Thematic Investing involves capitalizing on powerful secular trends, disruptive ideas, innovations and economic forces that are constantly reshaping the world. Thematic investing builds portfolios of companies positioned to exploit these transformational changes and, just as importantly, avoids companies that will be disrupted by creative destruction.
“The strong basis for stock selection comes from whittling down the thousands of public securities around the world to a manageable group- identified through our thematic research. This screening process is perhaps the most important part of investing.”
Amy Raskin Chief Investment Officer
Thematic Investing doesn’t fit into any of Morningstar’s 115 fund categories or neatly into one of its style boxes. It emerged in response to the extreme segmentation of the investment industry.
News & Noteworthy
- Panelist Amy Raskin Discusses Capital Markets, Investing and The Economy Posted in: Latest News, Noteworthy, People - How might an increase in the capital gains rate affect the financial markets? Hear Amy Raskin, Chief Investment Officer, examine the possible implications.
- The American Families Plan Posted in: Latest News, Noteworthy - President Biden laid out his vision for The American Families Plan in his address to Congress. Learn more about the proposed changes.
Important Chevy Chase Trust 2021 Tax Information
President Biden laid out his vision for The American Families Plan in his address to Congress. The President’s address and the related Fact Sheet the White House released on April 28 described a number of proposed tax increases that would be used to pay for the Plan’s programs. Some of the noted proposals are highlighted below:
- Increase the top tax rate to the pre-2018 level of 39.6% from 37% today. Currently, the top rate applies to individuals with income above $523,600 and married taxpayers with income above $628,300. It is not clear what the thresholds will be for the 39.6% rate, but the President has said the increases will apply only to those with income above $400,000.
- Apply the top 39.6% rate to all types of income, including capital gains and qualified dividends, for those with income in excess of $1 million.
- End the step-up in basis for inherited assets in excess of $1 million ($2.5 million per couple), with certain exemptions to protect family-owned farms and businesses.
- Change the taxation of carried interest income for hedge fund and private equity partners from capital gains to ordinary income tax rates.
- Eliminate like-kind exchange capital gain deferral for real estate gains in excess of $500,000.
- Broaden the application of the 3.8% Net Investment Income Tax for those earning in excess of $400,000.
These tax proposals are in the earliest stages. We expect the points will be heavily debated and revised prior to becoming law.
While neither the President nor the White House’s Fact Sheet addressed changes to the estate and gift tax laws, on March 25, Senator Bernie Sanders introduced the For the 99.5% Act, which would make sweeping changes to federal estate and gift taxes. In addition to provisions that would impact many popular estate planning strategies, including GRATs, Defective Grantor Trusts and valuation discounts, the legislation would do the following:
- Reduce the current estate tax exemption from $11.7 million to $3.5 million (from $23.4 million to $7 million for a married couple).
- Cap the exemption for lifetime gifts at $1 million.
- Increase the estate and gift tax rate from 40% to 45% on the estate value between $3.5 and $10 million; to 50% on the value between $10 and $50 million; to 55% on the value between $50 million and $1 billion; and to 65% on the value above $1 billion.
- Reduce the annual gift tax exclusion from $15,000 to $10,000 per recipient, and apply a cumulative limit of $20,000 per year for those gifts.
Again, these changes are subject to modification during the legislative process, or may fail to pass entirely. If enacted, the effective date for the changes is January 1, 2022.
We encourage you to discuss these matters with your income and estate tax advisors and reach out to us if we can be of assistance to you.
Chevy Chase Trust does not render legal, tax or accounting advice. Accordingly, you and your attorneys and accountants are ultimately responsible for determining the legal, tax, and accounting consequences of any suggestions offered herein.
Furthermore, all decisions regarding financial, tax, and estate planning will ultimately rest with you and your legal, tax, and accounting advisors.
U.S. Treasury Circular 230 Notice:
Any U.S. federal tax information included in the communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal tax-related penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.
- Optimizing Your Wealth and Health Posted in: Latest News, Noteworthy, People, Video - Charitable Giving Strategies and Maintaining Your Well-Being During COVID-19
On Tuesday, April 27, 2021, Chevy Chase Trust proudly partnered with the Virginia Hospital Center Foundation for a virtual program on charitable giving and staying-well strategies. Laly Kassa CFP®, Managing Director, offered insights into the most tax-efficient methods for giving charitably and Dr. Michael Silverman shared insight about the COVID-19 pandemic from the vantage point of the Virginia Hospital Center emergency room.
Click on the link to hear Ms. Kassa describe the most optimal types of assets to give and the benefits of Donor Advised Funds and Dr. Silverman’s insights about the vaccine roll out and staying well while returning to a more active lifestyle.
- Food for Thought: Fixed Income Posted in: Latest News, Noteworthy, Video - What differentiates Chevy Chase Trust’s approach to fixed income investing?
How do investors benefit from your approach in times of volatility? At Chevy Chase Trust, our clients speak directly with decision makers allowing for great flexibility. Hear more from Craig Pernick, Head of Fixed Income.
- First Quarter, 2021 Posted in: Featured, Insights, Investment Update, Latest News, Noteworthy - Think of the quarter not as the beginning of a new year, but as the end of an extraordinary 12-month period. Learn where our Thematic research is leading us as we look forward.
Trauma. Mania. What’s Next?
The S&P 500 Index finished 2021’s first quarter at 3,972, generating a total return for the quarter of 6.2%. But it’s more meaningful to think of the quarter not as the beginning of a new year, but as the end of an extraordinary 12-month period of trauma and mania.
In last year’s first quarter, of course, a novel coronavirus named SARS-CoV-2 began spreading in the U.S. Businesses and schools shut down to contain this new disease bringing economic activity to a near halt. The S&P 500 fell sharply to a low of 2,237 on March 23, 2020.
In response, governments opened their purse strings to support their citizens and corporations through the crisis. Central banks slashed interest rates and instituted massive bond purchase programs. Due to these aggressive actions, financial markets soared. Since its March 2020 low, the S&P 500 has gained nearly 80%. The NASDAQ Composite, the Korean Stock Exchange and the Russell 2000 Index have all doubled.
Interest Rates Firmly in the Driver’s Seat
Interest rates represent the difference between the certain value of something today and its uncertain value tomorrow. As a result, assets that pay off far in the future, such as Growth stocks, are more sensitive to changes in interest rates than assets that pay off near term. That sensitivity was on display as market sentiment – and rates – swung rapidly from fear to euphoria due to expectations of a rapid recovery. (See Display 1)
Relationship between Growth and Value Equities
Interest rates were near historic lows globally before the pandemic began, reflecting deep cuts made to restore the global economy after the 2008 Global Financial Crisis (“GFC”). As a result, pre-pandemic stock valuations were already high, and Growth stocks had already outperformed Value stocks by the widest margin in history.
When the pandemic struck and economic activity came to a standstill, interest rates plunged even further. The U.S. 10-year Treasury bond yield reached an intraday low of just 0.32% in March 2020. Rates remained near rock bottom levels through the end of the third quarter of 2020. This led to further growth outperformance and sky high valuations as investors embraced long-term “dream” stocks and shunned the more economically sensitive Value sectors.
However, in Q4 of last year, news of breakthrough vaccines and hope for even more stimulus buoyed investors’ expectations for stronger economic growth. Interest rates began to climb amid concerns about potential inflation, and Growth stocks began to lag Value stocks.
Rapid growth and inflation ahead?
Few things are sure in investing, but booming U.S. economic activity in 2021 comes close. The Federal Reserve is purchasing large amounts of Treasury and mortgage bonds and promising to keep short-term rates close to zero for the foreseeable future. Fresh fiscal stimulus of nearly $2 trillion is entering the economy now. Household net worth is at an all-time high of $130 trillion. With vaccination rates accelerating and the prospect of full economic reopening approaching, it would be shocking not to see nominal GDP growth in 2021 approach 10%—higher than at any time in the past 35 years.
For the first time in over a decade, we believe that this economic growth may lead to near-term inflation. There are many reasons why; here are three:
1. The fiscal plan has a high multiplier. The American Rescue Plan is skewed toward low- and middle-income households, who tend to spend unexpected money faster than higher-income households. This multiplies the impact of the stimulus on the overall economy. The Tax Foundation estimates that the Plan will raise the after-tax income of households in the bottom quintile of the income distribution by somewhere between 11% and 25%, while income for the highest quintile of earners will increase 2%.
2. Pent-up demand. U.S. households had been restraining spending for more than a decade before the pandemic began. After the GFC, households and companies were forced to reduce their debt levels. U.S. household debt-to-disposable income fell to 97% by the end of 2019, its lowest level since early 2001. Since then, this ratio fell further, to 92.5%, with roughly a third of COVID relief payments used to pay down debt. U.S. household savings increased by $1.6 trillion last year, due to fiscal largesse coupled with the reality that there wasn’t as much to buy.
The dynamic was similar for companies. Corporate cash on hand now tops $7 trillion for the S&P 500 alone. As the economy reopens, some of these funds will be put to work, potentially quite quickly.
3. Limited capacity. Some of the hardest hit industries will likely find themselves with more favorable pricing dynamics when economic activity returns to pre-pandemic levels. Last year, over 110,000 restaurants closed in the U.S., and most of the closed restaurants do not plan to reopen. Separately, travel restrictions and shutdowns disrupted supply chains for many industries, wreaking havoc on previously finely tuned, just-in-time operations. Recently, for example, semiconductor shortages led to shutdowns of automotive and consumer electronics factories on multiple continents. It will take time to restore operations to pre-pandemic levels. Until that time, suppliers of a wide range of scarce goods and services will likely be able to raise prices without worrying about losing sales.
After the Boom…
While soaring economic growth is highly likely in the short- to medium-term, the combination of unprecedented fiscal stimulus, extremely easy monetary policy, economic reopening and pent-up demand cannot last indefinitely.
Our base case is that gargantuan stimulus will likely lead to a multi-quarter burst of growth that will cause interest rates and inflation to rise, but higher rates, higher inflation and a lack of additional fiscal stimulus will eventually slow real economic growth. We believe that economic growth will revert to pre-pandemic levels faster than many currently expect, driven by structural constraints that currently limit the economic potential of the U.S.
Potential economic growth is a function of labor force growth and productivity growth, and right now, both of these factors leave the U.S. with quite low long-term economic potential. Demographic trends strongly indicate the U.S. labor force will grow less than 1% a year. Productivity growth won’t be much higher, after years in which the U.S. (and many other countries) underinvested in infrastructure, and companies bought back stock instead of investing to expand and improve their businesses.
In our opinion, the impact on financial markets of a strong economic growth spurt followed by a subsequent slow down depends on how long higher inflation persists.
If inflation peaks during 2021 in the range of 3%-4% and then reverts to the Federal Reserve’s long-term target of 2%, interest rates will likely continue to rise in the short-term, but the pace of the increase should slow considerably. In this scenario, equity markets may continue to favor Value stocks over Growth stocks for a few more quarters, but we are unlikely to see a sharp sell-off.
However, if inflation is stickier than the Fed expects, and prices do not decline as economic growth slows, we may enter a period of stagflation. In this scenario, interest rates are likely to climb higher than most investors currently expect, and equity markets will suffer. This is not our base case, but it is a risk we’re monitoring closely.
Contrary to popular opinion, markets don’t respond to current economic conditions, they are leading indicators of them. A year ago, the stock market was pricing in an economic shutdown and earnings slump. Today, stock market pricing reflects the strong economic and earnings growth likely in 2021, and bond yields reflect higher inflation ahead.
We expect interest rates to rise further and Value stocks to continue to outperform Growth stocks in the short term, but we do not believe that inflation will spiral out of control. In the second half of this year, we expect equity markets to begin to reflect economic conditions in 2022 that will be more like those in 2019 than in the 2021 boom. Investors will also likely price in fiscal policies that are far less supportive of economic growth next year. Tax increases may be under discussion. Finally, earnings growth forecasts for 2022 won’t look great, when compared to the surge in earnings created by pent-up demand in 2021.
One of the most challenging aspects of investing is balancing long-term trends with the short-term outlook for macroeconomic conditions. We tackle this challenge directly in the first two steps of our four-step investment process. (See Display 2)
Thematic Investment Process (Display 2)
Our first step is to identify long-term, secular trends that we believe will play out over years, if not decades. These trends typically lead us to companies with strong growth potential that will persist through cyclical swings in the economy. Our second step incorporates our assessment of where we stand in the economic cycle, allowing us to adjust portfolios to offset the short-term impact that cyclical headwinds may have on our themes.
When our long-term positioning aligns with the portion of the economic cycle most favorable to Growth companies, our portfolios have tended to do well. We were in this sweet spot for most of 2020. However, toward the end of the third quarter, we began to anticipate the cyclical changes currently underway and selectively repositioned portfolios to increase their weights in traditional Value sectors, such as Financials and Energy.
In many cases, these portfolio adjustments meant trimming or selling some investments that had appreciated significantly and, therefore, recognizing relatively large capital gains. In retrospect, it was the correct thing to do. Since September 2020, the Energy sector has outperformed the NASDAQ 100, a proxy for Growth stocks, by over 50%. That’s a useful reminder that even in taxable portfolios, trimming or selling appreciated stocks, in favor of higher-conviction investments, is often wise and can lead to higher after-tax wealth.
As always, we will follow our process, guided by our long-term conviction in Thematic investing, while remaining vigilant and nimble in response to an uncertain world. We are navigating unchartered waters, but our process has successfully guided us through difficult times in the past. We believe it will do so again.
- Thematic Investing. The Other way. Posted in: Latest News, Noteworthy, Video - Thematic Investing doesn’t follow common Wall Street practice. And it has made all the difference.
Thematic Investing doesn’t follow common Wall Street practice. And it has made all the difference.
- Q & A with Michael Kleinschmidt, Assistant Vice President Posted in: Noteworthy, People - What sets Chevy Chase Trust apart from other Investment Advisory firms? Providing a top-level customer experience. Meet Michael Kleinschmidt, Assistant Vice President.
Tell us about your role here at CCT.
My objective is to provide a top-level customer service experience for our clients; I ensure our clients’ needs are met by coordinating with the various departments in our firm as well as any of our clients’ third-party financial professionals.
What led you to a career in financial services?
Truthfully, I always wanted to be a high school Social Studies teacher. I graduated from college in the middle of the great recession, and jobs were scarce. I wanted a job that would provide security and found a position as a part-time teller at a bank. I quickly became enamored with the financial services industry and realized I wanted to pursue a career in this field.
What’s the most rewarding part of the job?
During my time I have been able to build incredibly strong relationships with my clients and am proud to be their primary resource here at Chevy Chase Trust. I absolutely cherish being their go-to person, finding answers to their questions and solutions to their problems. This is what keeps me coming back to work every day.
Did you have a mentor and what are some lessons learned from him?
My mentor was a former Senior Trust Officer here at Chevy Chase Trust, Amir Shahabi. Amir helped me understand the ins and outs of the Senior Trust Officer role. He taught me that as long as you stay cool, calm and collected you will be able to solve any problem you encounter, which I find to be one of the most valuable lessons I have learned.
What are your interests in the community?
I recently finished the MBA program at the University of Maryland where I was involved in many of the school’s activities and fundraisers.
Do you have a book or podcast to recommend?
I recommend Extreme Ownership by Jocko Willink and Leif Babin. This book discusses leadership and personal accountability. It may fundamentally change how a person views what a leader is and how a leader should act. Additionally, this book discusses how the reader can develop personal accountability and set themselves apart as a leader.
What advice would you give to someone considering a career in investment management or financial services?
I have three key pieces of advice: First, continue to maintain and expand your network. Nothing is more crucial in a career in investment management or financial services than a strong network. This opens doors and opportunities arise that you may never imagine otherwise. Second, be biased towards action. Be proactive, not reactive. Third and most important, be adaptable. In this field you must always be ready for change; laws, markets, personnel and systems are developing all the time. The most adaptable will always succeed, no matter the environment.
Considering all the people you’ve met in your field, what personal attributes are essential for success?
I feel there are three key characteristics: The first and most important is to have is a cool head. No matter how quickly things are moving around you, staying calm and thinking rationally are key to prevailing over whatever challenges you may face. The second is a keen attention to detail. And lastly, a successful person must be a creative thinker. A creative person will be able to focus on the end goal and utilize the tools at their disposal to accomplish the task at hand.
- A Conversation with Walter Isaacson on March 9, 2021 Posted in: Events, Featured, Noteworthy, People, Video - Chevy Chase Trust was pleased to host renowned author, journalist, and professor, Walter Isaacson for a conversation about his new book.
Chevy Chase Trust was pleased to host renowned author, journalist, and professor, Walter Isaacson for a conversation about his new book, The Code Breaker: Jennifer Doudna, Gene Editing, and the Future of the Human Race. In the book, Mr. Isaacson showcases Jennifer Doudna, Ph.D., whose work on the gene-editing technology called CRISPR won her and Emmanuelle Charpentier the 2020 Nobel Prize in Chemistry and, Mr. Isaacson believes, will change the future of medicine.
Click on the link above to view the recording of the Chevy Chase Trust event featuring Mr. Isaacson’s description of Dr. Doudna’s journey of discovery, the life sciences revolution in which “molecules will become the next microchip,” the ethical issues associated with designer babies and much more. His remarks are followed by a question and answer session led by Amy Raskin, Chief Investment Officer, and Andrew Marshall, Vice President, both of Chevy Chase Trust.
- Manager of the Decade Designation and Top Gun Ratings | Informa Financial Intelligence Posted in: Latest News, Noteworthy - Chevy Chase Trust has been honored with the Manager of the Decade designation and 5 and 6 star Top Gun ratings for its Global Thematic Equity strategy by Informa Financial Intelligence’s PSN manager database.
Press Release: February 24, 2021 – Chevy Chase Trust has been honored with the Manager of the Decade designation and 5 and 6 star Top Gun ratings for its Global Thematic Equity strategy by Informa Financial Intelligence’s PSN manager database, North America’s longest running database of investment managers.
“We are pleased that our Global Thematic Equity strategy has been recognized as a performance leader among its global equity peers” said Jeff Whitaker, President and CEO. “It’s a testament to the disciplined approach, high-quality work and dedication of our investment team over the past decade.”
At Chevy Chase Trust, thematic investing involves capitalizing on powerful secular trends, disruptive ideas, innovations and economic forces that are constantly reshaping the world and building portfolios of companies positioned to exploit these transformational changes.
“Congratulations to Chevy Chase Trust for being recognized as a PSN Top Gun,” said Ryan Nauman, Market Strategist at Informa Financial Intelligence’s Zephyr. “This highly esteemed designation allows us to recognize success, excellence and performance of leading investment managers each quarter.”
PSN Top Gun Selection Methodology
Through a combination of Informa Financial Intelligence’s proprietary performance screens, *PSN Top Guns ranks products in six proprietary categories in over 50 universes. This is a well-respected quarterly ranking and is widely used by institutional asset managers and investors. Informa Financial Intelligence is part of Informa plc, a leading provider of critical decision-making solutions and custom services to financial institutions.
Top Gun firms are awarded a rating ranging from one to six stars, with the number of stars representing continued performance over time. The parameters of the star ratings and Manager of the Decade award are outlined below:
- Manager of the Decade: had an r-squared of 0.80 or greater relative to the style benchmark for the latest 10-year period. Moreover, the strategy’s returns were greater than the style benchmark for the latest 10-year period and also standard deviation less than the style benchmark for the latest ten-year period. At this point, the top ten performers for the latest 10-year period become the PSN Top Guns Manager of the Decade.
- 5 and 6 Star Ratings: had an r-squared of 0.80 or greater relative to the style benchmark for the recent five-year period. Moreover, the strategy’s returns exceeded the style benchmark for the three latest three-year rolling periods. Products are then selected which have a standard deviation for the five-year period equal or less than the median standard deviation for the peer group. The top ten returns for the latest three-year period then become the 5 Star Top Guns and top ten information ratios for the latest five-year period then become 6 Star Top Guns.
The complete list of PSN Top Guns and an overview of the methodology can be located on https://psn.fi.informais.com/.
For more details on the methodology behind the PSN Top Guns Rankings or to purchase PSN Top Guns Reports, contact Margaret Tobiasen at Margaret.email@example.com.
About Chevy Chase Trust
Chevy Chase Trust is an independently owned investment management firm and think tank specializing in global thematic research, portfolio management, conflict-free advice and financial planning for high-net-worth individuals, families, endowments, and institutions. Headquartered just outside of Washington, D.C., the firm has more than 90 professionals averaging 20 years of experience, and a client retention rate of more than 97%. The firm is a thought leader and performance leader in global thematic investing.
About Informa Financial Intelligence’s Zephyr
Financial Intelligence, part of the Informa Intelligence Division of Informa plc, is a leading provider of products and services helping financial institutions around the world cut through the noise and take decisive action. Informa Financial Intelligence’s solutions provide unparalleled insight into market opportunity, competitive performance and customer segment behavioral patterns and performance through specialized industry research, intelligence, and insight. IFI’s Zephyr portfolio supports asset allocation, investment analysis, portfolio construction, and client communications that combine to help advisors and portfolio managers retain and grow client relationships. For more information about IFI, visit https://financialintelligence.informa.com. For more information about Zephyr’s PSN Separately Managed Accounts data, visit https://financialintelligence.informa.com/products-and-services/data-analysis-and-tools/psn-sma.
- Best-in-State Wealth Advisors 2021 | Deb Gandy Posted in: Latest News, Noteworthy, People - Congratulations to Deb Gandy, Managing Director, for making the Forbes 2021 list of Best-in-State Wealth Advisors in Maryland.
Congratulations to Deborah (Deb) Gandy, Managing Director at Chevy Chase Trust, for making the Forbes 2021 list of Best-in-State Wealth Advisors in Maryland. The ranking methodology included an examination of both qualitative and quantitative factors such as best practices, compliance records, service models, revenue and AUM. To learn more, click on the links below.