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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
InvestmentUpdate 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
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  • InvestmentUpdate 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 Spencer Smith featured on Gray TV: “Robot revolution: Is your job at risk?” - Spencer Smith, Director of Research, was interviewed for an article regarding the rise of artificial intelligence and robotics. Posted in: Noteworthy

    Spencer Smith, Director of Research, was interviewed for an article regarding the potential impact of artificial intelligence and robotics on employment. Smith stated 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.

  • InvestmentUpdate 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.

    Subscribe to our quarterly Investment Update

  • 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.

  • The Hill LogoV4-01 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.

  • Claudine and Amy Dr. Claudine Isaacs, featured speaker at Women & Progress 2017 - Chevy Chase Trust hosted the third in a biannual series of events focused on issues important to women on February 15, 2017. Posted in: Events, Noteworthy

    Chevy Chase Trust hosted the third in a biannual series of events focused on issues important to women on February 15, 2017.  This year’s event, Women & Progress, featured two empowering women in the forefront of their respective industries. Ambassador Melanne Verveer the Executive Director of Georgetown University’s Institute for Women, Peace and Security, and Claudine Isaacs, MD, professor of Medicine and Oncology and the co-Director of the Breast Cancer Program at the Lombardi Comprehensive Cancer Center at Georgetown University.

    Dr. Claudine Isaacs discussed recent advances in breast cancer research, genetic testing, and prevention strategies. Over the past three decades, advances in research have progressed along two paths: identification of breast cancer subtypes and drug development. By identifying specific subtypes in breast cancers, therapies and medications are no longer approached as one-fits-all as they have been in the past. Doctors are now able to better tailor treatments to patients and provide more individualized care. In addition, Dr. Isaacs asserts that clinical trials have been an important step in improving these tailored treatment options for breast cancer.

    Genetic research is another area of rapid growth in the medical industry, and researchers are now able to determine whether an individual is predisposed to certain types of cancer. The genetic mutations that are tied to a likelihood of developing breast cancer are BRCA 1 and BRCA 2. By locating a genetic mutation, early steps to prevent breast cancer can be taken. Advancements in research, diagnosis, and treatment continue, and, according to Dr. Isaacs, the outlook for those affected by breast cancer, is better than ever before.

    Dr. Isaacs earned her medical degree and completed residency training at McGill University. She completed fellowship training in the Division of Hematology and Oncology at McGill University and a Fellowship in Breast Medical Oncology in the Division of Medical Oncology at Georgetown University. She then joined the faculty in the Department of Medicine and Oncology at Georgetown University.

    Click here to watch a video of the full program.

  • Melanne and Stacy Chevy Chase Trust hosts Ambassador Melanne Verveer for Women & Progress 2017 - On February 15, Chevy Chase Trust hosted Women and Progress, an event focused on the advancements women are making in corporate America, politics and breast cancer research. Posted in: Events, Noteworthy

    On February 15, Chevy Chase Trust hosted Women and Progress, an event focused on the advancements women are making in corporate America, politics and breast cancer research. The featured speakers were Ambassador Melanne Verveer, Executive Director of Georgetown University’s Institute for Women, Peace and Security, and Dr. Claudine Isaacs, co-Director of the Breast Cancer Program at Lombardi’s Comprehensive Cancer Center.

    Ambassador Verveer began her remarks stating that institutions such as McKinsey & Company and the World Bank have published research showing that women are one of the “most powerful demographic groups the world has ever seen,” and pointed out that women now lead or own a quarter of private businesses globally. Regarding the buying power of women, she noted that if American women were their own country, their GDP would rank fifth globally, just behind Germany.

    During her question and answer session with Stacy Murchison, Chief Marketing Officer at Chevy Chase Trust, Verveer highlighted how women –now more than ever– are using their power for purpose. Citing stories from her book, Fast Forward: How Women Can Achieve Power and Purpose, Verveer described how women are critical agents in creating economic growth and social progress. One story she related was about Coca Cola’s efforts to accelerate women into senior operating roles, and its 5by20 initiative that is geared to empower five million female entrepreneurs along its value chain –from agriculture all the way to retail– by the year 2020. Regarding women in U.S. politics, Verveer discussed the relatively low participation here compared with both developed and developing nations, yet acknowledged an increasing desire of U.S. women to create change and gain access to positions in public office.

    Melanne Verveer served as the first ever U.S. Ambassador-at-Large for Global Women’s Issues, and during the Clinton Administration served as Assistant to the President and Chief of Staff to First Lady Hillary Clinton. She is the co-founder of Vital Voices Global Partnership, an international nonprofit born from the U.S. government’s Vital Voices Democracy Initiative.

    Click here to watch a video of the full program.

  • The Hill LogoV4-01 Urbanization ushers in upstart industries, innovative ideas - In 2009, for the first time in world history, the number of people living in urban areas surpassed the number living in rural areas. More recently, U.S. urban population growth began outpacing suburban growth for the first time since World War II. Posted in: Insights, Noteworthy

    By Spencer Smith, Director of Research

    Originally posted on 1/26/17

    Flying from Los Angeles to Washington, D.C. on a clear day, one cannot help but look down at miles of open land spotted with small towns and wonder, “With all that space, who’s down there?”

    In 2009, for the first time in world history, the number of people living in urban areas surpassed the number living in rural areas. More recently, U.S. urban population growth began outpacing suburban growth for the first time since World War II.

    This trend should continue for the foreseeable future, with the world urban population, by one estimate, expected to increase 84 percent by 2050. Cities are one of the most important inventions in human history.

    Read the full article here.


  • InvestmentUpdate Investment Update, Fourth Quarter 2016 - 2016 was a good year for equity markets. Posted in: Investment Update, Noteworthy

    2016 was a good year for equity markets. The S&P 500 generated a total return just shy of 12% and the MSCI All-Country World Index, excluding the U.S., returned 4.5%. While the U.S. Presidential election and Brexit dominated headlines, the broad economic recovery was the most important financial development of the year.

    The current equity bull market began in March 2009. It has been called the most unloved bull market in history. Still fresh memories of the financial crisis have led to an almost pathological assumption that good times can’t and won’t last. In fact, since the start of the recovery, there have been net redemptions from domestic equity mutual funds and ETFs every year except 2013. Unlike 2013, when a rise in bond yields was relatively short lived, the current rise in yield appears more sustainable. This could spur a rotation back to equities from bonds, providing a catalyst for yet another leg up in the current bull run.

    The most recent surveys of institutional investors show that the majority of participants believe U.S. equity markets are overpriced. This is understandable given that the market capitalization of the S&P 500 has increased by almost $1 trillion just since the election. While we would not be surprised by a fourth consecutive weak January, led by investors who deferred selling stocks with embedded gains, important near-term indicators, including healthy market breadth, narrow credit spreads and accelerating earnings growth, point to continued strength.

    The bull market is very likely closer to its end than its beginning, but it may not be over yet. Alan Greenspan first used the phrase “irrational exuberance” in 1996. That market had three more years to go and more than doubled before it ended in 2000.

    Signals Versus Noise

    Recently, many traditional economic relationships have broken down. Sharp parallel rises in both currency and yields are rare. Usually when the U.S. dollar appreciatesrapidly, long-term interest rates do not since dollar strength slows economic growth. Emerging markets usually do well when commodity prices rise since many emerging market economies are commodity dependent. However, since the election, the MSCI Emerging Market Index has declined 5% while the Goldman Sachs Commodity Index has risen almost 15%. In an environment of strengthening global growth, cyclical currencies usually strengthen against the U.S. dollar. The opposite is occurring.

    Given these paradoxes, the metric we are watching most closely is inflation. A relatively low and stable level of inflation is a sign of a healthy economy. Equity market multiples tend to be at their highest when inflation is between 0% and 2%. The Federal Reserve Board believes that an inflation rate of 2% is ideally conducive to its mandate of price stability and maximum employment. Over time, a higher inflation rate would hamper the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would increase the probability of deflation.

    Broadly speaking, the past 30 years have been characterized by increasing globalization which is inherently deflationary. In a globalized world, more competition and access to cheaper labor reduces the costs of goods. Further, if a country experiences an idiosyncratic shock that raises domestic demand, the demand can be met with more imports rather than higher prices. Many of the factors that facilitated globalization over the past 30 years were one-off developments. China cannot join the WTO more than once. Tariffs in most developed countries cannot fall much further because they are already close to zero. There is nothing on the horizon that will match the breakthrough productivity gains in global shipping that stemmed from containerization. And the global supply chain is already highly efficient.

    We believe the deflationary pressures that were the hallmark of the post-Bretton Woods era are behind us and we are entering a reflationary period where the risks of deflation have receded, but widespread inflation is not yet imminent. This is generally good for risk assets in the short-term, particularly cyclical equities.

    Portfolio Positioning

    With global economic growth improving, higher inflation still suppressed and real yields negative in Europe and Japan, stocks remain attractive relative to bonds. The majority of our equity holdings are beneficiaries of trends that we believe are powerful enough to influence corporate performance.  Most of our investment themes are secular rather than cyclical, driven by technological or demographic forces that persist independent of economic cycles and thus have the potential to outperform across different market environments. On occasion, at economic turning points like we believe we are witnessing now, cyclical forces can have an outsized influence on equity market performance. Currently, two of our six themes are motivated primarily by cyclical changes impacting financials and energy.

    The macroeconomic transition from a deflationary to a reflationary environment will put upward pressure on interest rates. Concurrently, the financial regulations implemented post-crisis have been absorbed and will likely ease under a new administration. Both of these changes will benefit banks. The financial sector is the only major S&P sector still trading below its 2007 high. We believe a pick-up in lending activity due to accelerating global growth, rising interest rates, wider net interest spreads and financial deregulation will be tailwinds to large U.S. banks in 2017.

    Another sector that we believe will disproportionately benefit from faster global growth is energy. It is often said, the cure for high oil prices is high oil prices and the cure for low oil prices is low oil prices. At $30 per barrel, most oil companies could not profitably drill for oil, so they stopped and supply fell. Because demand growth was also tepid in the first half of the year, the drop in supply did not result in an increase in price.  As economic growth accelerated in the second half of the year, demand rose and the price of oil began to climb.  Simultaneously, OPEC reemerged with some unity and production discipline. Ride-sharing services like UBER have and will continue to increase automobile usage and gas consumption, likely at the expense of public transportation. This creates additional oil demand in the short run. These factors should combine to produce tailwinds for some energy companies in 2017.

    Genomics remains one of our highest conviction secular themes. The broader healthcare sector underperformed the market in 2016 after five straight years of strong performance. We still believe advances in molecular medicine will dramatically improve the ability to identify and combat disease, and will benefit innovative companies facilitating this life sciences revolution. The pipeline of oncology drugs has never been greater. A November 11th article in the Washington Post, titled “How a researcher used big data to beat her own ovarian cancer,” provides a real life case study of how a combination of DNA sequencing, new therapies and big data analytics (another Chevy Chase Trust theme) can dramatically change the impact of cancer.

    From a geographic perspective, we are increasing our holdings in developed market non-U.S. equities, in particular, Japan. In the third quarter of 2016, Japan corporate profits reached a record high yet foreign fund flows into Japanese equities were still negative for the full year.  Japan is a prime example of how an aging population will eventually push up interest rates. The household savings rate in Japan was over 14% in the early 1990s. Since then the percentage of the population that has moved from working age to retirement age has more than doubled, from 12% to 26%. The savings rate today is only 2%. Meanwhile, the ratio of job openings-to-applicants is at a 25-year high. This will eventually lead to higher wages and end persistent deflation. Japan will benefit from this shift because inflation will pressure real rates (as opposed to nominal rates), lead to a weaker yen, a stronger stock market, and even higher inflation expectations.  We are looking at investment opportunities in Japan, particularly ones tied to our global themes.

    From a longer term perspective, there are reasons to be concerned. In the U.S., rising interest rates coupled with a stronger U.S. dollar will be a drag on U.S. economic growth.  Additionally, when inflation is on a firm upward trajectory, central banks everywhere may find it difficult to slow the trend. These two factors will then weigh on equity market multiples. And a strong U.S. dollar puts pressure on emerging markets. As of mid-2016, dollar denominated debt held outside the U.S. had risen to almost $10 trillion dollars. About one-third of the debt is held in emerging markets. As the dollar rises against other currencies, the cost of servicing debt increases. Nonetheless, barring an exogenous shock, these risks are real but probably not pressing enough to change near-term equity market momentum. It may be a bumpy ride, but we believe there is still upside entering 2017.

    Fixed Income

    2016 was a wild year in the bond market. 10-year bond yields started the year at 2.27% and fell to a low of 1.32% shortly after Brexit. Prior to the U.S. election, yields climbed back to 1.88%, and after the election shot up another 76 basis points to a 2016 high of 2.64%, before settling back to end the year at 2.44%. Although the absolute numbers may seem small, in percentage terms these are large moves.

    Pundits debate whether the 30-year bull market in bonds is finally over. We do think the cycle-low for bond yields is behind us and yields will continue to climb from current levels, just not linearly. But, we don’t expect another doubling in yields until spare capacity outside the U.S. is absorbed. Only when other central banks start raising rates will the Federal Reserve be able to sustain its rate hikes. Until then, any Fed tightening beyond what is already expected will put upward pressure on the U.S. dollar, thereby reducing the need for further hikes.

    Given this outlook, we are maintaining our current portfolio positioning. The average duration of our bond holdings is approximately 3.5 years. As bonds reach maturity or we identify swap opportunities, we will seek to reinvest the proceeds in higher yielding instruments. Continued volatility in the bond market will present opportunities to buy high quality securities at discount prices.  We will capitalize on these opportunities to add value.



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