Investment Commentary: Q1 2025

The Community Foundation’s Corporate Commingled Fund posted a quarterly net return of 0.1% in the first quarter, which was 1.1% ahead of its Policy Benchmark and driven by strong performance from the equity and absolute return allocations.

As of March 31, 2025, markets experienced increased uncertainty due to policy changes, slowing economic growth, and shifts in investor sentiment. The “Magnificent Seven” (Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, Tesla), which drove U.S. large-cap returns for the past two years, underperformed because of concerns over AI-related capital expenditures following the release of DeepSeek’s R1 model and broader fears of a recession. Shortly after the quarter ended, markets faced downside volatility as they processed significant tariff-related news. However, as of April 15, markets rebounded from their lows as current administration delayed implementation of the initially high tariffs.

The S&P 500 Index fell -4.3% in Q1 2025, while international developed equities (MSCI EAFE) generated returns of 6.9%, supported by cheaper valuations, a weaker U.S. dollar, and new European fiscal stimulus plans. For the first quarter, the Corporation’s returned +0.1%, outperforming the Policy Index return of -1.0%. While the headlines and market volatility are certainly concerning, rather than reviewing recent events in detail, it is perhaps more relevant to review what can be expected during these periods of volatility.

Regardless of the market environment, on an ongoing basis the investment team believes there is sufficient cash and fixed income to meet organizational needs, distributions to organization funds and charitable activities, capital calls for private market investments, and other ongoing operational objectives. Close communication among the team ensures ongoing needs are met, and the portfolio is prepared to take advantage of opportunities should they arise during a market drawdown.

Over the last year and continuing into the first quarter, the portfolio was proactively rebalanced due to strong public equity market performance over the prior two years. Maintaining a disciplined process and reducing equities to their exposure targets helped increase the level of both cash and fixed income allocations before the most recent equity drawdown. The routine rebalancing within the Commingled Fund can prove to be a fundamental aspect of portfolio management that helps to ensure the overall portfolio is not taking unintended risks.

In the middle of an equity market drawdown, the same approach was employed as had been applied during previous periods of volatility:

1. Confirm sufficient cash and fixed income to meet charitable needs.
2. Contact each underlying investment manager retained within the Commingled Fund to understand how they react to the market and if they are identifying opportunities.   
3. Further optimize the portfolio.

Further optimization suggests a particular action. The portfolio may be rebalanced depending on the reason for the drawdown, the duration of the drawdown, and the perceived attractiveness of equities – not all equity market drawdowns are the same. It is also essential to bear in mind that if the level of uncertainty is too high, taking no action may be the most appropriate action. During this specific period, no action was taken. At any moment, the administration could either “ramp up” the tariff rhetoric, causing stocks to decline further, or as was recently the case, reverse many of the tariffs and provide relief to the markets. Despite taking no specific rebalancing action, several investment managers within the portfolio were reducing their existing cash balances to reinvest in their current holdings that they believed had “sold off” but were unlikely to be significantly impacted by the tariffs.

The current investment environment requires a balanced approach, liquidity, and adaptability to navigate ongoing volatility. While the portfolio is exposed to broader market machinations, employing a disciplined investment process, allocating capital to high quality managers, and maintaining a long-term perspective will help ensure the portfolio is well-positioned through different economic environments. During drawdowns, it is paramount that we not only meet ongoing needs of our customers, donors and community but also create opportunities for asymmetric positive returns as markets normalize.

We look forward to speaking with you soon.

*The Corporation is a Connecticut registered investment adviser and part of The Community Foundation for Greater New Haven.

Learn more about The Community Foundation's investments.