term). For example, with a willing spender in the US government and the normal governor of inflation (the Fed) now absent, the odds of inflation coming back rise. If you were around in the early 1980’s, you know that inflation can be hard to eradicate. Inflation destroys the value of the USD. Inflation at 1.7% per year (its average over the last decade) for 40 years cuts the dollar’s value in half. If inflation averages 3% as it has over the last 40 years, the USD loses 70% of today’s value. A weaker USD is certainly better for equities than for debt, but over the long run weaker dollars can help cause inflation and make achieving 5% real returns even harder. The next administration will play an important role in determining how this plays out.

The stock market has also shown some signs of frothiness. We see a new potential threat beyond the mundane economic and earnings fundamentals and even the ever-changing political landscape – namely new equity issuance. With an average of ~$500 billion per year of net stock retired in each of the last 5 years, a surge of equity issuance could dilute buying power otherwise intended for existing shares. Poor quality new issuance would be another indicator of market excess.  In August, we had two “unicorns” (private companies valued at >$1 billion) file to go public via direct listings. In the past, few companies chose the direct listing path because they could not raise new funding at the same time, making it an impractical choice for companies looking for both liquidity and growth capital. The SEC recently approved regulations that enable companies to raise new capital by selling new shares of stock in direct listings on the NYSE. In addition to the two direct listers, we’ve also seen five other unicorns file to go public. That brings to $44 billion the total value of just these seven companies looking to tap into the public markets. Though we are probably a long way from this becoming a big burden, excessive, low-quality equity issuance during the latter part of the circa 2000 tech bubble played a role in the precipitous decline that followed.

Before touching on one last topic we would just note that there are many other differences between this year’s candidates that will likely impact capital markets, including but not limited to their approaches to healthcare and Covid-19, climate change and renewable energy, China and global trade, the domestic economy and fairness, and finally regulation and taxes. In the long- term, many other trends and economic dynamics may overwhelm some of these policy differentials, but clearly these policies can have short- and intermediate-term impacts. For an interesting perspective on the potential modest impact on long-term trends, we invite you to read the recent Gavekal Research article entitled Don’t Waste Time Analyzing The US Election that discusses their view of how best to think about the upcoming election – it is posted on our website under 3Q2020 CIO Quarterly Commentary. If history can be counted on as our guide, it may all work out just fine.

Potentially the Ugly

Our last meaningful concern as we write is the November elections themselves. In November, Americans will select a President, 35 Senators, 435 Congresspeople, 11 Governors and lots of other state and local leaders. We join the many civic minded voices who urge every citizen to vote. From a capital markets perspective, we’d like to see decisive margins of victory in each individual race (to minimize the likelihood of ugly post-election litigation), but a divided federal government that requires rational debate and compromise to get things done. Anybody remember Tip O’Neill and Ronald Reagan? We fear an increase in polarization and possibly even violence if either party “sweeps” our federal elections. We also fear the consequences a sweep might have on capital markets.

There is some chance that due to absentee ballots, the refusal of either side to accept defeat and expected legal challenges, this election will be fraught with uncertainty and an eventual winner could take days, weeks, or in the worst cast months to determine. Some examples of

potential election uncertainty emanate from at least the following: a) potential lawsuits about voting processes and potential perceived irregularities; b) states having difficulty certifying their election results and returning them to the electoral college by December 14, 2020 (the date by which the electoral college is required by law to vote); c) some have warned of states sending multiple electoral slates to the electoral college if a state falls prey to b); and d) the actual mechanics of the 12th Amendment and the House selecting the President and the Senate selecting the Vice President in the event the circumstances of b) above preclude a candidate winning the majority of electoral voters (note: the 12th Amendment covers basic scenarios, but Constitutional scholars are able to envision many scenarios and conflicts not contemplated by that Amendment). This is a partial list of the complexities that could present themselves in this election and some scholars perceive that the uncertainty could persist even past January 20, 2021. The good news is that most of these uncertainties only present themselves in a very close election. Our bottom line here is that while it could get messy, this is part of a wall of worry the market is likely to climb by the end of January (or earlier) and then the uncertainty will be gone.

Long-Term Investing in Uncertain Times

Having now pontificated for a couple of pages on some ostensibly depressing subjects, we’ll end on a brighter note. We remain long term optimists on the United States, democracy, capitalism, and human nature in general. We will find a cure for, or at least a means to survive and prosper while coping with, Covid-19. The planet will get greener and cleaner over time, even if not fast enough to satisfy everyone. Society will make real progress on lifting up and providing opportunity to those who have not been able to share and benefit fully in all our country has to offer. We are recognizing and addressing injustice even if that progress is not as straight line or as speedy as it ought to be. And, yes, America and democracy will both withstand whomever our next president turns out to be. The truly remarkable American non- profit sector, unparalleled anywhere else in the world, will play a vital role in helping to achieve all these things and in keeping America the greatest country on earth.

So, as we invest the portfolios of our non-profit members, we mostly “look across the valley” of the daunting problems facing society today. We keep most of your assets invested in equities which benefit disproportionately as the world solves current problems and advances to new heights. To be sure, we take careful account of, and form beliefs around near-term opportunities and risks. To that end, we have maintained equity exposure at about the 65% level and acquired a bit of downside portfolio protection as stock prices have relentlessly marched higher. Our diversifying investments remain spread across a broad group of hedge fund strategies and our fixed income exposure continues to be short duration government debt and cash. Our long- term view remains broadly constructive and, as Warren Buffet suggests, we won’t be betting against America even with some obvious economic and political challenges ahead, because in America, over the long run, stocks move up and to the right. In the event that some of the risks, particularly those around the election, present attractive entry points, we could envision adding to our long-term equity exposure.

We hope your favorite candidates win in November and we look forward to our next opportunity to see you, ideally in person, but at least virtually. We very much appreciate the opportunity to manage your capital and to help you achieve your organization’s financial 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

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