Don’t just take our word for it. Posted in: Featured - At Chevy Chase Trust, we specialize in global research and thematic investing informed by careful planning, and it's working. Forbes and RIA Channel recently ranked us among the highest in their Top 100 list, for 2 years running. Important Disclosures
Thematic Investing Performs Posted in: Uncategorized - Thematic investing at Chevy Chase Trust is a progressive departure from common Wall Street practice. It examines how the world is changing, determines which companies will be advantaged and invests accordingly.
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- Chevy Chase Trust | Philanthropy Webinar Posted in: Noteworthy, Video - Guest speakers include The Community Foundation of Greater Washington, Manna Food, Mary’s Center and Catholic Charities.
Listen to nonprofit leaders in the DMW describe how they have pivoted to meet the community’s expanding needs as a result of the COVID-19 shutdown.
- Chevy Chase Trust Ranks: Barron’s Top 50 RIA Firms 2019 Posted in: Featured, Insights, Noteworthy - At Chevy Chase Trust, we specialize in global research and thematic investing informed by careful planning, and it's working. Barron's Top Financial Advisors recently ranked us among the highest in their Top 50 list.
- Washington ABC7 News | Deb Gandy Posted in: Latest News, Noteworthy, People, Video - Chevy Chase Trust’s Deb Gandy sat down with ABC7 news anchor Alison Starling to share some financial advice and a bit about Deb’s personal story.
WASHINGTON (ABC7) —Having recently been named to the Forbes list of Top Women Wealth Advisors, Chevy Chase Trust’s Deb Gandy sat down with ABC7 news anchor Alison Starling to share some financial advice and a bit about Deb’s personal story. She described challenges she faced as a youth in the south during the civil rights movement and her work as one of the financial industry’s first female African American business development officers.
- To Take or Not to Take: RMDs in 2020 Posted in: Latest News, Noteworthy, People - The CARES Act offers a one-time opportunity to those age 70 ½ and older to forego their RMD for 2020. Susan Freed, CFP® answers questions about the important considerations involved in making this decision.
The CARES Act offers a one-time opportunity to those age 70 ½ and older to forego their Required Minimum Distribution (RMD) for 2020. Susan Freed, CFP®, Managing Director at Chevy Chase Trust, answers questions about the important considerations involved in making this decision. As with all financial decisions, please consult your tax advisor.
Should I forgo taking my RMD this year?
This is not a one-size-fits-all answer and depends on the facts and circumstances of your personal situation. If your retirement plan has taken a hit due to market volatility, the ability to skip the RMD distribution this year warrants consideration. The most important question is whether you need the distribution to fund your lifestyle. If the answer is yes, you should consider whether you have other income or assets that you can spend instead of the RMD. If you do, you may want to skip taking an RMD this year and give your retirement plan time to grow tax-free.
What are the tax implications of skipping a year?
If you decide to skip a year your tax bill will likely go down. But remember, if you liquidate other appreciated assets to replace your lost RMD income, there will be capital gains taxes to pay. If you are able to take money out of your IRA at a low tax bracket it may be advisable to take your RMD this year, especially if a large portion of your net worth consists of pre-tax retirement assets.
For those who typically have taxes withheld on RMDs, consult with your tax advisor about the impact of skipping a year on your quarterly estimated or other tax payments.
Can I withdraw monies for a Roth IRA?
For those who do not need their RMD for living expenses, consider withdrawing monies to contribute to a Roth IRA. If you contribute your RMD dollars to a Roth IRA in 2020, your tax situation is neutral; you will pay tax on the RMD just as you would in any other year. Yet monies have been transferred to an account that grows tax-free and neither you, your spouse nor other beneficiaries are subject to taxation on distributions. This can be an effective inter-generational estate planning opportunity.
Is a partial distribution an option?
Yes, a partial distribution is an option, especially if you can take monies out of your IRA at a relatively low income tax bracket or only need a portion to fund living expenses. For those who are charitably inclined, consider taking Qualified Charitable Distributions as a way to allocate monies from your IRA to your favorite philanthropic causes.
If I decide to suspend, what do I have to do?
For those who elect to suspend RMDs for 2020, you must notify your IRA plan custodian in writing. If you have already submitted paperwork to receive your 2020 RMD, or have set up an annual automatic distribution, you should provide written notice that you wish to suspend for 2020.
What if I have already received my RMD for 2020?
If you’ve already received all or a portion of your RMD, you may ‘roll over’ one payment back into your IRA. This applies to payments received after January 31, 2020 and the roll over must be completed by July 15, 2020. Your plan custodian can assist you as appropriate.
- Amy Raskin Discusses Current Markets and Themes Posted in: Noteworthy - During Pillsbury’s April 2020 webinar "Capital Markets, Credit, and Investing: The Road Ahead."
As a panelist at Pillsbury’s April 2020 webinar “Capital Markets, Credit, and Investing: The Road Ahead,” Amy Raskin commented that from an investment perspective, the markets and the economy are certainly more divorced than they’ve ever been in the past. And while she is studying the long term implications of the downturn from an economic perspective, she is more focused on the markets than the economy. She highlighted two of Chevy Chase Trust’s global investment themes, Molecular Medicine and Automation, as having been well positioned before the pandemic and expects them to gain even more traction coming out of this crisis. Click to hear the conversation in full.
- America’s Top Women Wealth Advisors 2020 | Deb Gandy Posted in: Latest News, Noteworthy, People - Congratulations to Deborah (Deb) Gandy, Managing Director at Chevy Chase Trust, for making the Forbes 2020 list of top female wealth advisors.
Congratulations to Deborah (Deb) Gandy, Managing Director at Chevy Chase Trust, for making the Forbes 2020 list of top female wealth advisors in the country. The ranking methodology included an examination of both qualitative and quantitative factors such as best practices, compliance records and service models as well as revenue and AUM. To learn more, click on the links below.
- First Quarter, 2020 Posted in: Insights, Investment Update, Latest News, Noteworthy - We are in the midst of a healthcare crisis and a financial crisis. The combination of a rapidly spreading novel coronavirus and dramatic swings in global financial markets creates unprecedented challenges.
We’re Here — We are in the midst of a healthcare crisis and a financial crisis. The combination of a rapidly spreading novel coronavirus and dramatic swings in global financial markets creates unprecedented challenges. These challenges will continue for some time. They affect our employees and their families, our clients and their families and our communities. We are committed to helping in every way we can.
In the past few weeks, we have successfully transitioned to a fully functioning new work environment. We have created a daily firm-wide internal communication to inform employees about rapidly changing economic and market activity as it relates to our clients, their portfolios and our thinking. We believe that providing our investment, trust, planning and relationship teams with real-time information that they can then use to inform their thinking and share with clients is critically important at this time. They are reaching out to you and you should not hesitate to reach out to them.
A First Quarter of Firsts
The S&P 500 ended 2019 at 3,231. In the first six weeks of 2020, the index rose 5%, reaching an all-time closing high of 3,386 on February 19th. At the peak, it appeared economic data was strong, unemployment was at multi-decade lows and consumer confidence was high. By March 12, only 16 trading sessions later, we were in a bear market and, likely, a recession. By March 23, the Index had fallen 34% from the peak. The market recovered some, but the S&P 500 still ended the quarter down 20% from the start of the year and the Dow had its worst first quarter in its 135-year history.
Whole sections of the economy have closed in a way that hasn’t happened since WWII. The next few quarters could result in some of the worst GDP numbers since the Great Depression. On the supply side, production has been impaired by workers’ inability to get to their jobs. The Bureau of Labor Statistics estimates that less than 30% of U.S. employees can work from home. On the demand side, workers have less to spend and almost nowhere to spend it.
Economies and markets, like individuals, have a hard time dealing with uncertainty, especially when the stakes are this high. The speed and magnitude with which policymakers have responded in recent weeks is unprecedented. This will not necessarily reduce the short term pain felt by large swaths of the economy, but it has provided important ballast to financial markets. The Federal Reserve and other central banks have rewritten existing rule books by expanding balance sheets by trillions of dollars, providing unlimited liquidity to the banking sector and setting up programs to backstop stressed parts of financial markets, all with heretofore unseen speed and scale.
This recession, unlike prior recessions, was caused by deliberate policy decisions aimed at restricting the spread of disease, rather than a gradual build-up of financial imbalances. As a result, it should not be surprising that economic data, instead of declining gradually, is falling off a cliff. On March 26, weekly unemployment claims showed an off-the-chart increase of 3.28 million newly unemployed workers, an all-time record that far eclipsed the previous high of 659,000 in 1982. And the true increase in unemployment is certainly understated because many state websites lacked the bandwidth to handle the volume of applications. In addition, under then existing rules, the self-employed and those working in the gig economy did not qualify for unemployment benefits (this was rectified in the CARES Act). Approximately 32 million people, or almost 20% of the U.S. workforce, are employed in retail, hospitality and air transportation. Second order impacts, from dentists to hair dressers to dry cleaners, could affect almost half as many more. The St. Louis Fed estimates that Q2 unemployment could be as high as 30% with a GDP decline of approximately 50%.
The abrupt halt in economic activity is global. Open Table is the primary restaurant reservation system in many countries. Open Table tracks the number of seated diners in some 60,000 restaurants that use its reservation system. The following table shows that in a span of less than two weeks, global restaurant dining went from business as usual to a virtual standstill.
A Liquidity Crisis
It wasn’t just the dramatic decline in economic activity that rattled markets. A scramble for cash and volatility across asset classes led to a breakdown in market functioning, even in large liquid markets like U.S. Treasuries. Investors sold what they could, if they could. The day record-breaking unemployment claims were released, the S&P 500 climbed 10% in response to tentative signs that liquidity was returning to some fixed income markets.
Although the situation has moderately improved, the global economy is still facing a cash shortage. Companies are tapping credit lines at a time when banks would normally be looking to increase their own cash reserves. The demand for cash has caused LIBOR, repo and commercial paper spreads to surge. And it’s not just any cash. As the world’s reserve currency, the U.S. dollar is in increasingly short supply driven by global demand.
U.S. consumers were in relatively good shape coming into this crisis, but many corporations were not. Prior to the downturn, half of the $7 trillion investment-grade corporate debt in the U.S. was BBB rated, only one notch above a “junk” or “highyield” rating. Many prominent issuers have been downgraded due to reductions in revenue and cash flow projections. More downgrades will come. This will add significant supply to the high-yield market just as demand is drying up.
It is crucial that this temporary liquidity crisis does not become a solvency crisis with rising bankruptcies and even higher unemployment. The secondary damage would be more difficult to heal than damage from a temporary fall in spending. Central bankers led by the U.S. Federal Reserve Bank seem set on preventing a systemic financial problem. If a program doesn’t have the intended effect, they seem willing to tweak it or increase the size. In a world of fiat money, we believe central banks will be able to prevent wide-spread funding-related problems, but it’s a risk. We don’t expect spreads to revert to pre-crisis levels in the short- or even medium-term.
Volatility in Perspective
Volatility is high in all asset classes. The speed at which markets are moving is only seen during historic events. Based on the following chart, current volatility dwarfs volatility in all prior crises going back to the Great Depression.
Bear markets are usually volatile and bottoming is usually a process. The following accounts for every single trading day during the Great Financial Crisis.
We expect volatility to continue at least until fixed income markets are fully functioning at more normal levels and we can better estimate the duration of the economic shutdown. Equity markets will likely need some certainty that large economies have the spread of COVID-19 under control before risk assets can mount a sustained rally from current levels.
Assessing the Timeline
This recession is different from other recessions in that shutting down the economy is a deliberate policy choice, a necessary step to slow the spread of the coronavirus, not the result of financial imbalances. Provided that the number of new infections around the world stabilizes during the next two months, growth should begin to recover in the third quarter. China is a useful template to assess the likely path forward. China seems to have COVID-19 under control, with most provinces not reporting new cases for several weeks. But as data come in, it is clear that China is seeing a 40-45% contraction in services activity from pre-crisis levels and a 30-35% fall in manufacturing activity. Activity is normalizing, but slowly.
In the U.S. the economic damage from the economic shutdown is potentially so large that it cannot be sustained for more than a few months without some irreversible economic damage. So the issue is: what will be the criteria for shifting from more extreme to less extreme controls? We believe the general roadmap is probably very tight controls for a few months, followed by fewer but still pervasive controls for up to a year.
Author Tomas Pueyo created a framework for evaluating these options. There are four categories of measures presented in descending order of how extreme and essential they are to keeping the spread of the virus low. The measures in Category 1 will almost certainly need to stay in place for a considerable period of time. The measures in Category 4 should be eliminated first. The measures in Categories 2 and 3 represent areas where regional jurisdictions will make different decisions.
Category 1: High Impact Measures with Low Cost:
- Contract tracing
- Hand washing/public hygiene
Category 2: High Impact Measures with Substantial But Moderate Cost:
- Restrictions on gatherings above a certain size
- Travel restrictions
Category 3: Low/Medium Impact Measures with High Costs:
- Closing conferences
- Closing sports
- Closing clubs
Category 4: High Impact Measures with Unsustainable Costs:
- Closure of schools and universities
- Closure of bars and restaurants
- Closure of most non-essential services and businesses
- Stay at home orders
Our investment themes haven’t changed. Three themes which have been some of our mainstays will be even more relevant as various aspects of a post-pandemic environment take hold. Within molecular medicine, it is likely that there is some genomic basis to explain why certain people have extremely adverse reactions to COVID-19 and others are largely asymptomatic. Age and preexisting conditions are factors but do not appear to be the only factors. We expect the pandemic will lead to an acceleration in genomic research as it pertains to COVID-19 and viruses more broadly. Our investments in companies focused on genomic related testing, logistics and therapy development should see higher growth rates. Further, some of the political pressure on the healthcare sector should be alleviated as these companies step up to the urgent needs. Similarly, our investments related to heterogeneous computing and technology should benefit from their role in facilitating remote working models even after work from home is no longer mandated. Finally, our automation related investments should benefit as companies are forced to rethink some of the more manual steps in their production processes and adapt workflows to better manage inventory throughout supply chains.
We are not market timers. We do not believe that market timing is an investment skill that can be successfully executed with precision or repeatability. Over the last 20 years, which represents over 5,000 trading days, if an investor missed the ten best days in the market, an investment in the S&P 500 would have forfeited 60% of the total return for the entire period.
Prior to the end-of-month market rally, the S&P 500 dropped 34% over 23 days. Typically, the transition from a bull market to a bear market takes about ten months. This time, it took 16 trading days. Whether the market bottom is behind us or in the near future, we believe current market levels represent relatively good entry points that will reward investors with adequate liquidity and a long-term investment horizon. Investors who bought equities between the fall of 2008 and spring of 2009 saw investments double in less than five years.
For most clients with balanced portfolios, we will use liquidity to opportunistically rebalance equity percentages at least to allocation levels prior to the precipitous decline. For many clients, we will also initiate planning and risk tolerance conversations to consider increasing overall equity allocations at opportune times over the next quarter. Finally, for clients with other outside liquid asset classes, we think shifting to equities is worth consideration.
Fixed income allocations will be viewed as a source of funds if and when bonds trade at fair value. In normal times, we view fixed income as ballast against volatility and downside risk, a source of liquidity and a yield vehicle to fund recurring spending needs. In the current environment, all three have been impaired. Unlike bond mutual funds and ETFs, our clients own individual high quality bonds that can be held until maturity, so principal is not impaired and unrealized losses are not realized. We think fixed income’s role as ballast against volatility and downside risk, and as a source of liquidity, will return to normal. However, we do not think yields will be particularly attractive for the foreseeable future and we favor equities over bonds for their return potential.
- Estate Planning Opportunities After a Market Decline Posted in: Noteworthy, People - Elizabeth Kearns, Vice President at Chevy Chase Trust, discusses changes you should consider.
Elizabeth Kearns, Vice President at Chevy Chase Trust, discusses changes you should consider.
What estate planning opportunities should I consider right now?
Increased market volatility can be stressful for investors but it creates estate planning opportunities for individuals who might have a taxable estate. Down markets are ripe times for transferring assets out of your estate at depressed values, thereby using less of your allowable estate and gift tax exemptions.
What is the best way to transfer assets out of my estate?
The simplest planning technique is to make gifts of your assets to others. If you make an in-kind gift of securities while they are at a temporarily depressed value, you’ve successfully transferred an asset out of your estate at a lower cost to your lifetime estate and gift tax exemption.
What if I’m not sure about making a permanent transfer?
If you’re not interested in giving away your assets forever, you might consider a Grantor Retained Annuity Trust, or GRAT. Rather than transferring assets out of your estate permanently, this trust allows you to transfer future appreciation of your assets out of your estate, while receiving your initial investment back in the form of annuity payments. You would create the GRAT for a fixed term – typically two or three years – and transfer assets such as stocks into the trust. Over the trust’s term, you receive annuity payments equal to your original investment plus interest at a “hurdle rate” set by the IRS. At the end of the term, if the trust’s investments have grown at a higher rate than the IRS hurdle rate, that excess appreciation goes to the beneficiaries of the trust. And because you receive your original investment back via the annuity payments, there is no gift tax. In this low interest rate environment, there is greater potential for the stocks you transfer to the GRAT to outperform the hurdle rate. Of course, having an active portfolio manager to assist with the timing and the selection of securities is key.
Given today’s social distancing environment, how can I accomplish this?
Both Maryland and the District of Columbia have passed emergency temporary legislation to facilitate the execution of estate planning documents virtually. Check with your jurisdiction because this kind of legislation is becoming increasingly common to enable individuals to finalize their estate planning from home.
Our team of experienced estate planning attorneys and financial planners are prepared to advise you on these and other techniques.
- Temporary waiver of RMDs for 2020 Posted in: Noteworthy - The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on Friday, March 27, 2020.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on Friday, March 27, 2020.
The legislation includes numerous provisions related to retirement accounts, one of which is waiving Required Minimum Distributions (RMDs) for 2020. Individuals who have not yet taken their RMDs can forego them for 2020. The waiver includes RMDs from IRAs, 401(k)s and 403(b)s. It also includes RMDs for those who turned 70 ½ in 2019 and delayed the RMD until 4/1/2020. Those individuals should be able to waive both the 2019 and the 2020 RMD.
The legislation does not address RMDs that were already taken in 2020. Hopefully, guidance will be forthcoming soon. In the meantime, individuals who have taken 2020 RMDs in the past 60 days should be able to rollover that distribution, if they have not had any rollovers in the past 365 days. Tax experts believe that although rollovers of RMDs are disallowed, because of the CARES Act, 2020 distributions from retirement accounts are no longer considered RMDs and are therefore eligible for rollovers (if they take place within 60 days of the distribution and the 365-day rule is satisfied). If you have taken your RMD for 2020 within the past 60 days, you may want to consult your tax advisor about putting these funds back into your IRA or qualified plan.
Inherited IRAs are eligible for the 2020 waiver, but distributions that were already made are not eligible for the 60-day rollover. Consequently, you may need to wait for guidance about whether these RMDs may be re-contributed to the IRA if you want to avoid inclusion of the RMD amount in your 2020 income.
Individuals who waive 2020 RMDs will not be required to double-up next year. Their 2021 RMDs will be calculated, as usual, based on 2020 year-end balances.
- Food for Thought: Investment Management Fees Posted in: Noteworthy, Video - What you should know about investment management fees.