Thematic Investing involves capitalizing on powerful secular trends, disruptive ideas, innovations and economic forces that are constantly reshaping the world. Thematic investing builds portfolios of companies positioned to exploit these transformational changes and, just as importantly, avoids companies that will be disrupted by creative destruction.
“The strong basis for stock selection comes from whittling down the thousands of public securities around the world to a manageable group- identified through our thematic research. This screening process is perhaps the most important part of investing.”
Amy Raskin Chief Investment Officer
Thematic Investing doesn’t fit into any of Morningstar’s 115 fund categories or neatly into one of its style boxes. It emerged in response to the extreme segmentation of the investment industry.
News & Noteworthy
- Chevy Chase Trust supports Leadership Greater Washington Posted in: Community, Noteworthy - Chevy Chase Trust was proud to sponsor Leadership Greater Washington's 35th annual Celebration of Leadership on October 12.
- Third Quarter, 2021 Posted in: Insights, Investment Update, Latest News, Noteworthy - Due to choppiness in the last two weeks of September, the S&P 500 Index ended the third quarter roughly flat. Nonetheless, the Index has delivered a strong...
Finding Balance in A Rapidly Changing Market
Due to choppiness in the last two weeks of September, the S&P 500 Index ended the third quarter roughly flat. Nonetheless, the Index has delivered a strong, 16% total return year to date. It is now almost double its pandemic-driven low and more than 25% above its pre-pandemic high. This rebound has been the largest and fastest post-recession recovery in the last 80 years.
S&P 500 Price Change in 553 Days from Bottom
Note: 553 days chosen to capture pandemic-related low through September 30, 2021
Source: Bloomberg and Standard & Poor’s
There are several reasons for these strong returns, including robust economic and profit growth, plentiful liquidity supplied by the world’s largest central banks, interest rates near record lows, and healthy consumer balance sheets. All these factors suggest a recession is unlikely to unfold within the next 12 months. Since bear markets typically occur alongside recessions, investors have felt comfortable buying during the occasional shallow dips.
While we understand the optimism driving the market higher, there are also reasons to worry:
- Economic growth may not meet now-lofty expectations. Very high GDP growth in the second quarter prompted analysts to lift economic and profit expectations for the rest of this year and 2022. If economic growth reverts to good, but not great, levels, disappointing earnings growth or negative earnings revisions may follow.
- Valuations are very high by almost any metric. Whether one compares stock prices to earnings, sales, book value or free cash flow, equity markets are expensive. Disappointing results that lower earnings expectations typically lead to larger corrections when valuations are high.
S&P 500 Valuation: Current Percentile Ranking Relative to History
As of September 30, 2021
Source: Strategas and Center for Research in Securities Prices
- Elevated inflation may persist longer than expected. This is perhaps the risk we worry about most. High inflation is typically associated with high interest rates and low inflation with low interest rates. Currently, inflation is high, but interest rates are low. This disconnect is because many investors are betting that after a short bump due to economic reopening, inflation will fall rapidly and remain subdued thereafter. If, however, the currently high levels of inflation do not decline as expected, interest rates may climb. This scenario would be particularly troublesome for Growth stocks because higher rates would reduce the present value of their often-distant future cash flows.
Short, Sharp Intra-Market Rotations
Interest rates are at extremely low levels; therefore, even small interest rate moves are leading to big changes in equity market performance. The correlation between equities and the 10-year U.S. Treasury Bond yield has never been higher. Over the past four quarters, this has resulted in shorter, yet sharper, equity market movements and rapid rotations between Growth and Value stocks.
- During the fourth quarter of 2020 and the first quarter of 2021, interest rates rose sharply, and Value stocks outperformed Growth. From September 30, 2020, to March 31, 2021, the 10-year U.S. Treasury yield rose from 0.68% to 1.74% and the Energy sector of the S&P 500 rose 67%, while the Growth-heavy Technology sector only increased 14%. After several very difficult years, Value stocks were finally having their day in the sun.
- These glory days were short lived. From March 31, 2021, to August 4, 2021, the 10-year U.S. Treasury yield declined from 1.74% to 1.12%, and Growth stocks outperformed again. During that period, the Technology Sector outperformed the Energy Sector by 16%.
- Then, in the last few weeks of September, 10-year U.S. Treasury yields moved sharply higher again, rising from 1.30% to 1.54% in just four trading sessions. If this continues, another period of Value outperformance is likely.
We expect these short, sharp rotations to continue until there are clearer indications of the future rate of economic growth over the next decade. Unfortunately, this isn’t likely any time soon. The unprecedented economic shutdown during the pandemic and subsequent reopening of the global economy make analyzing trends in economic data extremely difficult, and many variables may still affect the economy’s direction.
We believe the most likely outcome is that economic growth remains robust for the next few quarters as more of the globe reopens and consumers continue to spend the fiscal stimulus distributed during the pandemic. However, we do not think rapid growth will last long, as even moderately higher interest rates are likely to have a negative impact on both the real economy and financial markets.
Rapidly changing market leadership is difficult for even the nimblest portfolio managers, and capital gains tax and trading expenses make it costly to try to catch every zig and zag. Thus, short-term trading has never been our approach. We’re longterm investors.
In this difficult market, we have positioned client portfolios to be well-balanced between Growth and Value stocks. As a result, our model portfolio has lower valuations relative to its benchmark than at any time in the last eight years, while maintaining above-market rates of earnings growth.
We hold our Value and more cyclical stocks primarily in our End of Disinflationary Tailwinds and Next Generation Automation themes, and to a lesser extent, our Crisis Beneficiaries theme. Many of these stocks have strong current cash flows and dividend yields. If inflation remains relatively high, we think interest rates will rise further, and stocks such as these will outperform. Given the deep discounts at which Value stocks are trading, these holdings are likely to pay off in the short term even if inflation is only marginally higher than expected.
Growth stock holdings dominate our Molecular Medicine, Heterogeneous Computing, and Wealth Concentration themes. A large free cash flow stream that can grow at an above-market rate is indeed valuable, especially if we’re right about economic growth slowing in 2022. Our Thematic investment approach seeks to identify such stocks, emphasizing those that other investors do not yet fully appreciate.
We believe our current balanced approach is well suited to the times.
- Chevy Chase Trust Ranks on list of CNBC’s Top 100 Financial Advisors 2021 Posted in: Insights, Latest News, Noteworthy - More than 38,000 firms were analyzed on a variety of core data points ranging from compliance records and years in the business to total accounts and assets under management.
Chevy Chase Trust is proud to be named to CNBC’s Top 100 Financial Advisors for 2021. More than 38,000 firms were analyzed on a variety of core data points ranging from compliance records and years in the business to total accounts and assets under management.
View CNBC’s rankings here.
Learn more about our Global Thematic Investing at Chevy Chase Trust.
- President & CEO | Jeff Whitaker Posted in: Latest News, Noteworthy, People - Learn about Jeff Whitaker’s return to the DMV as President and CEO of Chevy Chase Trust, the challenges he’s faced, and the firm’s next big goals.
Washington Business Journal – 10. 2021: “For Jeff Whitaker, stepping into the role of president and CEO of Chevy Chase Trust marks a full circle moment.
Born and raised just a few blocks away from the trust’s current offices in Bethesda, Whitaker went on to stints outside of the region at Bridgewater Associates, Berkshire Partners and JPMorgan Chase & Co. He accepted the role at Chevy Chase Trust early this year after a nationwide search to replace the firm’s previous leader, Peter Welber, who had held the CEO title for 17 years.
The firm — which held $32 billion in assets under management as of 2020 and employed 110 people, per Washington Business Journal research — has been embracing remote work and virtual sessions to help expand its client base. “The Zoom meetings are here to stay,” Whitaker said.”
Read the full article in the Washington Business Journal.
- Barron’s Feature | Jeff Whitaker & Amy Raskin Posted in: Featured, Latest News, Noteworthy, People - Read the Barron’s article about Chevy Chase Trust’s global thematic investing as the firm is named to Barron’s 2021 Top 100 RIA Firms list.
Barron’s, September 2021: Chevy Chase Trust is proud to be named to Barron’s 2021 Top 100 RIA Firms list for the third year in a row. This is a testament to the hard work and dedication of a diverse and experienced team of more than 100 professionals. Jeff Whitaker, President & CEO, and Amy Raskin, Chief Investment Officer, were interviewed for the Barron’s article linked below that explores our global thematic investing strategy.
Click here to read the full article.
- Columbia University’s School of Professional Studies | Jeff Whitaker Posted in: Latest News, Noteworthy, People, Video - Our President & CEO, Jeff Whitaker, discussed what makes Chevy Chase Trust unique, the business model of the future, and his definition of success for the firm in a virtual panel discussion hosted by Columbia University School of Professional Studies.
President & CEO of Chevy Chase Trust, Jeff Whitaker, joined a panel conversation hosted by Columbia University’s Masters in Wealth Management program. Hear Jeff’s perspective on the growing wealth management industry, its various business models, key challenges and opportunities.
- Chevy Chase Trust Ranks on list of Barron’s Top 100 RIA Firms 2021 Posted in: Featured, Insights, Latest News, Noteworthy - At Chevy Chase Trust, we specialize in global thematic investing and planning. And it's working.
- Featured: Women in Business Posted in: Latest News, Noteworthy, People - See our Women in Business on page 61 and learn about the roles women play at Chevy Chase Trust.
- Chevy Chase Trust Welcomes Wendy Moyers, CFP® Posted in: Noteworthy, People - Wendy Moyers, CFP® has Joined Chevy Chase Trust as Director, Wealth Advisor and Relationship Manager.
- Investing Advice for 2021 | Marc Wishkoff Posted in: Latest News, Noteworthy, People - Chevy Chase Trust’s Head of Business Development weighs in on inflation and the massive liquidity fueling the financial markets.
“We are telling clients to pay attention to the powerful economic reopening in the U.S., fueled by gargantuan fiscal and monetary stimulus flooding the economy and markets with liquidity,” said Marc Wishkoff, senior managing director and head of business development for Chevy Chase Trust. “We are witnessing pent-up consumer and corporate demand being unleashed.”
But it’s a unique situation. While things are indeed bouncing back, there’s now worry about inflation or a market correction. Interest rates are still at rock bottom, meaning there’s little return right now in the bond markets or cash equivalents. And no one is really sure what’s going on with commercial real estate, what with such a big demand for hybrid work. Wishkoff doesn’t expect a major equity correction this year, though he does advise some caution.
“We are telling clients to pay attention to inflation data but to differentiate between short- and long-term trends,” he said.
Even during the 2020 recession, Wishkoff said, aggregate household net worth expanded by $6 trillion and personal savings by $2 trillion, while debt levels just ticked up modestly. Those numbers will be key going forward.
“We expect the increase in consumer wealth during this recession to be the largest contributor to higher near-term inflation,” he said. “Long-term, we expect inflation to recede after its initial rise, as pent-up demand is satisfied, although we don’t expect it to decline to pre-pandemic levels.”