Investment Commentary: Q1 2026

The Community Foundation’s Corporate Commingled Fund returned net -2.8% for the quarter, compared to -1.5% for its Policy Benchmark.

Due to ongoing advancements in artificial intelligence and geopolitical developments, the range of potential market outcomes has broadened, prompting greater dispersion in market returns. Despite this uncertainty, economic growth has remained resilient, and corporate earnings expectations have generally been supportive for equity markets.  

At the start of the year, the narrative was relatively straightforward. Continued investment in artificial intelligence, a resilient U.S. economy, and the expectation of lower interest rates provided a supportive macroeconomic backdrop. Over the course of the quarter, that clarity faded. Developments in AI have increasingly changed how investors think about the opportunity set. What had been a tailwind is now being examined more closely across different business models. Some areas of the market are clearly benefiting, particularly those tied to infrastructure, energy and industrial capacity, while others are being called into question. Software, payments and other asset-light models have seen meaningful pressure as investors try to understand how durable those earnings streams will be in a more competitive, AI-driven environment.

AI-driven concerns are not contained within equity markets. While the S&P 500 software sector generated a -24% return year-to-date, loans to companies in the sector also rattled investors. The most acutely impacted segment of the lending markets is business development companies (BDCs) and other funds that offer intermittent investor liquidity. The challenge is twofold: (1) roughly 20% of loans issued from the BDC market are to software companies; and (2) due to favorable redemption terms, investors quickly rushed to redeem from these funds. This escalated into a “rush for the exit” scenario, prompting several private BDCs to limit investor redemptions and, in turn, exacerbating concerns. This led several BDC and direct-lending funds to trade well below their net asset values (NAV) amid concerns that AI may disrupt software businesses. In these moments of volatility and concern, we believe cooler heads will prevail, and while there will undoubtedly be loan defaults, we ask ourselves whether our long-term capital can earn an outsized return for our patience. At this juncture, we continue to evaluate our opportunities but have not made any opportunistic investments. Notably, The Community Foundation for Greater New Haven (CFGNH) portfolio has about 0.1% exposure to the direct-lending market. The CFGNH portfolio is certainly not over-extended to this market and is in a position of strength, should investment opportunities materialize.  

At the same time, geopolitical risk moved back into focus. The conflict in the Middle East and the disruption to energy markets pushed prices higher and brought inflation back into the conversation. While the direct economic impact remains uncertain, the market reacted immediately to inflation implications and potential Fed policy action (or inaction). Together, these dynamics have left the economic outlook largely intact while meaningfully reshaping market expectations. The market no longer anticipates any rate cuts this year, despite inflation expectations remaining muted; as of 3/31/2026, forward one-year inflation expectations are below 3.5%, and five-year annualized inflation remains below 2.5%.  

Fixed-income markets were somewhat weaker amid rising energy prices and inflation uncertainty, prompting a reassessment of the timing and magnitude of rate cuts (Bloomberg US Aggregate Bond Index: 0.0% return for the quarter). Even so, yields remain at levels that provide real income (positive returns after accounting for inflation) and continue to serve a purpose in portfolios beyond return generation. Private markets are beginning to show signs of improvement following a period of slower activity. Activity in private equity has picked up, and the outlook for liquidity events is gradually improving.  

Against this backdrop, our approach has not changed. We are not trying to predict a single outcome; rather, we are positioning the portfolio to navigate a range of possibilities. Within equities, that means maintaining broad diversification. The portfolio continues to have less exposure to the most concentrated parts of the U.S. market and meaningful exposure to international equities, where valuations are more reasonable, and return drivers are less uniform. Recent changes to our investment manager lineup reflect that same thinking, with a continued emphasis on quality, discipline, and ensuring each position serves a clear purpose in the portfolio.  

In fixed income, we continue to emphasize high quality and maintain an intermediate duration. While yields are attractive, the path of inflation and policy remains uncertain, supporting a balanced approach rather than reaching too far in either direction. Within credit, we are cautious in how we add exposure. While yields are compelling, spreads do not fully reflect the range of potential outcomes. The dispersion in credit underwriting quality is increasing, especially in private markets, which reinforces our focus on managers who have demonstrated discipline across cycles.  

More broadly, we continue to make incremental adjustments. Rebalancing is not just about maintaining targets; it is an opportunity to improve the portfolio's quality. We trim where expectations appear stretched and add where dislocations create opportunity, a steady process by design.  

Looking ahead, the environment remains constructive but less straightforward than it appeared at the start of the year. Growth remains intact, and innovation continues to drive investment and productivity. At the same time, geopolitical risk, inflation dynamics, and changes in competitive structure are creating a wider range of possible outcomes. This does not call for a different philosophy. Rather, it reinforces the one we have. Our focus remains on building a portfolio that can participate when conditions are favorable and hold up when they are not. Diversification, quality, and discipline are not just long-term principles, and they are what allow us to navigate periods like this with clarity.

We appreciate your continued trust and look forward to discussing the portfolio in more detail. Please contact me with any questions or for additional information.

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.