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
- 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.
- 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.
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.
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.
- Welcome to our new President and CEO, Jeff Whitaker Posted in: Featured, Insights, Latest News, Noteworthy, People - “I was drawn to Chevy Chase Trust because of its client-focused culture, its differentiated thematic investment approach, and its committed owner,” said Mr. Whitaker.
Press Release: January 4, 2021 – Chevy Chase Trust, a leading investment management firm for individuals, families, and institutions, today announced that Jeff Whitaker has been named President and CEO of the Bethesda-based firm. He succeeds Peter Welber, who retires after 17 years at the helm of Chevy Chase Trust. Under Mr. Welber’s leadership, assets under management at Chevy Chase Trust grew from $4.5B in his first year as CEO to $32B as of October 2020.
“I’m fortunate to be inheriting such a strong business and leadership team after so many years of steady direction from Peter,” said Jeff Whitaker, President and CEO of Chevy Chase Trust. “I was drawn to Chevy Chase Trust because of its client-focused culture, its differentiated thematic investment approach, and its committed owner. We are uniquely positioned for growth as we enter this next chapter for Chevy Chase Trust.”
Prior to joining Chevy Chase Trust, Mr. Whitaker held several leadership positions in the investment management and wealth management industry. Most recently, he served as Chief Operating Officer for Client Service and Marketing at Bridgewater Associates, the Connecticut-based hedge fund. Previously, he was Chief Operating Officer at the Boston-based private equity firm Berkshire Partners, and Managing Director and Chief Financial Officer at the J.P. Morgan U.S. Private Bank.
“After an extensive search, we are thrilled to be welcoming Jeff to Chevy Chase Trust,” said B. Francis Saul, II, Chairman of the Board of Directors at Chevy Chase Trust. “We are confident that with his many strengths, Jeff’s leadership and direction will allow the firm to thrive for years to come.”
In 2020, Chevy Chase Trust was named one of Barron’s Top 100 RIA Firms and one of Financial Times’ 300 Top RIAs.
Mr. Whitaker holds a B.A. (cum laude) in History and Political Science from Williams College and an M.B.A. from the Wharton School of the University of Pennsylvania.
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 98%. The firm is a thought leader and performance leader in global thematic investing.
About Barron’s Top 100 RIA’s
According to Barron’s, participation in the Top 100 RIA Firm Ranking is by invitation from Barron’s only. Firms submit answers to Barron’s questionnaire and Barron’s is responsible for the selecting the ranked firms. Participating firms were evaluated and ranked on a wide range of quantitative and qualitative data, including: assets overseen by the firm, revenue generated by the firm, level of technology spending, number of clients, size of staff, diversity across staff, and placement of a succession plan. The ranking is not indicative of the CCTC’s past or future performance. Neither CCTC nor its executives pay a fee to Barron’s in exchange for the ranking. CCTC is not affiliated with and does not endorse Barron’s and makes no representations concerning the factors used in compiling the list.
About Financial Times 300 Top RIAs
The Financial Times 300 Top Registered Investment Advisers is an independent listing produced annually by Ignites Research, a division of Money-Media, Inc., on behalf of the Financial Times (July 2020). The FT 300 is based on data gathered from RIA firms, regulatory disclosures, and the FT’s research. The listing reflected each practice’s performance in six primary areas: assets under management, asset growth, compliance record, years in existence, credentials and online accessibility. Over 750 qualified firms applied for the award, 300 of which were selected (40%). This award does not evaluate the quality of services provided to clients and is not indicative of the practice’s future performance.
Click here to read more about Jeff.
- A Covid 19 Briefing with Dr. Rohit Modak of VHC Posted in: Latest News, Noteworthy, Video - Hear about Dr. Modak’s rules to live by, vaccine updates, and much more.
12.8.2020 – Chevy Chase Trust was proud to partner with Virginia Hospital Center’s Infectious Diseases expert Dr. Rohit Modak. Learn Dr. Modak’s rules for staying safe during the COVID pandemic.
- Chief Thematic Investing Themes of the Decade Posted in: Latest News, Noteworthy, People - In Real Assets Adviser, Amy Raskin, CIO, discusses molecular medicine and quantum computing.
Amy Raskin, Chief Investment Officer, and her team use a thematic approach to investing, which involves capitalizing on powerful macro trends, disruptive ideas, innovations, and economic forces that are constantly reshaping the world. In the article, she discusses the next big trends in Thematic Investing, including molecular medicine and quantum computing.
Click here to read more.
- Food for Thought: The Client Experience Posted in: Latest News, Noteworthy, Video - Optimizing the client experience at Chevy Chase Trust is critical to what we do. Michael Gildenhorn discusses how our firm provides top-notch customer service for all of our clients.
- Q & A with Duna Hur, Trader Posted in: Noteworthy, People - We recently sat down with Duna Hur, Trader at Chevy Chase Trust, to learn more about her background, interests, and why she finds the role so rewarding.
Tell us about your role at Chevy Chase Trust.
I am part of the equity trading desk and we handle transactions on behalf of all the portfolio managers. Along with that, I am constantly monitoring market conditions and any developments that may occur throughout the day with respect to our holdings.
What does a typical day look like for you?
I spend the morning digesting news: I listen to Bloomberg while I get breakfast ready for my kids, I check in on international trades, I check my email, and I keep my eye out for anything related to our holdings. Once the market opens, I constantly monitor what is going on while executing trades. It is important for me to be aware of anything our portfolio managers need to know and for me to alert them to it in a timely manner.
Tell us about your background.
I grew up right outside of Baltimore and I went to school at The George Washington University. My junior and senior years of college, I interned at an institutional investment firm near school. When I graduated, they needed help on the trading desk and offered me a position. I didn’t know much about trading at the time, but the head trader had faith in me – I was truly lucky to be in the right place at the right time. I worked there for 16 years, eventually being promoted to Head Trader myself.
What led you to a career in this industry?
My siblings and I are first generation college students in my family, so I wanted to study something that would benefit me in the long run. I knew that finance is the basic foundation of everything. If I studied finance, I would be able to make a career for myself.
What’s been the biggest surprise about your career?
That I’ve been doing this for so long. I consider myself really lucky. I’m grateful I get to do something I love.
What is the most rewarding part of the job?
There’s not a day that goes by that I don’t learn something new, and that’s why I’ve been doing this for so long. There’s never a dull moment.
What makes Chevy Chase Trust different from the rest?
The best part of Chevy Chase Trust is the leadership and the people, they truly make a difference. They are a great group of people to work with.
Did you have a mentor and what are some lessons learned from her?
Louise Toler, the head trader who encouraged me to become a trader in the first place, was and is my mentor. She taught me everything I know about trading. One of the most important lessons she taught me was not to take things too personally. Trading can be high pressure, and people can get emotional. Another important lesson she taught me was to strive for perfection; there is no room for mistakes in trading. If that means having to ask the same question multiple times, it’s worth it.
What would you do if not this?
Now that I have two kids, I think I would have liked to be an elementary school teacher. Those younger years are really formative and teachers have such an imperative role – to be a part of that would be truly amazing.
If I had nothing to worry about, I wouldn’t have minded being a chef. It’s not so much about cooking, more the environment. I think the pressure in the kitchen is probably similar to trading and that would be very exciting. You never know what is going to happen next, and you have to work in tandem with a team to excel.
Do you have a book or podcast to recommend?
I love podcasts. I listen to Tim Ferriss’s podcast, the Tim Ferriss Show, he interviews world class performers and they share their tips, tricks and tools to what made them successful. I also enjoy listening to The Drive by Dr. Peter Attia; he discusses overall wellness from physical to mental health.
As for books, I love The Four Agreements: A Practical Guide to Personal Freedom. It’s a fairly simple read, but a great reminder of four principles to live your life by: “Be impeccable with your word. Don’t take anything personally. Don’t make assumptions. Always do your best.”
What advice would you give to someone considering a career in your industry?
Always be curious and never be afraid to ask questions. The worst someone can do is say no. Also, seek out professionals in your area of interest– there are a lot of people who are willing to teach, educate and share knowledge.
What parts of your job do you find most challenging?
Trading requires a great deal of mental endurance. This can be a very high pressure position. It is important to be acutely aware of everything that is going on around me; this role is fast paced and requires multi-tasking, but nothing can slip while I am doing that.
- Chevy Chase Trust Webinar | Amy Raskin and Dan Clifton Posted in: Events, Latest News, Noteworthy, People, Video - “Investment Update” and "The 2020 Election in an Era of Unprecedented Disruption."
View our webinar featuring Amy Raskin, CIO of Chevy Chase Trust, on “Investment Update,” and Dan Clifton, Partner and Head of Policy Research at Strategas, on “The 2020 Election in an Era of Unprecedented Disruption.”
- Amy Raskin discusses the TINA argument, current valuations, bubble territory and much more. Posted in: Latest News, Noteworthy, People - Amy Raskin, Chief Investment Officer, was a featured panelist on Pillsbury’s webinar on Thursday, September 24. The topic was “Where to from here? Capital markets, credit, and the economy as of September 24, 2020."