Thematic Investing involves capitalizing on powerful secular trends, disruptive ideas, innovations and economic forces that are constantly reshaping the world. Thematic investing builds portfolios of companies positioned to exploit these transformational changes and, just as importantly, avoids companies that will be disrupted by creative destruction.

“The strong basis for stock selection comes from whittling down the thousands of public securities around the world to a manageable group- identified through our thematic research. This screening process is perhaps the most important part of investing.”

Amy Raskin Chief Investment Officer

Thematic Investing doesn’t fit into any of Morningstar’s 115 fund categories or neatly into one of its style boxes. It emerged in response to the extreme segmentation of the investment industry.

News & Noteworthy

  • First Quarter, 2021 Posted in: Featured, Insights, Investment Update, Latest News, Noteworthy - Think of the quarter not as the beginning of a new year, but as the end of an extraordinary 12-month period. Learn where our Thematic research is leading us as we look forward.

    Trauma. Mania. What’s Next?

    The S&P 500 Index finished 2021’s first quarter at 3,972, generating a total return for the quarter of 6.2%. But it’s more meaningful to think of the quarter not as the beginning of a new year, but as the end of an extraordinary 12-month period of trauma and mania.

    In last year’s first quarter, of course, a novel coronavirus named SARS-CoV-2 began spreading in the U.S. Businesses and schools shut down to contain this new disease bringing economic activity to a near halt. The S&P 500 fell sharply to a low of 2,237 on March 23, 2020.

    In response, governments opened their purse strings to support their citizens and corporations through the crisis. Central banks slashed interest rates and instituted massive bond purchase programs. Due to these aggressive actions, financial markets soared. Since its March 2020 low, the S&P 500 has gained nearly 80%. The NASDAQ Composite, the Korean Stock Exchange and the Russell 2000 Index have all doubled.


    Interest Rates Firmly in the Driver’s Seat

    Interest rates represent the difference between the certain value of something today and its uncertain value tomorrow. As a result, assets that pay off far in the future, such as Growth stocks, are more sensitive to changes in interest rates than assets that pay off near term. That sensitivity was on display as market sentiment – and rates – swung rapidly from fear to euphoria due to expectations of a rapid recovery. (See Display 1)


    Relationship between Growth and Value Equities

    and Long-Term Interest Rates (Display 1)


    Interest rates were near historic lows globally before the pandemic began, reflecting deep cuts made to restore the global economy after the 2008 Global Financial Crisis (“GFC”). As a result, pre-pandemic stock valuations were already high, and Growth stocks had already outperformed Value stocks by the widest margin in history.

    When the pandemic struck and economic activity came to a standstill, interest rates plunged even further. The U.S. 10-year Treasury bond yield reached an intraday low of just 0.32% in March 2020. Rates remained near rock bottom levels through the end of the third quarter of 2020. This led to further growth outperformance and sky high valuations as investors embraced long-term “dream” stocks and shunned the more economically sensitive Value sectors.

    However, in Q4 of last year, news of breakthrough vaccines and hope for even more stimulus buoyed investors’ expectations for stronger economic growth. Interest rates began to climb amid concerns about potential inflation, and Growth stocks began to lag Value stocks.


    Rapid growth and inflation ahead?

    Few things are sure in investing, but booming U.S. economic activity in 2021 comes close. The Federal Reserve is purchasing large amounts of Treasury and mortgage bonds and promising to keep short-term rates close to zero for the foreseeable future. Fresh fiscal stimulus of nearly $2 trillion is entering the economy now. Household net worth is at an all-time high of $130 trillion. With vaccination rates accelerating and the prospect of full economic reopening approaching, it would be shocking not to see nominal GDP growth in 2021 approach 10%—higher than at any time in the past 35 years.

    For the first time in over a decade, we believe that this economic growth may lead to near-term inflation. There are many reasons why; here are three:

    1. The fiscal plan has a high multiplier. The American Rescue Plan is skewed toward low- and middle-income households, who tend to spend unexpected money faster than higher-income households. This multiplies the impact of the stimulus on the overall economy. The Tax Foundation estimates that the Plan will raise the after-tax income of households in the bottom quintile of the income distribution by somewhere between 11% and 25%, while income for the highest quintile of earners will increase 2%.

    2. Pent-up demand. U.S. households had been restraining spending for more than a decade before the pandemic began. After the GFC, households and companies were forced to reduce their debt levels. U.S. household debt-to-disposable income fell to 97% by the end of 2019, its lowest level since early 2001. Since then, this ratio fell further, to 92.5%, with roughly a third of COVID relief payments used to pay down debt. U.S. household savings increased by $1.6 trillion last year, due to fiscal largesse coupled with the reality that there wasn’t as much to buy.

    The dynamic was similar for companies. Corporate cash on hand now tops $7 trillion for the S&P 500 alone. As the economy reopens, some of these funds will be put to work, potentially quite quickly.

    3. Limited capacity. Some of the hardest hit industries will likely find themselves with more favorable pricing dynamics when economic activity returns to pre-pandemic levels. Last year, over 110,000 restaurants closed in the U.S., and most of the closed restaurants do not plan to reopen. Separately, travel restrictions and shutdowns disrupted supply chains for many industries, wreaking havoc on previously finely tuned, just-in-time operations. Recently, for example, semiconductor shortages led to shutdowns of automotive and consumer electronics factories on multiple continents. It will take time to restore operations to pre-pandemic levels. Until that time, suppliers of a wide range of scarce goods and services will likely be able to raise prices without worrying about losing sales.


    After the Boom…

    While soaring economic growth is highly likely in the short- to medium-term, the combination of unprecedented fiscal stimulus, extremely easy monetary policy, economic reopening and pent-up demand cannot last indefinitely.

    Our base case is that gargantuan stimulus will likely lead to a multi-quarter burst of growth that will cause interest rates and inflation to rise, but higher rates, higher inflation and a lack of additional fiscal stimulus will eventually slow real economic growth. We believe that economic growth will revert to pre-pandemic levels faster than many currently expect, driven by structural constraints that currently limit the economic potential of the U.S.

    Potential economic growth is a function of labor force growth and productivity growth, and right now, both of these factors leave the U.S. with quite low long-term economic potential. Demographic trends strongly indicate the U.S. labor force will grow less than 1% a year. Productivity growth won’t be much higher, after years in which the U.S. (and many other countries) underinvested in infrastructure, and companies bought back stock instead of investing to expand and improve their businesses.

    In our opinion, the impact on financial markets of a strong economic growth spurt followed by a subsequent slow down depends on how long higher inflation persists.

    If inflation peaks during 2021 in the range of 3%-4% and then reverts to the Federal Reserve’s long-term target of 2%, interest rates will likely continue to rise in the short-term, but the pace of the increase should slow considerably. In this scenario, equity markets may continue to favor Value stocks over Growth stocks for a few more quarters, but we are unlikely to see a sharp sell-off.

    However, if inflation is stickier than the Fed expects, and prices do not decline as economic growth slows, we may enter a period of stagflation. In this scenario, interest rates are likely to climb higher than most investors currently expect, and equity markets will suffer. This is not our base case, but it is a risk we’re monitoring closely.


    Portfolio Positioning

    Contrary to popular opinion, markets don’t respond to current economic conditions, they are leading indicators of them. A year ago, the stock market was pricing in an economic shutdown and earnings slump. Today, stock market pricing reflects the strong economic and earnings growth likely in 2021, and bond yields reflect higher inflation ahead.

    We expect interest rates to rise further and Value stocks to continue to outperform Growth stocks in the short term, but we do not believe that inflation will spiral out of control. In the second half of this year, we expect equity markets to begin to reflect economic conditions in 2022 that will be more like those in 2019 than in the 2021 boom. Investors will also likely price in fiscal policies that are far less supportive of economic growth next year. Tax increases may be under discussion. Finally, earnings growth forecasts for 2022 won’t look great, when compared to the surge in earnings created by pent-up demand in 2021.

    One of the most challenging aspects of investing is balancing long-term trends with the short-term outlook for macroeconomic conditions. We tackle this challenge directly in the first two steps of our four-step investment process. (See Display 2)


    Thematic Investment Process (Display 2)


    Our first step is to identify long-term, secular trends that we believe will play out over years, if not decades. These trends typically lead us to companies with strong growth potential that will persist through cyclical swings in the economy. Our second step incorporates our assessment of where we stand in the economic cycle, allowing us to adjust portfolios to offset the short-term impact that cyclical headwinds may have on our themes.

    When our long-term positioning aligns with the portion of the economic cycle most favorable to Growth companies, our portfolios have tended to do well. We were in this sweet spot for most of 2020. However, toward the end of the third quarter, we began to anticipate the cyclical changes currently underway and selectively repositioned portfolios to increase their weights in traditional Value sectors, such as Financials and Energy.

    In many cases, these portfolio adjustments meant trimming or selling some investments that had appreciated significantly and, therefore, recognizing relatively large capital gains. In retrospect, it was the correct thing to do. Since September 2020, the Energy sector has outperformed the NASDAQ 100, a proxy for Growth stocks, by over 50%. That’s a useful reminder that even in taxable portfolios, trimming or selling appreciated stocks, in favor of higher-conviction investments, is often wise and can lead to higher after-tax wealth.

    As always, we will follow our process, guided by our long-term conviction in Thematic investing, while remaining vigilant and nimble in response to an uncertain world. We are navigating unchartered waters, but our process has successfully guided us through difficult times in the past. We believe it will do so again.


    Important Disclosures

  • Thematic Investing. The Other way. Posted in: Latest News, Noteworthy, Video - Thematic Investing doesn’t follow common Wall Street practice. And it has made all the difference.


    Thematic Investing doesn’t follow common Wall Street practice. And it has made all the difference.

  • Q & A with Michael Kleinschmidt, Assistant Vice President Posted in: Noteworthy, People - What sets Chevy Chase Trust apart from other Investment Advisory firms? Providing a top-level customer experience. Meet Michael Kleinschmidt, Assistant Vice President.

    Tell us about your role here at CCT.

    My objective is to provide a top-level customer service experience for our clients; I ensure our clients’ needs are met by coordinating with the various departments in our firm as well as any of our clients’ third-party financial professionals.


    What led you to a career in financial services?

    Truthfully, I always wanted to be a high school Social Studies teacher. I graduated from college in the middle of the great recession, and jobs were scarce. I wanted a job that would provide security and found a position as a part-time teller at a bank. I quickly became enamored with the financial services industry and realized I wanted to pursue a career in this field.


    What’s the most rewarding part of the job?

    During my time I have been able to build incredibly strong relationships with my clients and am proud to be their primary resource here at Chevy Chase Trust. I absolutely cherish being their go-to person, finding answers to their questions and solutions to their problems. This is what keeps me coming back to work every day.


    Did you have a mentor and what are some lessons learned from him?

    My mentor was a former Senior Trust Officer here at Chevy Chase Trust, Amir Shahabi. Amir helped me understand the ins and outs of the Senior Trust Officer role. He taught me that as long as you stay cool, calm and collected you will be able to solve any problem you encounter, which I find to be one of the most valuable lessons I have learned.


    What are your interests in the community?

    I recently finished the MBA program at the University of Maryland where I was involved in many of the school’s activities and fundraisers.


    Do you have a book or podcast to recommend?

    I recommend Extreme Ownership by Jocko Willink and Leif Babin. This book discusses leadership and personal accountability. It may fundamentally change how a person views what a leader is and how a leader should act. Additionally, this book discusses how the reader can develop personal accountability and set themselves apart as a leader.


    What advice would you give to someone considering a career in investment management or financial services?

    I have three key pieces of advice: First, continue to maintain and expand your network. Nothing is more crucial in a career in investment management or financial services than a strong network. This opens doors and opportunities arise that you may never imagine otherwise. Second, be biased towards action. Be proactive, not reactive. Third and most important, be adaptable. In this field you must always be ready for change; laws, markets, personnel and systems are developing all the time. The most adaptable will always succeed, no matter the environment.


    Considering all the people you’ve met in your field, what personal attributes are essential for success?

    I feel there are three key characteristics: The first and most important is to have is a cool head. No matter how quickly things are moving around you, staying calm and thinking rationally are key to prevailing over whatever challenges you may face. The second is a keen attention to detail. And lastly, a successful person must be a creative thinker. A creative person will be able to focus on the end goal and utilize the tools at their disposal to accomplish the task at hand.


    Read Michael Kleinschmidt’s Bio »

    Important Disclosures

  • A Conversation with Walter Isaacson on March 9, 2021 Posted in: Events, Featured, Noteworthy, People, Video - Chevy Chase Trust was pleased to host renowned author, journalist, and professor, Walter Isaacson for a conversation about his new book.

    Chevy Chase Trust was pleased to host renowned author, journalist, and professor, Walter Isaacson for a conversation about his new book, The Code Breaker: Jennifer Doudna, Gene Editing, and the Future of the Human Race. In the book, Mr. Isaacson showcases Jennifer Doudna, Ph.D., whose work on the gene-editing technology called CRISPR won her and Emmanuelle Charpentier the 2020 Nobel Prize in Chemistry and, Mr. Isaacson believes, will change the future of medicine.

    Click on the link above to view the recording of the Chevy Chase Trust event featuring Mr. Isaacson’s description of Dr. Doudna’s journey of discovery, the life sciences revolution in which “molecules will become the next microchip,” the ethical issues associated with designer babies and much more. His remarks are followed by a question and answer session led by Amy Raskin, Chief Investment Officer, and Andrew Marshall, Vice President, both of Chevy Chase Trust.


    Read our white paper on Investing in Disruptive Change: Personalized Medicine »

    Read our white paper on Genomics »


    Important Disclosures

  • Manager of the Decade Designation and Top Gun Ratings | Informa Financial Intelligence Posted in: Latest News, Noteworthy - Chevy Chase Trust has been honored with the Manager of the Decade designation and 5 and 6 star Top Gun ratings for its Global Thematic Equity strategy by Informa Financial Intelligence’s PSN manager database.

    Press Release: February 24, 2021 – Chevy Chase Trust has been honored with the Manager of the Decade designation and 5 and 6 star Top Gun ratings for its Global Thematic Equity strategy by Informa Financial Intelligence’s PSN manager database, North America’s longest running database of investment managers.

    “We are pleased that our Global Thematic Equity strategy has been recognized as a performance leader among its global equity peers” said Jeff Whitaker, President and CEO. “It’s a testament to the disciplined approach, high-quality work and dedication of our investment team over the past decade.”

    At Chevy Chase Trust, thematic investing involves capitalizing on powerful secular trends, disruptive ideas, innovations and economic forces that are constantly reshaping the world and building portfolios of companies positioned to exploit these transformational changes.

    “Congratulations to Chevy Chase Trust for being recognized as a PSN Top Gun,” said Ryan Nauman, Market Strategist at Informa Financial Intelligence’s Zephyr. “This highly esteemed designation allows us to recognize success, excellence and performance of leading investment managers each quarter.”


    PSN Top Gun Selection Methodology

    Through a combination of Informa Financial Intelligence’s proprietary performance screens, *PSN Top Guns ranks products in six proprietary categories in over 50 universes. This is a well-respected quarterly ranking and is widely used by institutional asset managers and investors. Informa Financial Intelligence is part of Informa plc, a leading provider of critical decision-making solutions and custom services to financial institutions.

    Top Gun firms are awarded a rating ranging from one to six stars, with the number of stars representing continued performance over time. The parameters of the star ratings and Manager of the Decade award are outlined below:

    • Manager of the Decade: had an r-squared of 0.80 or greater relative to the style benchmark for the latest 10-year period. Moreover, the strategy’s returns were greater than the style benchmark for the latest 10-year period and also standard deviation less than the style benchmark for the latest ten-year period. At this point, the top ten performers for the latest 10-year period become the PSN Top Guns Manager of the Decade.
    • 5 and 6 Star Ratings: had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, the strategy’s returns exceeded the style benchmark for the three latest three-year rolling periods. Products are then selected which have a standard deviation for the five-year period equal or less than the median standard deviation for the peer group. The top ten returns for the latest three-year period then become the 5 Star Top Guns and top ten information ratios for the latest five-year period then become 6 Star Top Guns.

    The complete list of PSN Top Guns and an overview of the methodology can be located on

    For more details on the methodology behind the PSN Top Guns Rankings or to purchase PSN Top Guns Reports, contact Margaret Tobiasen at


    About Chevy Chase Trust

    Chevy Chase Trust is an independently owned investment management firm and think tank specializing in global thematic research, portfolio management, conflict-free advice and financial planning for high-net-worth individuals, families, endowments, and institutions. Headquartered just outside of Washington, D.C., the firm has more than 90 professionals averaging 20 years of experience, and a client retention rate of more than 97%. The firm is a thought leader and performance leader in global thematic investing.


    About Informa Financial Intelligence’s Zephyr

    Financial Intelligence, part of the Informa Intelligence Division of Informa plc, is a leading provider of products and services helping financial institutions around the world cut through the noise and take decisive action. Informa Financial Intelligence’s solutions provide unparalleled insight into market opportunity, competitive performance and customer segment behavioral patterns and performance through specialized industry research, intelligence, and insight. IFI’s Zephyr portfolio supports asset allocation, investment analysis, portfolio construction, and client communications that combine to help advisors and portfolio managers retain and grow client relationships. For more information about IFI, visit For more information about Zephyr’s PSN Separately Managed Accounts data, visit


    Important Disclosures

  • Best-in-State Wealth Advisors 2021 | Deb Gandy Posted in: Latest News, Noteworthy, People - Congratulations to Deb Gandy, Managing Director, for making the Forbes 2021 list of Best-in-State Wealth Advisors in Maryland.

    Congratulations to Deborah (Deb) Gandy, Managing Director at Chevy Chase Trust, for making the Forbes 2021 list of Best-in-State Wealth Advisors in Maryland. The ranking methodology included an examination of both qualitative and quantitative factors such as best practices, compliance records, service models, revenue and AUM. To learn more, click on the links below.

    Read Deb’s bio »

    The 2021 Forbes Ranking Of Best in State Wealth Advisors: Methodology

    2021 Best-in-State Wealth Advisors List


    Important Disclosures

  • A Message from Jeff Whitaker, our new President & CEO Posted in: Latest News, Noteworthy, People, Video - Hear what drew Jeff to Chevy Chase Trust and his thoughts on this exciting next chapter for the firm.

    We are pleased to have Jeff Whitaker join Chevy Chase Trust as our new President and CEO.

    Jeff comes to Chevy Chase Trust after holding several leadership roles in wealth and investment management over the past two decades, including at Bridgewater Associates, Berkshire Partners, and the J.P. Morgan U.S. Private Bank. Jeff holds an undergraduate degree from Williams College and an MBA from The Wharton School.

    Hear what drew Jeff to Chevy Chase Trust and his thoughts on this exciting next chapter  for the firm.


    Read Jeff Whitaker’s Bio »

    Important Disclosures

  • Chevy Chase Trust | Washingtonian’s Best 2020 Posted in: Latest News, Noteworthy, People - Chevy Chase Trust is featured as Marylands’s Best Financial Advisers in Washingtonian Magazine.

    In November 2020, Susan Freed, Michael Gildenhorn, Leslie Smith, Lawrence P. Fisher II  and Marc Wishkoff of Chevy Chase Trust were selected by their peers as top Fee-Only Financial Planners in Washingtonian Magazine’s “Maryland’s Best Financial Advisers.” Read more.

    Important Disclosures

  • Chevy Chase Trust | Account Information Posted in: Featured, Latest News, Noteworthy - Details regarding the timing and availability of your Chevy Chase Trust account tax forms.

    2020 Tax Documents

    To allow you to plan for the preparation of your 2020 tax returns, we are providing a time table for the mailing of the official tax documents that Chevy Chase Trust is required to report to our clients and the Internal Revenue Service. Please note you will only receive the tax forms that are applicable to your account(s). Copies of your tax documents will also be available on Wealth Access.



    Consult with your tax advisor to discuss the possibility of filing an extension with the IRS to obtain additional time to file your tax forms, particularly if you hold securities subject to income reallocation.


    DOWNLOAD TAX DOCUMENTS TO TURBOTAX: Chevy Chase Trust is a TurboTax Import Partner. This means that you can import your Chevy Chase Trust 1099 forms directly into your tax return when you use TurboTax software. A TurboTax tracking code can be found on the front page of your tax statement. During the preparation of your return on the TurboTax software, you will select Chevy Chase Trust forms for import and will be prompted to enter your TurboTax tracking code and social security number.

  • Fourth Quarter, 2020 Posted in: Insights, Investment Update, Latest News, Noteworthy - After a year full of surprises, including remarkable stock market performance around the globe, we are positioning portfolios somewhat defensively. Learn where our thematic research is leading us in 2021.

    A Year of Surprises

    2020 was full of the unexpected. No one expected quarantines, rationing toilet paper, or virtual kindergarten. And we would have been hard-pressed to expect, despite widespread economic shutdowns, that markets would soar to new highs. 

    Stock markets around the world delivered robust returns in 2020. The S&P 500 generated a total return of 18.4%. The Nasdaq was even stronger with a total return of 45.1%. Most major non-U.S. markets also delivered impressive results. The total return for the MSCI All Country World Index in 2020 was 16.8%. At year end, the world’s equity market capitalization was nearing a record $100 trillion.

    These results are even more stunning since financial markets around the globe crashed in the first quarter. The S&P fell 33% in just 22 trading sessions. Japan’s Nikkei Index fell 28%, and Germany’s Dax fell 36%. At the same time, the U.S. 10-year Treasury yield fell from 1.88% to an intra-day low of 0.32%, and global short-term bond yields fell from 1.60% to a record low of 0.65%. Credit spreads widened as companies drew down credit lines to shore up balance sheets. The price of gold soared. Oil prices sank. 

    In response, governments and central banks stepped in with fiscal and monetary stimulus that dwarfed the huge measures implemented after the 2008 Global Financial Crisis.

    Economic Stimulus Crisis Response, % of GDP

    The U.S. Government issued over $12,000 of stimulus for every man, woman and child in the country (chart below). The Federal Reserve took unprecedented actions such as directly buying high-yield bonds. New regulations forestalled bankruptcies and foreclosures. After a decade of low inflation, governments were seemingly unconcerned that their actions could cause unwanted price increases that could drive inflation to dangerous levels.

    Debt Levels and Changes in Leading Economies

    Interventions of this scale were probably necessary in the moment, but they will likely have long-term consequences for financial markets. When fiscal and monetary decisions, rather than underlying economic conditions, are driving financial markets, investment decision-making must necessarily be different. 


    The Disconnect

    For the first time ever, the long-term correlation between the S&P 500 and inflation-adjusted GDP growth has inverted. While the stock market and real economy sometimes move in opposite directions for short periods, they have almost always moved together over rolling 10-year periods, until now.

    10-Year Correlation of The S&P 500 & U.S. GDP

    Relationships between other economic data and financial markets have also become disconnected. Historically, the ISM New Orders Index, widely considered one of the most reliable leading indicators of economic activity, has been highly correlated with bond yields. When the ISM New Orders Index signals an improving economic outlook, bond yields rise; when it signals a weakening economy, bond yields fall. This tight historical correlation is now broken. While the ISM New Orders Index is near a high for this decade, indicating a sharp expected pick up in economic growth, yields have not risen significantly. In fact, the 10-year U.S. Treasury yield is negative on an inflation-adjusted basis. A negative real yield typically implies that investors are concerned about economic growth ahead.

    The typical relationship between corporate earnings and equity markets is also broken. The consensus estimate for S&P 500 earnings per share for full-year 2020 is now about $136, down more than 20% from the $178 projected at the year’s start. The consensus for 2021 is now $167, down more than 10% from the $196 estimate at 2020’s start. Despite this drop in expectations, the S&P 500 delivered above-average returns in 2020.

    With stock prices up and earnings down, the price-to-earnings multiple of the S&P 500 has ballooned to 22.5 times, helping to boost S&P 500 returns 56% over the past two years. Valuations have seldom been this high. The only other time the market was this expensive was in 1999/2000. The aftermath wasn’t for the faint of heart.


    Can Markets Be Too Big to Fail?

    The combined market capitalization of all U.S. stocks is now 1.8 times total economic output, as measured by GDP. Never before—not even during the tech boom of the late 1990s—has the U.S. stock market been this large relative to the economy. Rather than economic growth driving equity market performance, it appears that equity market performance is driving economic growth, often characterized as a wealth effect. When people see their stock portfolios grow, they feel confident spending and investing more, which keeps the economy growing and the stock market rising, in a virtuous cycle. However, even virtuous cycles eventually come to an end.

    We think the massive stimulus was the primary cause of rising global equity markets in 2020. In the U.S., the Federal Reserve cut interest rates to zero and expanded the money supply by buying up Treasury, mortgage and corporate debt. Lawmakers provided support to hard-hit industries and public companies that otherwise would have likely gone bankrupt. Interestingly, bankruptcy filings during 2020 have been unusually low, despite the worst economic downturn since the Great Depression.

    We expect fiscal and monetary authorities to continue supporting financial markets. Ultimately, if this support continues anywhere near its current pace of over 25% annual growth in the money supply, and government, consumer, and corporate spending continue to increase, inflation will follow. The consensus calls for inflation to rise in 2021 from extremely low levels and then fade. We’re skeptical. We already see early signs that the velocity of money, a critical aspect of inflation, is starting to accelerate. If this continues, we may be entering new investment territory after more than a decade of little to no inflation.


    Bringing It Back to Our Themes

    We think economic growth is likely to pick up in 2021, but counterintuitively, robust growth may not be conducive to financial market gains. Major economic indicators that underpinned the stock market’s multiple expansion over the past two years have reversed course. At the beginning of 2019, 10-year U.S. Treasury yields were falling, oil prices were falling, and the U.S. dollar was rising. All three trends have now reversed. When the facts change, we adjust. Thus, our portfolios are now somewhat defensive and positioned to benefit from an uptick in inflation.

    Last quarter we highlighted updates to our investment themes. Here, we highlight two industries that our thematic research suggests are now particularly attractive.



    One new theme, An End to Disinflation Tailwinds, led us to take a closer look at energy-related investments. In July 2008, the price of oil reached an all-time high above $160 per barrel and Goldman Sachs increased its price target to over $200. With peak oil theories predicting that the world would eventually run out of oil, investors poured money into private and public energy firms. ExxonMobil became one of the world’s largest companies by market capitalization.

    As is typical in the boom phase of a commodity cycle, massive capital flows funded excessive investment, which contributed to a sustained drop in oil prices. In April 2020, the price of oil briefly fell below zero as most storage facilities were at or near capacity. As a result, major U.S. and European energy companies slashed capital spending and wrote down asset valuations. Many private equity investors shut their energy funds and practices. Bank of America said it would no longer finance oil and gas exploration in the Arctic. Canada’s BMO exited its U.S. oil and gas banking business. This is the bust phase of the commodity cycle.

    Making matters worse for the sector, some investors concerned about climate-change are requiring fossil fuel-free portfolios. We share their climate concerns, but don’t think ending investments in fossil fuels is the best solution from an Environmental, Social and Governance (ESG) perspective, or an economic perspective. Fleeing investments in fossil fuels will force energy prices higher, worsening income inequality—a key social problem for ESG investors. It will also create an economic problem since the world will need fossil fuels for the foreseeable future, even with rapid expansion of renewable energy sources. The world population is expected to increase by one billion over the next decade, and five new people are entering the middle class every second. Even with renewables, demand for oil is likely to grow.

    To us, this spells opportunity. Long-term returns tend to be better in areas that capital has fled. That’s particularly true for commodities. Oil stocks boomed in the 1970s, after hitting a low in 1972. Historically, the energy sector has become a larger portion of the Index’s market capitalization when overall valuations are low and a smaller portion when valuations are high. Recently, the energy sector’s weight in the S&P 500 fell below 2%, down from its 2008 peak above 13%. By comparison, the combined market capitalization of just two tech companies, Microsoft and Apple, represent over 11% of the Index.

    After underweighting the energy sector for seven years, we began to move to an overweight in 2020. Commodities are arguably the most traditional inflation hedge and are likely to provide superior risk-adjusted returns when inflation expectations rise. We think factors are in place today that make the risk-reward trade off attractive at current levels.



    While our Molecular Medicine theme performed particularly well last year, we think there are many reasons to continue to like healthcare stocks. Valuations are still reasonable, especially when compared to technology stocks. Profit growth, not multiple expansion, has driven healthcare stock prices higher. The pandemic has transformed investor attitudes toward the industry. Large pharmaceutical companies are no longer villains that politicians rail against. Instead, they’ve become saviors, discovering vaccines in record time and saving lives.

    Perhaps most important from an investment perspective, the pandemic has improved the pace of drug discovery. The CARES Act alone gave $27 billion to the Department of Health and Human Services to fund development of vaccines, therapeutics and other activities, according to a Government Accountability Office report dated June 25, 2020. At least $3.5 billion of that funding was earmarked for BARDA, the Biomedical Advanced Research and Development Authority. Also, the infrastructure being set up in record time to distribute and store vaccines at extremely cold temperatures will benefit advanced gene therapies that require cold storage during development and distribution. That’s just one of many barriers to commercialization of molecular medicine that’s falling just as genomic science is devising new cell and gene therapies that can cure previously untreatable diseases.

    Another potential catalyst for the sector is a likely boom in mergers and acquisitions. M&A typically soars when free cash flow yields are high relative to funding costs, as they are today. Furthermore, deals struck when spreads are favorable have tended to add value to the acquirer’s shareholders over the subsequent three years. Healthcare is the only sector where acquisitions have not, on average, destroyed value of acquirers.

    The consensus of Wall Street forecasters calls for the median biotech stock to deliver top-line growth comparable to software stocks over the next four years but generate higher ending free-cash-flow margins. However, the average biotech stock is trading at less than half the earnings multiple of the average software stock. We think such valuations are too pessimistic since large-cap biotech stocks have, on average, delivered faster five-year earnings growth than software companies over every fiveyear period since 2003.

    Not all healthcare companies will be winners. Some companies that generate disproportionately large profits from therapies for chronic diseases will be negatively impacted if and as new treatments are discovered. So far, valuations of individual healthcare companies have not diverged, increasing potential returns for investors who can identify those likely to be most successful.


    Fixed Income 

    2020 was another positive year for bond investors. The 10-year U.S. Treasury yield began the year at 1.88% and fell 52% to end 2020 at 0.93%, materially lifting prices over the course of the year. However, the quarter-to-quarter progression tells a slightly different story. The all-time low closing yield for the 10-year U.S. Treasury of 0.52% occurred in the third quarter. Since then, yields have been slowly, but steadily rising. During the fourth quarter, the U.S. 10-year Treasury bond yield rose 35%.

    The balance of probabilities points toward a steeper U.S. yield curve over the short- to medium-term, as U.S. short rates remain pinned near zero and long-dated U.S. Treasury yields continue to move higher as the economic recovery unfolds. Our emphasis is on individual high-quality bonds that are generally held to maturity, so principal can be preserved, and unrealized losses appear on statements but are never realized. We believe this is the prudent way to balance the higher inherent risks of equity investments.


    During Trying Times 

    We wrote in our year-end 2019 update, “we continue to adhere to our structured thematic investment process.” It served us particularly well in 2020, during difficult economic and market conditions. We are confident our thematic research can continue to identify investments likely to deliver strong performance. Our goal is to be ahead of the curve, sometimes too early, but always thoughtful and forward-looking.


    Important Disclosures

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