MARK CINTOLO: Hello, everyone. This is Mark Cintolo from the Portfolio Analysis and Consulting team at Natixis Investment Manager Solutions. I'm joined by my colleague, Matt Hunyadi. 

MATT HUNYADI: Hi. Great to be here. 

MARK CINTOLO: And today in this episode, we're going to talk about our institutional trends report. In this episode, we'll discuss artificial intelligence, unicorn performance, higher taxes on endowments and foundations, and more, as we recap our latest institutional trends report. Matt, let's start out with an overview of the return environment for the first half of the year. We had a pretty strong start to the year for returns, particularly in the second quarter as the market rebounded from some liberation day volatility.

MATT HUNYADI: Certainly. Through the first half of the year, non-US equity returns led the way as uncertainty remained elevated around US trade policy and its impacts on economic growth and inflation expectations. This initially weighed on dollar denominated assets through a downshift of growth expectations in the US, albeit still above the rest of the world. What we found interesting is that the currency impact has contributed to the bulk of returns found in non-US assets, rather than the local market outperforming. When you remove some of these currency impacts, you actually have started to see some of these areas of the market underperform US assets more recently.

MARK CINTOLO: So, Matt, in June, you and I introduced our megatrends framework, which quantifies an investor's exposure to technological, societal, and geopolitical themes that we believe could meaningfully impact the return environment over the next few years. So let's dive into some of the megatrends that have impacted returns so far in 2025.

MATT HUNYADI: Absolutely. Let's do it.

MARK CINTOLO: We've seen two themes take center stage in the first several months of the year, tariff risk and artificial intelligence. And while tariff risk dominated the headlines for much of the first four months of the year, recently, the more noteworthy performance stories have centered around AI.

MATT HUNYADI: Sure thing. So for our AI theme, segments that we've termed first order consist of early adopters of semiconductor, chip manufacturing, and power generation of data centers. Some of these industries include key mega cap growth industries like semiconductors, interactive media and services, and system software, to name a few. AI related segments that we've deemed second order consist of some of those industries that are set to be beneficiaries of AI technology going forward. Think of an industry like broadline retail, or something more broad, like the farming industry that hasn't been as involved in so-called the early innings of AI development as a company like NVIDIA, but could still increase their productivity once technology is widely adopted.

So as you can see in our chart, these two simple baskets of AI related themes traded roughly in line with the market for the first few months of the year, but recently have diverged. The second order basket could represent an opportunity for those to invest in industries that haven't been the clear cut winners of the AI revolution so far.

MARK CINTOLO: So public equity market returns have certainly been strong. And while we don't have figures on private equity yet for the first half of 2025, one promising signal comes from unicorns, which are privately held companies with a valuation of $1 billion or higher. We've seen strong valuation growth, and that's pushed year to date returns for unicorns well above the public markets.

MATT HUNYADI: Yeah, so through June, the global and US unicorn indexes have beaten the S&P 500 by a little over 12% and a little over 18% respectively. Not only has the performance picked up more recently, but the long-term performance of private equity to its public counterparts has been superior over the last 10 years. This has led to consistent inflows, some of which have come at the expense of other alternative categories, like hedge funds. I'd also add that this is interesting to track, because you not only get a sense of the opportunity set of adding something like private markets to a multi-asset portfolio more broadly, but that you get a sense of some of these companies that you might see in the IPO market over the next several years.

MARK CINTOLO: So let's talk about a few plan-specific trends. On the public fund side, we're seeing the first increase in expected return assumptions in at least 25 years. This was something we had highlighted as a potential outcome last year. The trend toward more conservative assumptions really started to stall out around 2023, and that was thanks to higher yields and a strong growth backdrop. But we still see over 70% of plans currently using a lower expected return assumption than they did in 2020.

So while this increase in expected returns is pretty modest, the change in direction is significant because it's what gets used to discount liabilities and calculate required contributions. When we see higher discount rates, that means lower liabilities and higher funded status. So we're seeing a multiyear headwind turn into a slight tailwind.

MATT HUNYADI: Not only that, but funded status for top public plans topped 81% in the first half of 2025, mainly through the growth that we've seen on the asset side. Given that we were near 65% funded status in 2020, you'd expect to see examples of some of these public funds looking toward fixed income, both to reduce risk and benefit from an elevated yield environment. And this is exactly what we're seeing with public funds and other plan types, which have continued to increase target allocations to fixed income over the last 2 and 10 years.

An interesting bright spot among the plan types has continued to be foundations. Strong returns for risk assets over the last five years have led to a meaningful increase in grant making by US foundations. While spending on grants and expenses have remained stable between 7 and 1/2% and 8% of total assets, the elevated asset base has led to all-time highs in dollar terms, estimated at over $120 billion in 2025. So as you can see in our chart, the teal bars have grown consistently over the last decade, while that purple line has remained flat, indicating that this has been more of a function of strong asset appreciation across risk assets.

MARK CINTOLO: We'll see if that growth in grant making is challenged over the next few years, because one of the very recent developments we've seen with foundations, as well as endowments, has been higher tax rates imposed by the federal government. We'll have to see if this growth in grant making is challenged over the next couple of years, because one very recent development for a lot of foundations, as well as endowments has been increased tax rates from the federal government.

MATT HUNYADI: Included in the budget reconciliation bill, termed One Big Beautiful Bill, are tax increases on certain endowments and foundations. The specific tax increases depend on the asset base and the student population for endowments. So let's give some more context on what the changes are for each cohort. Starting with endowments, schools with fewer than 3,000 students and/or religious affiliations are exempted. So for private institutions with an endowment value per student under 750,000, the tax rate stays the same at 1.4% on net investment income. As this ratio increases, tax rates can jump as high as 8%. For foundations, on the other hand, tax rates increase as high as 10%, but are solely based on foundation AUM.

MARK CINTOLO: Yeah, this is likely to lead to a greater preference for unrestricted donor gifts just to provide more flexibility. But a more tax-aware approach to investing could lead to a preference for lower turnover strategies that could help put hedge fund allocations at risk, or perhaps greater willingness to invest in tax-friendly asset categories like municipal bonds or direct indexing equity strategies. But I'd say we're also watching for broader asset allocation shifts motivated by liquidity management. These plan types tend to have some of the larger allocations to illiquid assets, particularly the largest investment programs.

MATT HUNYADI: Definitely. So allocations to less liquid categories make up 23 to 25% of the average endowment foundation portfolio. For larger endowment foundation portfolios, which are more directly impacted by these higher tax proposals, have somewhere in the range of 33% to 35% allocated to some of these less liquid categories. So we could see some outright selling of private market strategies, or an increase of dedicated cash allocations. We could also see impacted endowments and foundations make operational changes to help meet a higher tax bill in the future, or issue bonds. Either of these options would have less of a direct portfolio impact.

MARK CINTOLO: That concludes our discussion on some of the latest trends impacting institutional investors. For more of our research and investment insights, visit our website at im.natixis.com.

MATT HUNYADI: And as always, feel free to reach out to us with any questions, comments, or for customized insights tailored to your specific portfolio.

MARK CINTOLO: On behalf of the Portfolio Analysis and Consulting team and Natixis Investment Manager Solutions, thanks for your continued partnership, and thanks for listening.