• Invest in concepts,
    not conventions.

    Our approach seeks opportunities across asset classes and around the globe.

  • Different by design
    and planning.

    The smartest investment strategies are informed by sound financial planning.
    Our clients appreciate an integrated approach and the difference it can make.

  • Sometimes the 
    greatest returns come from 
    investing in people.

    We’ve created a culture that values service over products, long-term goals over
    short-term quotas and your success over anything else.

Noteworthy

  • Money_edited Chevy Chase Trust Ranks #2 Nationally on Forbes/RIA Channel 2016 Top 100 RIA Firms - Important Disclosures. Posted in: Announcements, Noteworthy

    Important Disclosures.Original content by Julie Cooling, Forbes Contributor

    This year’s unique Top 100 RIA Firms ranking showcases the wealth management firms by growth in assets over the past ten years with a majority of the firms accruing more than $1 billion in assets.

    These firms are leading because of their independence, their commitment to their clients and their ability to grow through a decade of market challenges and rewards.

     

    Read the list here.

     

  • Screen-Shot-2016-11-11-at-9.39.28-AM Blake Keeley Doyle Joins Chevy Chase Trust - Blake Keeley Doyle has joined the firm as Managing Director to build its institutional client business. Posted in: Announcements, Noteworthy, People

    November 14, 2016

    Bethesda, MD     Chevy Chase Trust, a research-driven investment management firm, announced today that Blake Keeley Doyle has joined the firm as Managing Director to build its institutional client business. Ms. Doyle joins Chevy Chase Trust from Height Securities, LLC, in Washington, D.C. where she was head of Institutional Sales and Capital Markets, with a focus on thematic research, regulatory and policy driven investment ideas, and special situations.

    Ms. Doyle joined Height Securities in 2009, served on the firm’s Executive Committee and worked to launch a joint venture with a Dublin-based thematic and policy-focused advisory firm.  Earlier, she worked at FBR Capital Markets in Arlington, VA. Ms. Doyle graduated from Vanderbilt University with a degree in Economics.

    “Blake is a seasoned professional in the securities industry. Her experience developing and launching institutional ventures will strengthen and augment Chevy Chase Trust’s success in family wealth management,” says Peter Welber, President and CEO.

    Ms. Doyle added, “Chevy Chase Trust is a firm I have admired for some time. Their thematic investment process and proven track record present a unique opportunity for me to be a part of something truly differentiated in the investment industry.

    The pre-eminent investment management firm in the Washington, DC area, Chevy Chase Trust is privately-owned by a family with a century of roots in the Washington community.  With $24 billion in  assets and 88 professionals, Chevy Chase Trust specializes in thematic research and investment management for wealthy individuals, endowments and institutions.

    For more information
    Stacy Murchison
    240.497.5008
    smurchison@chevychasetrust.com

  • InvestmentUpdate Investment Update, Third Quarter 2016 - There has been no shortage of newsworthy events this year. We’ve endured terrorist attacks on multiple continents and a widespread epidemic, Zika. Posted in: Investment Update, Noteworthy

    There has been no shortage of newsworthy events this year. We’ve endured terrorist attacks on multiple continents and a widespread epidemic, Zika. In a historic move, Britain voted to leave the European Union. The crisis in Syria continues to displace millions of people. Economic prospects in many countries around the world, including the U.S., seem even more dependent on accommodative actions of central banks than usual. As a result, every sentence uttered by a central banker has received extraordinary scrutiny. In this noisy atmosphere, it is critical for investors to remain focused on the important underlying, and sometimes less sensational, factors that influence investment outcomes. In this quarterly update, we thought we’d highlight some of the trends that shape our current portfolio construction and will likely influence our investment strategy for years to come.


    The Intersection of Demographics, Productivity and the Fourth Industrial
     Revolution

    Population aging is one of the most important demographic trends worldwide. Population aging is most acute in the more economically developed countries of the world. Typically, as countries grow wealthier, fertility rates drop. Population aging is also a large concern for the most populous country in the world, China, due to the one-child policy introduced in the late 1970s. Declining fertility rates, improved health and increased longevity are swelling older populations dramatically.

    By 2050, the number of people 60 and older will increase from 900 million to 2 billion, going from 12% to 22% of the world’s population. By 2020, for the first time in history, people aged 65 and over will outnumber children under age five. Improvements in nutrition, sanitation and healthcare are reasons why most children today reach adulthood and why most adults reach old age. The longer you live, the longer you’re likely to live.

    The demographics of aging pose a headwind to economic growth. This can be clearly seen in the long-term trend of dependency ratios. Dependency ratios reflect the percentage of people 65 and older to the working-age population (defined as ages 15-64). As the name implies, the higher the ratio, the more workers need to produce to satisfy the standard of living for all. Some of the countries that currently are among the largest contributors to global GDP are the most demographically challenged, including Japan and those in Europe.


    Dependency Ratios

    InvUpdate_Q3Graphic

    Economic growth is a function of labor worked and labor productivity. Growth in both labor supply and labor productivity have been weak in recent years. Weak labor supply growth is almost certain to persist since demographic trends are predictable and essentially irreversible in the short and intermediate term. Fewer births eventually lead to slower labor force growth and in some instances, even labor force declines.

    That leaves productivity. Productivity is defined as output per hour. Productivity growth is the primary driver of a rising standard of living. From 1995 to 2005, U.S. real GDP growth was 3.4%. Since 2005, GDP growth has averaged 1.4%. The 1995 to 2005 period saw big enough productivity gains to offset demographic headwinds. However, these gains began to dissipate in the middle of the last decade, even before the financial crisis began. The current slow pace in productivity gains is puzzling since technology seems to be permeating our daily lives at an ever-increasing rate. Big advancements tend to come in waves. We think transformative innovations are on the horizon and we are optimistic about the next decade.

    Three industrial revolutions have occurred over the past 250 years. Each has produced quantum leaps in productivity and standards of living. The First Industrial Revolution used water and steam power to mechanize production. The Second used electricity to create mass production. The Third used information technology to automate production.  

    We are now on the brink of a Fourth Industrial Revolution, which was a major topic at this year’s World Economic Forum in Davos, Switzerland. The Fourth Industrial Revolution consists of a wide range of new technologies that combine the physical, digital and biological worlds. Intelligent automation will connect digital systems to physical systems creating autonomous solutions where machines make decisions and take action with no human involvement. It is in its infancy.

    One example of how digital and physical systems are combining for improved productivity is warehouse automation. The rapid growth of e-commerce is placing pressure on fulfillment networks, not just for e-retailers  but for all retailers. Autonomous mobile robotic systems are being developed and deployed that combine physical characteristics with embedded intelligence and application software. These robots are overturning the business of storing, handling and moving goods among storage racks in distribution centers. They travel untethered at speeds up to 25 miles per hour, in aisles as narrow as 28 inches, storing and retrieving objects.

    For retailers, the three big costs of distribution centers are labor, time and real estate. Robotic automation can cut labor costs by 80% and reduce the size of warehouses by up to 40%. These robot systems work 24/7 without breaks, functioning in “lights out” warehouses that require human intervention only for repairs and process issues.

    Another industry that may be both revolutionized and disrupted by new technologies is the automotive industry. The car is arguably one of the most underutilized and time-consuming machines on earth. Cars are in operation for an average of one hour per day for a utilization rate of 4%. Considering that most of the time only one seat in the car is occupied, the utilization rate on a per seat basis is roughly 1%.

    Globally, there are approximately one billion cars that each travel about 10,000 miles per year. At an average speed of 25 miles per hour, this amounts to 400 billion hours of time spent operating a vehicle and doing nothing else (other than being distracted talking on a phone). Another 100 to 200 billion hours can be added for passengers unproductively confined to an essentially unconnected car.

    Three trends will likely converge to disrupt an automobile industry that has barely changed in 100 years. First, shared vehicles will move the industry from a privately owned and operated model to a fleet management model. Mobile technology and data management are already making this possible. Second, autonomous vehicles will eliminate the single biggest inefficiency, the human driver. Again, technology and data will be at the core of this transformation. And third, electric vehicles with better battery packs will become more efficient and more economical when used in the context of shared autonomous fleets.

    Today the auto industry sells machines to consumers who buy parts, gas, insurance, parking and repairs year after year and then repeat the process every six years or so — all for the privilege of driving an hour a day. In the future, automotive transportation will afford consumers mobility while they pursue other activities. The car will become the fourth content screen alongside the PC, phone and TV.

    The Fourth Industrial Revolution will be characterized by an acceleration of innovations, faster and broader diffusion of those innovations and disruption of many traditional business models. It will boost productivity growth and add to global market capitalization. Significant shareholder value will be created by first movers, enablers and disruptors.


    Capital Markets Update

    The S&P 500 Index generated a total return of 3.85% during the third quarter of 2016. This brings the year-to-date return to a respectable 7.84%. Importantly, the beginning of the third quarter marked a complete reversal in sector performance. During the first six months of the year, the two strongest S&P sectors were Utilities and Telecom, with returns in excess of 20% each. During the third quarter, these sectors were both down over 5%. They were the weakest sectors in the Index in the third quarter.

    Conversely, Technology and Financials, which both lagged the Index in the first half of the year, posted the strongest gains in the third quarter.

    The rotation in market leadership is encouraging. It is unusual for equity markets to rise with defensive leadership. More stable stocks such as Utilities and Telecoms tend to do best when fear is high and economic prospects grim. On the other hand, cyclicals such as Financials and Technology outperform when the outlook brightens and growth accelerates.

    The latest batch of global economic indicators show the global economy is more or less stuck in secular stagnation. It’s neither boom nor bust. The third quarter was the first this year in which international markets broadly outperformed the S&P. The MSCI World Index generated a return of almost 5%, which brings its year-to-date return to 6.06%.

    Ten-year bond yields rose slightly in the quarter to 1.59% from 1.47%. Yields fell to a low of 1.36% during the second quarter, having started the year at 2.27%. Globally, long-term bond yields have been moving higher, albeit gradually. We expect the same to occur in the U.S.

     

  • A message from the President & CEO - I like to think of Chevy Chase Trust as an investment think tank. Posted in: Noteworthy, Video

  • InvestmentUpdate Investment Update, Second Quarter 2016 - During almost all of the second quarter, U.S. equity markets seemed impervious to bad news. Through June 23, the S&P 500 traded in a 100 point range between 2,025 and 2,125, close to its record high of 2,134 in May, 2015. Then came Brexit. Posted in: Investment Update, Noteworthy

    During almost all of the second quarter, U.S. equity markets seemed impervious to bad news. Through June 23, the S&P 500 traded in a 100 point range between 2,025 and 2,125, close to its record high of 2,134 in May, 2015. Then came Brexit.

    Pundits, experts and polls did not expect the U.K. to vote to leave the European Union. Usually, people vote in their economic best interest. Money managers believed this, and their surprise contributed to the violent sell-off in equity markets in the days that followed.

    We, too, believed Britain would vote to remain in the European Union; but given significant structural issues facing the entire Continent, our exposure to Europe was and remains low. Only 1% of our equity holdings are domiciled in the U.K. and less than 9% in Continental Europe. Over 40% of the European equities we own are based in Switzerland which never joined the E.U. The remainder are dominated by industrials and energy exporters who generate the majority of their sales outside the region. Europe represents only 15% of sales for our combined portfolio holdings. We believe the source of global revenues is as relevant a long term investment criterion as country of domicile.


    An Imperfect Union
    Since the formation of the European Union in 1993 and the introduction of the Euro currency in 1999, many experts questioned their sustainability. Doubts stem primarily from a union having monetary authority but no fiscal authority.

    Over the years, there have been occasions when it appeared that a member nation might secede, with the Greek bailout referendum being the most recent. However, before now, no member has left. Brexit represents a significant break from the post WWII movement toward open trade and economic integration across Europe. In many respects, it is fortunate that the first country to separate from the Union was not a member of the Euro currency. Secession by a member of the currency union would be infinitely more complicated and likely have far greater financial consequences.


    Global Implications of Brexit

    The U.K. economy represents less than 3% of global GDP, so in and of itself, a recession in the U.K. should not materially slow global growth. However, in the short-term, the Brexit decision will increase volatility in financial markets and fuel demand for “safe-haven” assets like the U.S. dollar. A stronger dollar effectively tightens financial conditions in the U.S. and the 40% of the world economies that tie their currency to the dollar. This will likely cause a temporary slowdown in global growth.

    Longer-term, if the separation is orderly and other European countries do not follow suit, we think this will be unfortunate for Britain, but will not have broader impacts. On the margin, it may turn out to be beneficial for Luxembourg and other money centers in Continental Europe that could see increased investment as financial activities are redirected from London to secondary European money centers.


    An Investment Perspective
    The Brexit vote and other nationalistic/protectionist movements are essentially responses to non-economic problems. From an investment perspective, protectionism has the potential to diminish one of the few economic bright spots of late. Globalization has improved productivity, increased corporate profit margins and lowered prices for most consumer products. This potential negative combined with the surprise factor of the vote outcome had the markets looking shaky before firming up quickly. Events in Europe are still unfolding. Other crises, related and unrelated to Brexit, are sure to follow. When, where and what are unknowable. What we do know is that there are still attractive long term investment opportunities in the global equity markets. We believe our thematic investments can ride the tailwinds of strong secular trends. Companies at the forefront of innovations in robotics, genomics, urbanization and data inundation will, we believe, outlast the next crisis and outperform the markets over time.

    We also see near-term opportunities in certain markets, sectors and companies that are out of favor or undervalued. Currently, only 1% of our holdings are in Japan but the risk/reward trade-offs of some segments of the Japanese market look attractive. Similarly, European banks look extremely undervalued with many of the uncertainties priced in. On balance, we think it presents a buying opportunity, particularly with respect to banks with Eurozone exposure as opposed to U.K. domestic earners. Many are trading at less than 50% of book value with
    high single digit yields.


    Fixed Income
    From a fixed income perspective, the most important and immediate implication of the U.K. decision to leave the E.U. is lower sovereign yields. The uncertainty created by this event triggered a flight to safety, sending sovereign yields lower in all major bond markets including the U.S., Japan, Germany, France and the U.K. Not surprisingly, U.K. yields fell the most.

    The 10-year U.S. Treasury bond fell to 1.40% the day after the Brexit result. On July 1st it declined below the former all-time low of 1.39% in 2012. Prior to the vote, the 10-year had been trading in a range of 1.70% to 1.95%. It started 2016 with a yield of 2.27%. Market reactions to unusual events tend to have similarities. Looking back at past financial crises, immediately after the 1987 stock market crash, 1998 failure of Long Term Capital Management and 2008 Lehman bankruptcy, yields fell briefly and then evened out. We think the 10-year U.S. Treasury bond will rebound from these extreme levels and trade in the 1.50% to 1.70% range until there is a clearer picture of the implications of the U.K. vote and the impact on U.S. and global economic growth.

    A current consensus view in both fixed income and equity markets is that inflation will remain at extremely low levels. As a result, buying inflation protection in the form of Treasury Inflation-Protected Securities (TIPS) is relatively inexpensive. Core CPI, which excludes food and energy, has been above 2% per year for the past seven months. We think it is highly likely that once energy prices stabilize due to supply reductions which are already underway, aggregate CPI will rise to this level, or higher.  In addition to TIPS, we continue to purchase both taxable and tax-exempt investment grade bonds with average durations between three and four years. Given recent flattening of the yield curve, we believe these bonds offer value with very modest risk.

     

  • ducks What Differentiates Chevy Chase Trust? - Clients tell us they find our approach to be refreshingly straightforward. We offer careful planning, global thinking, exhaustive research and thematic portfolios. This is investing pure and simple. Posted in: Noteworthy

     

    Private ownership by the B.F. Saul family, with roots in the community that date back more than 100 years.

    • No outside shareholders with quarter to quarter profitability concerns; no pressures regarding business model or profit margins.

    • No need to scale the business; firm can maintain a service model that is in the best interest of our clients, and can attract and retain talented professionals.

    More than 80 employees, all (including decision-makers) based in the same location.

    • Large enough to offer world class expertise and services, but not so large to require segmentation that leads to disjointed delivery of services.

    • Small enough to know and accommodate our clients and their unique needs.

    We manage all portfolios internally, using individual equity and fixed income securities.
    No outside managers, no proprietary funds. Easy for clients to understand what they own.

    • Our clients have a personal relationship with their equity and fixed income portfolio managers who are directly accountable to clients for all investment decisions and performance.

    • We do not subscribe to the common style box approach (i.e. we do not allocate specific percentages to Large Cap, Small Cap, International, Growth, Value, etc.) that frequently results in over-diversification and index-like returns, usually at a high cost with layered fees.

    • We are thematic investors; we look for investable ideas that stem from economic, demographic and technological trends powerful enough to influence corporate performance across multiple industries. We invest in companies of all sizes and located almost anywhere in the world. As examples, current themes include urbanization in the U.S. (with both baby boomers and millennials choosing to move into cities rather than suburbs) and the advent of molecular medicine (the impact of genetic sequencing on medicine and health care).

    • Portfolios of new clients are not automatically liquidated and reinvested into our strategy. We take a careful look at existing holdings and consider tax consequences of any changes. We strive to achieve the best after-tax performance for our clients.

    Each client relationship includes a planner; ideally, all new relationships begin with
    a financial plan.

    • Planners work to gather pertinent financial data and help clients assess their short- and long-term objectives.

    • Resulting plans inform the investment strategy and asset allocation recommendations.

    • The financial plan and investment strategy are not static; financial plans are updated regularly through the years as the client’s unique needs, the economy, markets, and tax laws change.

    We are a trust company that can serve in a fiduciary role when those services are needed, providing a continuum of investment management, planning and fiduciary oversight for our clients and their families.

    • Our staff includes a deep bench of professionals with experience administering trusts and estates, including estate planning lawyers who had 15 to 20 years in private law practice before joining Chevy Chase Trust.

    • We are able to hold non-traditional trust assets, such as private company stock, partnership interests and real estate investment assets that some firms are hesitant to, or will not, hold in fiduciary accounts.

    • We develop a personal relationship with beneficiaries considering how best to meet their financial objectives within the terms and spirit of the trust.

    Chevy Chase Trust charges one investment management fee that covers all of its services.

  • Chevy Chase Trust: Company Vision - Everything about Chevy Chase Trust gives our entire team the freedom to practice the art and science of creative thinking. Posted in: Noteworthy, Video

  • globe What is Thematic Investing? - Thematic investing is at the core of portfolio management at Chevy Chase Trust. We believe that adherence to a thematic investment process delivers superior results over wealth-relevant time horizons. Posted in: Noteworthy

    Global Thematic Equity Investing

    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.

    How We Do It. 

    Chevy Chase Trust’s research team is organized around themes rather than narrow, industry sub-sectors. We believe that our in-depth research on social, economic and technological changes builds a deeper understanding of the underlying drivers of value creation and risk. By immersing themselves in investment themes, Chevy Chase Trust research analysts develop a forward-looking lens into transformational shifts and form stronger convictions around their investment decisions.

    Identifying and researching secular themes is our starting point. Once we’ve established an investment theme, we conduct in-depth analyses on companies positioned to benefit from the theme. We assess each company’s strategic direction, competitive positioning, valuation, financial condition and management. Every portfolio company is the product of fundamental analysis.

    Why it Works. 

    “The idea of the future being different from the present is so repugnant to our conventional mode of thought and behavior that we, most of us, have a great resistance to acting on it in practice.” 
    – Mark Twain

    It is difficult to envision change. The behavioral finance term for this condition is “anchoring.” Anchoring is making decisions based on known facts and past results even though those facts may have little or no bearing on future outcomes. As a result of this human tendency, markets generally overemphasize present data and short-term trends and underestimate and undervalue the impact from longer-term structural changes.

    Traditional investment frameworks structured around benchmarks often have limited success from another fundamental reason. The short-term focus on quarterly returns relative to indices works against one of an investor’s greatest advantages, a long-term investment horizon. The very nature of a process built around benchmarks or specific styles is by definition backward-looking and fails to incorporate emerging trends and forward-looking perspectives. In contrast, a thematic investment approach seeks to capture, across asset classes and around the world, opportunities created by secular changes. Very few themes are constrained to one industry or one geographic region, which is why traditional research often fails to uncover the breadth of investment possibilities inherent in a major trend.

    The End Result.

    Our thematic portfolios don’t look like most other portfolios. They don’t conform to standard industry classifications based on market capitalization, geography, style or specific benchmarks. Today’s macro themes are unprecedented and powerful. Themes such as genomics, big data, U.S. urbanization, aging populations and robotics provide us with a conceptual framework to construct portfolios that, we believe, are favorably positioned for investment success. 

  • BeyondTheTrends Chevy Chase Trust’s thematic investing approach featured in Forbes article on “Investing Beyond the Trends” - Chevy Chase Trust, recently named #1 on the annual Forbes list of Top Wealth Managers, orients its entire research process around investing in global themes.

    Important Disclosures
    Posted in: Announcements, Noteworthy

    Chevy Chase Trust, recently named #1 on the annual Forbes list of Top Wealth Managers, orients its entire research process around investing in global themes. This contrasts sharply with the more widespread method of investing based on sectors, industries or geography.

    Read the Forbes article here.

    Important Disclosures

     

     

  • InvestmentUpdate Investment Update, Fourth Quarter 2015 - The S&P Index ended 2015 at 2,044, almost exactly where it started the year at 2,059. Including dividends, the Index’s total return for the year was +1.38%. Volatility was higher than in any year since 2008. Market performance was very concentrated. Posted in: Investment Update, Noteworthy

    Going Nowhere Fast

    The S&P Index ended 2015 at 2,044, almost exactly where it started the year at 2,059. Including dividends, the Index’s total return for the year was +1.38%. Volatility was higher than in any year since 2008. Market performance was very concentrated. The ten largest S&P stocks were up 17%, while all others were down 5%. In sum, it was not a banner year for US equity investors, particularly if you didn’t own the winners.

    What now? If the only statistic that mattered was the aggregate return for 2015, there would be reason for optimism. Since 1970, in every year after a relatively “flat” year, the S&P generated a double digit return. Results varied between +11% and +34% with an average of +17%. However, in these “following years” S&P earnings increased by 12% on average. Given the current macroeconomic backdrop, we think it will be very difficult to achieve double digit earnings growth in 2016.

    Due to extremely low inflation, weakening nominal GDP growth, elevated corporate credit spreads and slower money growth, we think 2016 S&P earnings will only grow a modest 5% or so. Pricing power remains a major impediment to faster growth. Deflation plagues more than half of the 60 major industry groups. Selling prices in 32 industries are declining. Six other industries have been unable to raise prices by more than 0.5% per annum, while another seven are below 2%. Thus, more than two-thirds  of industries can’t keep pace with core inflation. This does not bode well for future corporate profit growth.

    Coupling our modest 2016 earnings growth projections with already relatively high price/earnings multiples, leads us to conclude that aggregate returns in 2016 will once again be below long-term averages. Despite this relatively pessimistic view, we believe our thematic approach will  continue to present selective investment opportunities.

    2016 MACROECONOMIC BACKDROP

    We expect 2016 US GDP growth will remain low but positive. Key factors we’re watching include:

    Interest rates – Historically, small changes in interest rates have not had a large impact on GDP growth. However, the global economy looks very different than it did in the past due to major shifts in demographics. A greater percentage of the global population is no longer in the workforce, the workforce is aging, and birthrates are declining. These demographic changes suggest that small movements in interest rates may matter more now.

    The December 16 Fed rate hike was the first time since 1967 that the start of a Fed tightening cycle coincided with a drop in corporate profits. Volatility will likely remain elevated and markets will struggle if the Fed continues to tighten into a slow growth, low inflation US economy. We would not be surprised if the Fed reverses course, particularly if inflation remains low. All else being equal, we would be more optimistic about equity markets if Fed policy moves to a more neutral stance.

    Energy prices – Energy prices are a key input to inflation. Oil has fallen more than 65% since mid-2014. We don’t expect another 65% decline from current prices. Just as important, we do not expect a sustainable and significant price increase. Equity markets are in a bit of a catch-22. Companies need some inflation to drive profitability, but if inflation grows too fast, the Fed will almost certainly tighten more aggressively. We think lower for longer inflation levels are better for equity markets, because lower earnings growth will be balanced by price/earnings multiples that remain high.

    The US dollar – One of the most important factors for global investors to consider when allocating assets geographically is the relative strength or weakness of the US dollar. When measured in their local currencies, the German, French and aggregate Euro equity indexes generated positive returns of between 3% and 10% during 2015. However, when converted to US dollars, returns were uniformly negative. Since early 2014, we’ve been bullish on the US dollar, expecting it to strengthen against other currencies. This was one of the primary reasons we reduced our non-US equity exposure. Since July, 2014, the US dollar has risen 20% compared to a trade-weighted basket of other currencies.

    Going forward, we think dollar strength will be more muted. This view is based on the belief that the divergence in central bank policies that has been a driver of recent dollar strength will revert to a more synchronized and uniformly accommodative stance. As mentioned, although the Fed finally raised interest rates after a nine year hiatus, we’re skeptical that the economy will weather many more increases before the Fed pauses or potentially reverses course. Conversely, the European and Japanese Central Banks have recently disappointed markets by their reluctance to ease policies more aggressively. On the margin, we think the gap between our monetary actions and those abroad will shrink, which should reduce interest rate differentials and limit the strength of the US dollar.

    Improving fiscal policies – One area of potential economic upside that has not received much investor focus is the large fiscal stimulus enacted by Congress in late December. The legislation significantly increases discretionary spending by over $40 billion and repeals the crude oil export ban. It also extends a number of tax credits and provides relief from taxes imposed by the Affordable Care Act. This package alone may add roughly 0.7% to GDP growth next year. However, it will also increase the deficit  by 0.9%, which may contribute to US dollar weakness.

    EQUITY POSITIONING

    We are maintaining equity allocations at the low to midpoint of specified ranges. Within our holdings, we’ve made changes to reflect our updated outlook.

    • Increased the weighting to our Automation theme – In a low inflation environment the best way to increase profitability is to improve productivity. Economies of scale have driven down the cost of robotic technology so that it is now a cost effective option in a wide array of industries. Many of our core holdings in this theme are domiciled outside the US. Given our more balanced view on the US dollar, we’re increasing our holdings in these companies and marginally reducing our U.S. overweight.

     

    • Moved to a neutral stance in energy – As mentioned, we think the lion’s share of the price declines have occurred. We were not surprised by the stealth collapse of OPEC after participants failed to reach an agreement with regard to pumping limits at its last meeting. However, since most OPEC members are already pumping oil at or near capacity, we don’t expect a flood of new supply to come to market as a result of the cartel’s breakdown.

     

    • Reduced exposure to our Data Inundation theme and increased weightings in defensive sectors – Many companies in the Data Inundation theme significantly outperformed the market during 2015, some more than doubling in price. We have taken some profits and reallocated to well positioned, reasonably valued companies in defensive sectors with a focus on those with improving pricing power. In particular, consumer staples and telecom services are exhibiting price firming after long periods of decline.

     

    • Global exposure – We have modestly increased our exposure to developed markets outside the US, while continuing to avoid emerging markets. Earnings of emerging market companies are more positively correlated with international trade than with world GDP growth. International trade continues to slow with the Baltic freight index reaching an all-time low in December 2015. The current deflationary impulses benefiting consumers in developed markets continue to plague many emerging economies saddled with enormous extra production capacity. Until we see the incessant decline in global trade subside and utilization levels rise, we will avoid emerging markets.

    FIXED INCOME

    Most US fixed income investments generated very low returns in 2015. Outliers were high yield bonds which declined over 4% and municipals which were up over 3%. Nominal yields for ten year Treasury bonds averaged 2.27%, versus an average yield from 1958-2015 of 6.23%. Real yields (yields adjusted for inflation) in 2015 were even more anemic at 0.25%, versus the 57 year average of 2.46%.

    Over the past six months, in anticipation of Fed tightening, US two year interest rates have nearly doubled to over 1%. Ten year yields remain unchanged around the 2.30% level. This has resulted in the yield curve moving to its flattest level since the Eurozone crisis in 2012, although it is still a long way from inverting. On the margin, given our outlook for relatively modest economic growth, we favor intermediate duration instruments which are more impacted by inflation expectations and are not as explicitly linked to Fed policy. Currently, we are maintaining client portfolio durations in the three-to-four year range.

    Market expectations for future rate rises are still well below the Fed’s published targets, but have moved up recently. Recognizing that any future Fed rate decisions are data dependent and given our economic outlook, we question whether even the market’s expected rate rises will be realized. This makes us relatively optimistic about the outlook for bonds. If we see signs of rising inflation and a faster growing economy, we will grow more cautious since yields across the curve would move higher and bond prices would broadly decline. However, this is not our base case. In the current macroeconomic environment we believe fixed income continues to be an important counterweight to more volatile equity markets.