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Amy-R The $26 Billion woman - Read the Washington Business Journal’s feature on Amy Raskin, Chief Investment Officer, who is responsible for overseeing $26 billion in active and passive investments at Chevy Chase Trust. Posted in: Featured, People
Forbes_RIA_Blog Don’t just take our word for it. - 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 Posted in: Featured
Chevy Chase Trust - Investment Update, Third Quarter 2017 Investment Update, Third Quarter 2017 - U.S. equity markets continued a steady climb during the third quarter of 2017. Posted in: Investment Update, Noteworthy
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  • Dontfeartherobot_The Hill-01 Don’t fear the robot: Harness automation to boost labor force - Despite below-average economic growth and recurring geopolitical uncertainty, manufacturers here in the U.S. are reporting brisk business. Posted in: Insights, Noteworthy

    By Bobby Eubank, Thematic Research Analyst

    Originally posted on 10/10/17

    The Institute for Supply Management’s (ISM) production index increased to 62.2 in recently released data for September, a month marked by notable and unfortunate hurricane activity. This reading is nearing the highs of this economic expansion.

    The overall Purchase Manager’s Index (PMI) from the ISM which includes production but also factors such as employment, inventories, backlogs and inflation was reported at 60.8, the highest reading in more than 13 years.

    Enabling Secular Growth

    Despite below-average economic growth and recurring geopolitical uncertainty, manufacturers here in the U.S. are reporting brisk business. However, with manufacturing gains for 100 consecutive months, many are asking when this business cycle will end.

    Instead of focusing on when the cycle will end, which it eventually will, it is important to ask how to make America’s manufacturing base better positioned for secular growth.

    The U.S. won’t become the lowest-labor-cost country for manufacturing, and that’s okay. By embracing automation and training our labor force, we can still become a low-cost producer.

    Highly productive manufacturing is necessary for the U.S. to become a more competitive exporter but also able to better serve its $13 trillion domestic consumer economy. Several major apparel brands have announced initiatives to start automated production here in the U.S.

    Without automation, these plans would never make it to the CFO’s desk given our labor costs relative to developing countries. For now, these initiatives are limited in scope but may begin to attract creative designers and talented engineers to the space.

    Job Opportunities

    The word automation is often associated with job loss. While job displacement by definition happens with increased automation, the U.S. has a unique opportunity to create a large and well-paid workforce that harnesses the power of automation.

    Currently, the U.S. lacks the trained labor force to program and implement automation across our factories and warehouses. None of the major robotics companies are based in the U.S.

    However, the U.S. is a leader in the hardware and software that enable Artificial Intelligence (AI) which is on the cusp of adoption in factories and warehouses around the world. This technology can allow robots to learn on their own how to best perform a task and then share that method with other robots.

    AI will drastically reduce the high costs of programming automation equipment and free those programmers from the tedious task of integrating machinery and allow them to work on higher value problems.

    One area that continues to see strong job growth despite automation is warehouses. Our consumer economy is going through a paradigm change where goods are being delivered from warehouses rather than being carried home from a store.

    Amazon, despite rapidly increasing its robotics usage, announced in July that it was looking to hire an additional 50,000 people for its fulfillment centers and also announced plans for a second headquarters with 50,000 jobs, each paying over $100,000.

    This is in addition to its already massive employee base, including those programming robots and researching artificial intelligence.

    Artificial Intelligence Arms Race

    From manufacturing to retail merchandising algorithms, AI offers great benefits to numerous industries. Companies worldwide are seeking to catch up to American companies’ head start.

    Stifling the adoption of automation and AI during this key phase would harm rather than help America’s ability to grow a talented workforce capable of solving the challenging problems of the future.

    Bobby Eubank, CFA, is an equity research analyst for Chevy Chase Trust, which provides investment advisory and corporate fiduciary services.


  • Chevy Chase Trust - Investment Update, Third Quarter 2017 Investment Update, Third Quarter 2017 - U.S. equity markets continued a steady climb during the third quarter of 2017. Posted in: Investment Update, Noteworthy

    U.S. equity markets continued a steady climb during the third quarter of 2017. The S&P 500 Index generated a total return of 4.48%, bringing the year-to-date return to 14.24%. Volatility remained exceptionally low. If the year were to end today, 2017 would contain the fewest +/- 1% days since 1964. The S&P has gone ten months without a sell-off of more than 3%, making it the second longest stretch since 1950. Historically, 3% (or greater) sell-offs have occurred on average every two to three months.

    Unlike prior bull markets, the relatively steady climb higher does not seem to be lulling investors into complacency.   Memories of the bursting internet bubble and global financial crisis, stretched valuations, and rising geopolitical risks (most notably North Korea), contribute to somewhat bearish sentiment. Also, investors instinctively, if not intellectually, understand the concept of “negative skew.”  Negative skew applied to equity markets means advances tend to be gradual and steady while sell-offs are sudden and sharp. Markets rarely melt up, but they do melt down.

    Despite the longevity of this bull market (now well into its eighth year), and several real risks, we are maintaining our current portfolio strategy and positioning. Bear markets have almost always coincided with economic recessions, with the latter usually causing the former. None of our recession-timing signals are flashing red. ISM manufacturing new orders are strong, initial unemployment claims are low, core capital goods orders are accelerating, and the yield curve is not in immediate risk of inverting. U.S. financial conditions have eased this year, which should support near-term growth.

    The key indicator we are watching is inflation. In our opinion, a sustained increase in inflation will mark the beginning of the end of this bull market. Rising inflation will signal that the slack created by the last recession has disappeared and the Federal Reserve will have a green light to raise interest rates with intent to slow economic growth.

    After five months of inflation data coming in below consensus expectations, the August consumer price index was higher than expected. This is only one data point after a string of lower readings. We will be watching to see if this is a one-off blip or a change in trend. For now, we are holding on loosely, but alertly.


    Looking Deeper

    Understanding current equity market dynamics requires looking beyond aggregate results. Thus far, 2017 has seen the largest gap between the performance of growth and value stocks in twenty years. The two tables below illustrate this point.


    Invesment update Q3 charts 2017-01

    During 2016 it paid to be smaller and more value-oriented (cyclically positioned). The opposite has been true thus far in 2017. Typically, large cap growth stocks outperform when we are in a slow growth environment. When growth is scarce, investors pay more for it. Cyclicals tend to outperform when underlying economic growth is accelerating.

    Another shift that has occurred in 2017 is the outperformance of non-U.S. equity markets versus the U.S.  From 2010 to 2016 the S&P 500 outperformed the MSCI All Country World Index in all but one year. The average difference between the two indexes was a whopping 4.9% per year. In 2017 the opposite has occurred. Year-to-date the MSCI All Country World Index has generated a total return of 17.75% versus the S&P 500’s 14.24%.

    Surprisingly, this performance divergence has occurred alongside a weakening U.S. dollar. Conventional wisdom at the beginning of 2017 was that the Federal Reserve would raise interest rates faster than other major geographies and, as a result, the U.S. dollar would strengthen. This did not happen. Despite two rate hikes this year, the DXY Index, which measures the U.S. dollar versus a basket of foreign currencies, has declined approximately 9%. This weakness serves as a tailwind for U.S. corporate earnings. A recent research report estimates that every 1% depreciation in the dollar increases S&P 500 earnings by 1.6%. Conversely, relative strength in the euro, yen and yuan acts as a drag on earnings. This makes the year-to-date performance of non-U.S. regions even more impressive.

    Finally, U.S. dollar weakness is inflationary since it requires more dollars to buy the same imported goods bought just one year ago. The fact that inflation has missed consensus expectations for most of the year, despite dollar weakness, tells us that secular deflationary pressures are still present despite the U.S. economy approaching full employment. If the U.S. dollar stops depreciating, as many expect, the strong performance of non-U.S. equity markets will likely continue into 2018, and inflation may again fall short of expectations.



    As thematic investors, we research secular trends and the resulting changes that we think will impact corporate strategies and performance. Our secular themes tend to be long-lived and typically remain relevant for multiple years. However, they evolve over time and the ideas they spawn and the stocks that capitalize on the themes change as they become more widely recognized. Two current examples are Amazon and NVIDIA.

    For several years, the narrative around Amazon was that it didn’t make money and would never be profitable. Our thematic research focused on the growing importance and underappreciation of access to consumer data (our Intangibles theme), and on changing consumer behavior as populations shifted toward denser urban areas in the U.S. (our U.S. Urbanization theme). We believed Amazon’s dominant web services business and the fact that the company was already the largest cloud computing provider in the world, were not appropriately valued because most investors only viewed Amazon as a retail company. We also believed the company’s substantial investment in fulfillment centers close to urban populations would give it a sustainable competitive advantage in retail delivery. This barrier to entry and first mover advantage contributed to the company’s ability to increase market share at the expense of competitors. Today 80% of incremental retail sales occur online and 60% of those sales are captured by Amazon. The company now accounts for half of all growth in retail sales.

    As Amazon’s strong positioning became more evident, sentiment also changed. Recent headlines and analyst reports have been almost universally favorable. We still own Amazon, but its uniqueness is no longer as underappreciated.

    Similar to Amazon, the semiconductor chip company NVIDIA appeared well positioned to capitalize on more than one of our investment themes. The initial thesis for investing in NVIDIA was fairly simple. The amount of global data being generated was growing at an exponential rate (our Intangibles and Automation themes). Making sense of that data was increasingly challenged with conventional processing techniques. Interestingly, we first discovered NVIDIA’s advantages from speaking with genomic experts while researching our Molecular Medicine theme. We learned that the primary bottleneck in genomic sequencing was processing. Each human genome contains six billion base pairs.  It took a day or more to process this amount of data with conventional CPUs and the data analysis portion of the total cost of genomic sequencing kept rising.  Scientists discovered that NVIDIA’s GPU chips, first created for graphically intense computer games were a perfect complement to CPUs as an accelerator.

    Realizing that Molecular Medicine would not be the only field challenged by data proliferation, we examined the potential for GPUs in other fields and applications. NVIDIA also recognized the potential early and invested heavily in developing their GPUs and the requisite software required to easily program them for different applications. As a result, it was able to capture 85% market share before the opportunity became more broadly recognized by chip competitors. NVIDIA still has a leadership position, but the field is becoming more competitive as GPUs are critical technology for applications as diverse as artificial intelligence (AI) and self-driving vehicles.

    Intangible Assets: An Investable Theme
    –  A recent feature in The Economist stated “the world’s most valuable resource is no longer oil, but data.”   In a twist on economics, oil’s value derives from its limited supply and scarcity while data’s value is derived from almost limitless growth and new discoveries.

    Despite the growing importance of data, it is not listed as an asset on a company’s balance sheet.  Unlike property, plant and equipment, it is difficult to value and Generally Accepted Accounting Principles (GAAP) provide little guidance.   Access to data has changed the nature of competition by creating self-sustaining network effects.  By gathering more data, a firm can improve its products or services, which attracts more customers and generates more usable data.   Importantly, these virtuous cycles are occurring across many industries in innovative ways.

    The more data Tesla and Google gather from their self-driving cars, the better they become at driving themselves.  The more information GrubHub gathers about when, where and what consumers order from restaurants, the better it can help manage inventory, workflow and customer service.  Google, Facebook and Amazon can see what people search, share and buy, giving them almost a ‘God’s eye view.’  And a company like NVIDIA acts as the ‘pick and shovel’ facilitating the mining of these vast pools of data.  Data inundation, data mining and intangible assets that defy traditional valuation are related subjects in our thematic research.


    Fixed Income

    The 10 year bond yield ended the third quarter of 2017 at 2.33%, slightly below the 2.49% level where it began the year. It dipped to 2.00% in August, but rebounded as risk appetites increased and inflation expectations perked up after the higher than expected August CPI reading mentioned earlier. Forecasting a rise in yields has become a fool’s errand. From a long term perspective, it does not appear that the secular downtrend of lower yields that has been in place for over 30 years is coming to an end. Still, there have been periods during this long bull market where multiple signals point to a modest rise in rates, even when economic conditions remain unchanged. This may be one of those periods. We think yields could climb moderately higher in the short term, but ultimately, we would not be surprised to see them fall early next year.

    A big wild card in the bond market will be the impact of the Federal Reserve reducing the size of its balance sheet. Prior to the financial crisis, the Fed’s balance sheet was about $900 billion. It ballooned to $4.5 trillion due to quantitative easing programs put in place to spur economic growth. Now the Fed is finally reversing course and will begin shrinking its balance sheet. Most investors expect this to have either little impact or push yields higher (bond bearish). In essence, shrinking the balance sheet is a form of tightening. Tightening is usually bearish for bonds as it typically implies a backdrop of strong economic growth. However, tightening in the absence of robust growth may lead investors to reduce long-term growth and inflation expectations and, therefore, in this instance, it may actually be bullish (yields may decline). We are in unchartered territory so it is difficult to predict. Time will tell.

    We are maintaining our current positioning in short- to medium term investment grade bonds. At this point, we don’t believe risk/reward warrants reaching for longer duration.



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  • Q & A with Michael Gildenhorn - Chevy Chase Trust Q & A with Michael Gildenhorn - We recently sat down with Michael to learn more about his background and how he began his career. Posted in: Noteworthy, People

    Michael Gildenhorn, Director of Client Management and Senior Portfolio Manager

    Michael joined Chevy Chase Trust in 2005 after previously serving as the President of Asset Management Investment Advisers. He currently serves as Director of Client Management and Senior Portfolio Manager, where he provides portfolio and wealth management advice to high net worth and institutional clients. Having over 25 years of experience, Michael has been recognized multiple times as one of Washington area’s top investment advisors by Washingtonian Magazine. We recently sat down with him to learn more about his background and how he began his career. 


    Q: Tell us a little about your background.

    A: I’m a native Washingtonian and attended Walt Whitman High School. I went to Duke University and graduated with a degree in Economics and then studied law at the George Washington University National Law Center.  I earned my JD in 1984.


    Q: What was your first job out of college?

    A: I was a real estate attorney practicing in Washington, DC. I liked the law, but I always knew I loved finance more.


    Q: How did you transition into finance then?

    A: In 1986, I decided to explore investment advising opportunities and was offered a job at Asset Management, Inc. in Bethesda/Chevy Chase.  To prepare, I spent four months in New York City attending investment courses at the New York Institute of Finance.

    Asset Management, Inc. was Buddy Adler’s firm. He was a wonderful business role model.  He demonstrated that it is not only important to be an excellent investor & portfolio manager, but that it is equally, if not more, important to be connected to clients in a meaningful way. He truly cared about his clients and they appreciated that special quality.


    Q: What do you enjoy most about your career?

    A: Investment advising requires my pulling from entire education/knowledge base:  finance, investments, law, tax, psychology, math, science, politics, etc.  All of these areas affect the investments I make and the wealth advice I provide. Also, I began my career at the dawn of the computer age and I am fascinated with the tools I have available to manage money.


    Q: How did you come to be at Chevy Chase Trust?

    A: I came to Chevy Chase Trust as a product of an acquisition, but I cannot imagine an investment firm that offers more to clients than the current Chevy Chase Trust in terms of its research team, its global thematic investment approach and its comprehensive financial and estate planning offerings. The attention to detail seen in Chevy Chase Trust’s client service and portfolio management goes beyond that offered by the big, institutionalized money managers in this community. I am thrilled that my clients are benefitting in meaningful ways from the resources I have at my disposal.


    Q: Who was your mentor?

    A: My father. From a young age, I remember his joy and fascination with investing in the financial markets. We often had conversations about commodities, stocks and bonds, charts and trends and the fundamentals of investing.


    Q: When you aren’t in the office, what do you enjoy doing?

    A: I am very involved in the Jewish community. I am the chair of the investment committee for the JCC Association of North America, and the incoming chair of the investment committee at the United Jewish Endowment Fund.

    I also love fly-fishing and cycling.  I have fished & cycled extensively around the world. In September 2017 I will be participating in Deloitte Ride Across Britain which will cover the 967-mile length of the United Kingdom:  Lands End to John O’Groats.


    Q: What are is your favorite vacation destination?

    A: I love taking family vacations.  Kennebunkport, Maine, and Aspen, Colorado are my two favorites.


    Q: What is the best piece of advice or the best lesson that you have learned throughout your career?

    A:  Client expertise is just as important as investment expertise.

  • RealAssetsAdviser 655_cropped Amy Raskin featured in September’s Real Assets Adviser magazine - Read about who and what inspired her towards a career in finance and her commitment to thematic investing, the guiding principle at Chevy Chase Trust. Posted in: Noteworthy, People

    “The Best Unmade Plans: Chevy Chase Trust CIO Amy Raskin never drafted a professional blueprint, but her opportunism has blazed a torrid career path”

    Read about who and what inspired her towards a career in finance and her commitment to thematic investing, the guiding principle at Chevy Chase Trust.

    Read the full article here.


  • Chevy Chase Trust - Investment Update, Third Quarter 2017 Investment Update, Second Quarter 2017 - Global equity markets rose during the first half of 2017. In fact, annualized returns are on pace for the fifth best showing in 30 years. The MSCI All Country World Index (ACWI) generated a total return of 4.45% during the second quarter of 2017, bringing its year-to-date return to 11.82%. Posted in: Investment Update, Noteworthy

    Global equity markets rose during the first half of 2017. In fact, annualized returns are on pace for the fifth best showing in 30 years. The MSCI All Country World Index (ACWI) generated a total return of 4.45% during the second quarter of 2017, bringing its year-to-date return to 11.82%. Although the total return for the S&P 500 Index was below that of the ACWI, the S&P still generated a healthy total return of 3.09% for the second quarter and 9.34% year-to-date. The S&P outperformed most global indices each of the past four years. But relative economic conditions and policy positions have changed and it is not surprising the U.S. has lagged most non-U.S. markets in 2017.

    Despite this strong performance, investor sentiment is less sanguine. One potential reason is political uncertainty. History has proven that when it comes to investing, it pays to be apolitical. Tying investing to politics tends to be a losing proposition or, at least, a fleeting proposition. We believe that equity markets generally align with economic fundamentals. Strong post-election returns of some stocks based on beneficial exposure to proposed U.S. infrastructure spending and/or tax reform has reversed during the first half of 2017. In our opinion, current equity market valuations are not dependent on new fiscal stimulus. In fact, we believe at this point in the cycle, fiscal stimulus would be counterproductive and likely lead to further tightening of monetary policy which would, in turn, hurt economic growth and equity market multiples.

    Broadly speaking, we continue to be in a low growth, low inflation environment. This is a positive backdrop for equity markets. While the sheer length of the current U.S. expansion, now over eight years and the third longest in the post-war era, is worrying to many, expansions do not die of old age. Rather, they usually end by some combination of Federal Reserve tightening and the unwinding of built-up imbalances.

    During the most recent Federal Reserve meeting in mid-June, Chairwoman Yellen reaffirmed that the Fed remains inclined toward more rate hikes. This is our biggest concern. We think the Fed has just about exhausted its ability to raise rates without hurting the economy and equity markets. As growth and inflation data continue to come in below expectations, we think the current Fed stance will soften and slow (as it has done several times in recent years). If we’re right, it will support current or even slightly higher equity market multiples.

    Today’s economic imbalances are not as severe as those leading up to past recessions. The ratio of household debt-to-disposable income is still close to post-recession lows. Corporate debt-to-GDP is relatively high and somewhat concerning, but cash flow growth seems adequate to cover the increase in debt, and credit spreads remain extremely low. If corporate profitability declines for any reason, debt levels could become an issue. We don’t think this is a risk in the near term, but the end of the business cycle is likely closer in the U.S. than other major economies. Given this backdrop, we have added a new theme to portfolios to reflect this shift in global positioning.


    Investment Themes

    Our themes capitalize on secular trends, disruptive ideas, innovations and economic forces that are reshaping the world. Thematic portfolios include growth and value stocks, large and small capitalization stocks and companies with different geographic domiciles and global exposures. Each theme spans multiple sectors with macroeconomic conditions influencing sector, factor and geographic weightings. Five major themes shape our portfolios.

    Molecular Medicine Will Revolutionize Healthcare

    Breakthroughs in genomic science are changing the practice of medicine. Genomic sequencing technology, clinical knowledge and data analytics are converging to deliver novel treatments and diagnostics that will improve medical outcomes and usher in a new era of healthcare.

    • The sequencing market was approximately $5 billion in 2015. It is expected to grow to over $21 billion by 2020.
    • The cost of sequencing is declining rapidly. Ten years ago it cost almost $10 million to sequence one genome. Today it costs between $1,000 and $2,000.
    • Less than one million genomes have been sequenced to date. By 2025, 25% of the population in the U.S. will likely have their genome sequenced.
    • Genetic information is increasingly being used to better treat many diseases, including cancers.
    • Genomic data is doubling every seven months.

    After a Hundred Year Migration to Suburbia, the U.S. is Urbanizing

    Urbanization trends are occurring across the country influenced by demographics, changes in city planning, shifts in the housing market and new business models that leverage population density. Urban living has profound economic implications, changing behavior, spending and consumption patterns.

    • Population growth in metro areas is now outpacing growth in non-metro regions.
    • Urban areas have significantly higher income levels and more money is spent on clothing, education, travel and food outside the home.
    • On-demand services, such as UBER, GrubHub and FreshDirect, are enabled by increasing population densities. These services are leading to an even greater divide between spending and consumption patterns in urban and non-urban areas.
    • Rentership (versus home ownership) is increasing in every age cohort. Expectations are for at least an additional 4.4 million renter households by 2025.
    • Suburban and near-urban population centers increasingly include urban-style developments to accommodate walkable “downtowns” and other urban amenities.


    Next Generation Automation is Extending Beyond the Auto Industry

    Automation that was concentrated in automobile production in the developed world is now penetrating other industries such as retail, food service, and even healthcare. This will lead to improved productivity, dramatic shifts in supply chains and growing end markets for technology components and industrial equipment.

    • Improvements in machine vision, connectivity and programming/software are enabling robotics to extend beyond the factory floor.
    • Amazon now employs over 80,000 mobile robots in warehouses and fulfillment centers, up from only 1,000 a few years ago.
    • Amazon’s sales per square foot are over $1,800 versus approximately $200 for traditional retail stores.
    • We estimate that shipments of industrial robots will increase five-fold this decade.
    • Pricing for optical sensors used in machine vision has fallen from over $100 per megapixel in 2001 to less than $1 per megapixel today.


    Intellectual Capital, Data and User Networks Create New and Sustainable Moats

    Traditionally hard to measure assets such as access to nonpublic consumer data, intellectual capital (including R&D and proprietary technology), and robust user networks have become increasingly valuable. These properties provide competitive advantages and barriers to entry and have led to sustainably high returns for a select group of pioneering companies.

    • The value of intellectual capital has held up better than that of traditional assets in recent years.
    • Companies in the top-quintile of R&D spending-to-market capitalization have outperformed the market by 6% per annum since 1975 and more than that this decade.
    • Increases in brand value have a strong correlation to long-term outperformance.
    • The productivity gap between companies is widening. Between 2001 and 2013 the top 5% of firms within each industry generated productivity growth of 3% per annum, the remaining 95% saw productivity growth of less than 0.5%.
    • In an increasing number of sectors, it has been “winner-take-all” or “winner-take-most” with one or two companies attracting the top talent and garnering most market share in a particular industry.


    The U.S. Business Cycle Will End Before Others

    With unemployment below 4.5% and the potential for future interest rate increases, it is likely that the U.S. business cycle will end before business cycles in other developed markets run their course. This may well end the multi-year stretch of U.S. outperformance and impact sector leadership in the second half of 2017 and beyond.

    • The U.S. Federal Reserve has now raised rates four times. Current guidance is for at least one more increase in 2017. Another rate hike would bring the Fed Funds rate very close to, or potentially above, the neutral rate. This would mean monetary policy would shift from accommodative to restrictive.
    • The Fed has also indicated that it would begin to reduce its balance sheet by year end. This would also be a form of tightening monetary policy.
    • Conversely, central banks in Europe have much more room to maintain accommodative monetary policies, given the significantly higher levels of unemployment and very low inflation.
    • European GDP growth outpaced U.S. GDP growth last year and is on track to do so again in 2017.
    • The Bank of Japan is also likely to remain accommodative for the foreseeable future. Additionally, Japanese companies have been making important changes in corporate governance, which should benefit shareholders.


    Fixed Income

    For most of the quarter, performance in global fixed income markets seemed to indicate bond investors were pessimistic about prospects for global growth and inflation. Global bond yields fell steadily from mid-March through mid-June before rebounding in the last two weeks of the quarter. The U.S. ten-year bond yield was 2.60% on March 14th. It fell to a low of 2.12% on June 14th, then rebounded to 2.30% to end the quarter. Similarly, ten-year German bond yields yielded 0.44% in mid-March, fell to 0.26% in mid-June and then rebounded to 0.38%.

    Interestingly, the low point in U.S. bond yields coincided with the June Federal Reserve Board meeting. We suspect that some of the recent rebound in yields is due to more dovish commentary coming from Fed Governors. Paradoxically, if the Fed does not slow its rate increases, we’d expect the increase in long-term yields to be short lived. Yields could fall to 2.0% or even a bit lower. However, if the Fed pauses, as we expect, it is likely ten-year bond yields will trade between 2.3% and 2.6% as was the case for most of the first quarter.

    Overall, our positioning has not changed. We construct well-diversified, high-quality portfolios with short-intermediate durations. The average duration of our bond holdings is approximately 3.25 to 3.5 years and the vast majority of our bonds are investment grade.



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  • Spencer_interview Robot revolution: Is your job at risk? - Spencer Smith, Director of Research, discusses the potential impact of artificial intelligence and robotics on employment. Posted in: Noteworthy

    Spencer Smith, Director of Research, discusses the potential impact of artificial intelligence and robotics on employment. Smith states that the change will not be immediate, “There really are no jobs being taken away by our artificial intelligence right now. It only has very small, specific applications.” Smith predicts robots and automation could eventually displace jobs, but it will be a gradual transition.

    Gray TV is a Washington, D.C. based news bureau that provides stories nationwide to local outlets. Click here to view the full story.

  • Spring reception photo-01 Chevy Chase Trust hosts John O. Brennan for Spring Reception - Chevy Chase Trust was proud to host John O. Brennan, former Director of the Central Intelligence Agency (2013-2017) on April 24, 2017. Posted in: Events, Noteworthy

    Chevy Chase Trust was proud to host John O. Brennan, former Director of the Central Intelligence Agency (2013-2017) on April 24, 2017. Mr. Brennan worked at the CIA from 1980-2005 during which time he served in the Directorate of Intelligence, was the agency’s intelligence briefer to President Clinton, was Chief of Staff to George Tenet and served as deputy executive director until 2003. He then led a multiagency effort to establish what would become the National Counterterrorism Center. He also served President Obama as Assistant to the President for Homeland Security and Counterterrorism.

    Miles O’Brien, an award-winning independent broadcast journalist, moderated a discussion with Mr. Brennan on wide-ranging topics including the Russian government’s interference in the U.S. presidential election, the dangers associated with North Korean leader Kim Jong Un and a nuclear-armed North Korea, and cyber warfare and our growing dependence on the internet. Mr. Brennan also commented on the complicated security and intelligence issues with Syria, and government surveillance on U.S. citizens.

    The evening concluded with Mr. Brennan and Mr. O’Brien joining guests for a cocktail reception in the Chevy Chase Trust Galleria.

  • Chevy Chase Trust - Investment Update, Third Quarter 2017 Investment Update, First Quarter 2017 - During the first quarter of 2017, the S&P 500 Index generated a total return of 6.07%. Almost all of the gain, 5.36%, occurred between early February and early March. Since the election, the S&P has returned slightly over 10%. Posted in: Investment Update, Noteworthy

    During the first quarter of 2017, the S&P 500 Index generated a total return of 6.07%. Almost all of the gain, 5.36%, occurred between early February and early March. Since the election, the S&P has returned slightly over 10%. While the prospect of market-friendly policies has contributed, we believe most of the move is underpinned by strength in economic data. As it stands now, we are in the second longest bull market since 1928. It is logical to think about how and when it will end. The challenge for bears is that there are few signs of speculative excess that normally accompany the start of a bear market. Further, there is a real risk of exiting too early. On average, the final two years of a bull market have represented over 40% of the total return for the cycle. Over the last 80 years, the smallest equity return in the final two years of a bull market was 30%, with median returns of 45%. While we are not expecting returns of this magnitude, we think equities will outperform most other asset classes in 2017.


    The Economy and Inflation

    We generally agree with Fed Chair Janet Yellen’s assessment of the economy. During the most recent Federal Open Market Committee press conference in mid-March, she said that, “the simple message is the economy is doing well.” Indeed, the moderate pace of growth that has prevailed since the beginning of the recovery means that the typical imbalances and pressure points that accumulate in the advanced stages of a business cycle are, so far, still absent.

    Inflation has remained low, which has frustrated some, but we believe is beneficial for financial markets. Inflation-driven growth often feels good in the short term. Paychecks rise and debt becomes easier to repay. However, over longer periods of time, higher inflation tends to lead to tighter monetary policies and, eventually, recessions. For people on a fixed income, like retirees, even moderate levels of inflation can be problematic. As illustrated in this chart, equity market price-earnings multiples begin to compress when inflation rises above 4%.


    Investment update Q1 april 2017-01













    From an investment perspective, we are encouraged by the muted increase in U.S. wage growth. In March, the Fed revised its estimate of full employment to 4.7% from 4.8%. This may seem minor, but it suggests that policymakers believe the labor market has not yet tightened enough to push wage inflation higher. We would not be surprised to see the Federal Open Market Committee continue to trim its forecast for the structural unemployment rate in the coming quarters. We think it could fall as low as 4.2%-4.3% before we see inflationary pressure. This is critical because cycles typically peak when unemployment falls below NAIRU (the non-accelerating inflation rate of unemployment). We are not there yet.


    Although inflation can feel like a “quick fix,” the only true way to raise standards of living and increase durable, aggregate, real wealth is through productivity growth. Productivity growth is difficult to engineer and almost impossible to engineer quickly. It usually requires years of capital investment and technological breakthroughs. As thematic investors, we spend most of our time researching innovations that can influence productivity growth and impact the economy.


    • The $100 Genome – The first successful sequencing of the whole human genome concluded in 2003. It took over a decade and cost approximately $3 billion. In January 2017, Illumina announced a new genomic sequencer that will have the capacity to sequence an entire human genome in less than an hour for about $100. Although the cost of genomic sequencing has been falling steadily and precipitously, many oncologists and industry experts we talk to say it is this latest breakthrough that has the potential to spur far greater market penetration and to radically change the course of treatment for certain cancers. Today it can take days or even weeks for doctors to receive comprehensive sequencing results for a tumor. In cases where cancer has metastasized, this relatively short period of time can be too long to wait to start treatment. The oncologist must prescribe medication and/or procedures without a complete genomic analysis. If the doctor could get statistically significant results in hours, rather than days, the calculus changes. We expect a significant increase in the number of genetic tests, and more important, an improvement in cancer treatment as a result of this breakthrough.

      Thematic Investment
      – Chevy Chase Trust has invested in the global leader in DNA sequencing technologies and the leading provider of comprehensive genomic testing. The latter identifies the molecular alterations in a patient’s cancer and matches them with relevant targeted therapies, immunotherapies and clinical trials. We also invest in pharmaceutical companies with promising immune-oncology drugs currently on the market and in clinical trials. Because deciphering genetic information is extremely data intensive, several of our technology holdings will be direct beneficiaries of these developments.


    • Just Walk Out Shopping – Anyone who has tried to “run into a store to pick up a few things” and ended up waiting in line too long will be pleased that very soon lines may disappear. Last December, Amazon opened an Amazon Go store. There are no cashiers, no lines, and no waiting for the chip reader to chirp “Please Remove Your Card.” Walk in, pick up what you need and walk out. The purchases are posted to your Amazon account as you leave the store. Amazon has not revealed the technical details behind the Go stores. A combination of artificial intelligence, machine vision, RFID (Radio Frequency Identification) and sensor technologies make Amazon’s “just walk out shopping” possible and importantly, replicable. Amazon plans to expand Go stores later this year. Productivity innovations often come with some adverse consequences. Currently, cashiers are the second largest job category in the U.S.

      Thematic Investment
      – Chevy Chase Trust owns Amazon in most client portfolios. As the leader in this initiative, it will clearly have a first-mover advantage. However, Amazon is likely not the only or biggest beneficiary from this technological breakthrough. With Amazon’s annual revenue projected to be $165 billion this year, it is unlikely that the Go stores will be a large contributor to revenue or significantly influence the stock price. However, Amazon’s effort may further erode market share from some already struggling traditional retailers. Avoiding companies in the bullseye of creative disruption is a core element of thematic investing. On the other hand, enablers of the technology will benefit. We currently own the global leader in machine vision systems as well as a leading manufacturer of scanning systems. Both will likely see sales rise as competitors upgrade or fully replace their own check out systems to try to compete.


    • The U.S. as an Energy Exporter – One of the least discussed, but extremely consequential goals of the new Administration is to accelerate the transformation of the U.S. into an energy exporter. The Administration is on track to restart several dozen energy projects that were either canceled or mothballed by legislation and regulation during the prior administration. If the U.S. meets this goal, it will be a political achievement that will be further enabled by technology. Technological advances in oil extraction have led to a huge increase in productivity, shifting the global cost curve downward. In the Permian basin, for example, oil production-per-rig increased by 350% in the last few years, lowering the break-even points for U.S. shale operators. This progress has led to a boost in production, while supporting profitability in a lower-price environment. The economic and geopolitical consequences of reducing U.S. dependency on foreign oil and potentially even becoming an energy exporter could be game changing.

      Thematic Investment
      – Chevy Chase Trust is market weight the energy sector as a whole and underweight oil. Counterintuitively, increased investment in a sector more often than not leads to lower future returns. Although technological breakthroughs lower break-even costs for producers, in this situation we think they will also lead to more competition. We favor investment in companies that are among the lowest cost producers and have superior geological assets. These companies will likely fare best in this more competitive environment. Relatively low energy prices also support our longer-term benign inflation outlook and should provide a boost to our favored consumer-related holdings as money previously spent on energy will be redirected elsewhere.


    Portfolio Positioning

    In the latter half of 2016, we increased our non-U.S. holdings, particularly in developed markets such as Europe and Japan. We expect to continue to increase our non-U.S. equity exposure as we find companies domiciled abroad that benefit from our themes. Global economic growth has been accelerating in most geographies around the world. In fact, Europe’s GDP growth rate was faster than the U.S.’s last year and economic performance in the region continued to be relatively strong in the first quarter of 2017. After several years of underperformance, many non-U.S. equity markets have outperformed the S&P year-to-date. We expect this to continue, due in part to lower valuations and more room for margin expansion.





    Fixed Income

    After spiking higher late last year, long-term yields traded in a relatively narrow range during the first quarter of 2017. The 10-year Treasury bond began the year at a yield of 2.44% and ended the first quarter only five basis points lower at 2.39%, with a high for the quarter of 2.63% and a low of 2.30%. Similar to equity investors, bond investors will be attuned to inflation expectations. If inflation rises sooner and higher (not our current expectation), yields across the curve would rise at an accelerating pace and bond prices would decline. If inflation remains subdued, mid- and long-term bond yields may increase slightly, but not significantly.

    As expected, at its most recent meeting the Fed increased the Fed Funds rate by 25 basis points to a range of 0.75%- 1.00%. This is only the third rate hike in 15 months, a historically slow pace. Both the written and verbal commentary suggest that the Fed remains committed to a very gradual rate of increase. In fact, Chairwoman Yellen used the word “gradual” (or ”gradually”) 21 times during her press conference. Since the meeting, some Fed Governors have indicated that they anticipate three or four more 25 basis point rate increases this year. Even this pace feels slightly aggressive to us. Unless we see a significant pick-up in economic growth and/or inflation, we think there may be fewer rate hikes. A slower rate of increases is bullish for both equity and fixed income investors.



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  • Above: Tom Cholis, Ed Beckwith, Anne O’Brien Tom Cholis, featured speaker for Washington, D.C. Estate Planning Council event - Chevy Chase Trust Senior Advisor Tom Cholis was a featured speaker for the Washington, D.C. Estate Planning Council’s “Inside the Members’ Heads” on Wednesday, March 15, 2017. Posted in: Announcements, Noteworthy, People

    Chevy Chase Trust Senior Advisor Tom Cholis was a featured speaker for the Washington, D.C. Estate Planning Council’s “Inside the Members’ Heads” on Wednesday, March 15, 2017.

    Cholis was featured alongside fellow council member Anne O’Brien, Esq., of Caplin & Drysdale in this installment of the Council’s interview series. Ed Beckwith, Esq., of Baker & Hostetler LLP, interviewed the two; Beckwith asked them to discuss their backgrounds and career paths and to provide advice on developing successful, fulfilling careers in the estate-planning field. Cholis, who joined Chevy Chase Trust in 1999, remarked that working in this industry never ceases to interest him; “What we do requires constant learning, every day there are new questions that require new research.”

    Cholis has been a member of the Washington, D.C. Estate Planning Council since 1980, and served as Council President in 1991. The Washington, D.C. Estate Planning Council provides community-wide support and collaboration for 250 members in the estate planning industry.

  • Bill Gates_The Hill-01 Bill Gate’s robot tax idea is flawed. Here’s why. - Recently, a spate of stories have appeared in the media speculating that advances in technology, specifically robotics and artificial intelligence, will inevitably lead to widespread job losses as workers are replaced by machines. Posted in: Insights, Noteworthy

    By Spencer Smith, Director of Research

    Originally posted on  3/09/17

    Recently, a spate of stories have appeared in the media speculating that advances in technology, specifically robotics and artificial intelligence, will inevitably lead to widespread job losses as workers are replaced by machines.

    Naturally, many commentators have suggested policy solutions to address this issue. Perhaps attracting the most attention was Bill Gate’s assertion in a recent interview that robots should be taxed in the same way as human workers.

    There are several key problems with this proposal. First, it would be very difficult to define exactly what a robot is and, thus, how it should be taxed.

    Read the full article here.

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