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
- Third Quarter, 2020 Posted in: Insights, Investment Update, Latest News, Noteworthy - Despite the pandemic-related fall-off in February and March, the S&P 500 recently hit an all-time high. With a difficult-to-predict economic outlook, what’s next for equity markets? Read our investment update for our perspective.
The Great Market/Economy Divide
Stock markets around the world continued to rise in the third quarter. In the U.S., the S&P 500 delivered an 8.49% total return for the quarter and 5.6% year-to-date. Despite the pandemic-related fall-off in February and March, the S&P 500 recently hit an all-time high, with valuations expanding to unusually rich levels.
What explains the rally? Governments around the world have been spending heavily to offset the shuttering of economic activity. The Federal Reserve and other central banks have slashed interest rates to near zero or lower and injected massive liquidity to support markets and stimulate economies. These actions dwarf any previous programs initiated to address an economic or health crisis. Partly as a result, the U.S. economy has rebounded from its worst-ever quarterly drop. However, we are still operating well below pre-pandemic levels in many, if not most, sectors.
Given the unusual nature of this crisis, economic weakness is very unevenly distributed. Much of the economy’s losses are coming from private small businesses and a few concentrated industries, including travel and leisure, energy, restaurants and brick and mortar retail. Profitability in many of these sectors is challenging even in the best of times, due in large part to their labor intensity. As a result, their combined contribution to S&P earnings is smaller than their contribution to GDP, and their contribution to GDP is smaller than their impact on employment. Thus, it is not surprising that employment has fallen more than GDP or that S&P earnings have been more resilient than either GDP or employment data imply.
We do not think the economy is nearly as strong as equity market performance suggests. Unprecedented fiscal and monetary actions are important contributors to the current disconnect between economic and market performance. Cutting interest rates drives up the valuation of stocks. The stimulative impact on economic growth takes longer. While it’s not unusual for economic and market performance to diverge for periods of time, ultimately, the market and macroeconomic backdrop must re-converge. The question is, will GDP rise to meet the market or will the market fall to match GDP?
The economic outlook remains unusually difficult to predict. Americans are once again going to stores, albeit armed with masks and sanitizer, and dining at restaurants, or at least those with outdoor seating. But Covid-19 is not under control in the U.S., and cold weather may increase its spread. In Europe, a second spike in infections has caused some countries to reimpose partial shutdowns. Parts of the U.S. may do the same if infection rates rise. The economic momentum of late summer is already slowing.
The longer-term economic outlook was less than inspiring even before the virus struck, because the two main drivers of real economic growth–demographics and productivity—were weak. The demographic story is straightforward and essentially locked in place. Due to a falling birth rate, the working-age population will rise at a meager 0.2% per year for the next ten years, compared with over 1% per year in the 1980s, 1990s and 2000s.
Productivity is harder to measure and its trends less obvious. Nevertheless, growth in output per labor hour in the non-financial corporate sector has slowed markedly for more than decade after a tech-driven spurt in the late 1990s (see chart). Low levels of business investment, the recent retreat from globalization, increased government involvement in the economy and friction caused by pandemic-related protocols are other potential drags on productivity.
With real economic growth likely to remain tepid, the wildcard becomes inflation. Many economists argue that inflation is dead, noting that central banks have failed for ten years to increase inflation to their targets of 2% to 3%. The Fed doesn’t go that far, but it deems deflation a greater risk than inflation. Financial crises are often deflationary. The 2008 housing and credit crisis is a case in point.
Other economists think inflation is a significant risk, noting that the 2008 crisis differs from the 2020 crisis in four important ways that make it a poor indicator of future price trends.
- Causes of crisis. While the 2008 crisis was precipitated by excesses in the financial sector that led to widespread bank failures, the 2020 crisis was precipitated by the policy response to the pandemic, which, like war times, involves supplychain dislocations and misallocated resources. Financial crises have often been deflationary, or at least disinflationary, while wars have been inflationary.
- Trade and wage trends. The 2008 crisis accelerated globalization. World leaders came together in a shared response. China fast-forwarded its infrastructure spending to support the global economy, effectively connecting 500 million workers to the global labor market, putting downward pressure on wages in developed countries. The recent crisis, by contrast, has been marked by a decline in global trade likely to push wages up in many countries when the pandemic subsides.
- Oil prices. Before 2008, expectations that oil prices would reach new highs triggered huge investments in the energy sector, leading to a sustained decline in oil prices. As a result, oil prices were low before the 2020 crisis and have fallen further since. The oil and gas industry is now being starved of capital, which may lead to shortages and higher future prices.
- Fiscal policy. Perhaps the most important difference between now and the post-2008 period lies in fiscal spending. After an initial spending spree in late 2008 and 2009, most governments embraced belt tightening. U.S. federal spending flatlined for six years. The U.K. embraced austerity, and most governments across Europe sought to slash annual deficits to the 3% target in the Maastricht Treaty. In China, Xi Jinping’s anti-corruption drive led to local governments reining in spending. While many central banks around the world maintained easy monetary policies, fiscal policies were anything but easy. By contrast, since the pandemic struck, governments have been borrowing heavily to support people and companies hurt by the economic shutdown. The era of fiscal austerity is over, at least for a while. While deficit spending can stimulate an economic recovery, it tends to be inflationary in the medium to longer term.
We don’t expect inflation to emerge near-term; the economy’s too weak for that. We expect near zero interest rates and additional fiscal spending to support financial markets for the foreseeable future. Disconnects between underlying economic fundamentals and equity market performance can turn into bubbles that last far longer and rise much higher than investors expect. Nonetheless, recent events make future inflation more likely. History suggests that when inflation rises above 2%, interest rates will rise and equity multiples contract. Said another way, markets will fall to meet the economy.
A Concentrated Rally
For years, technology and interactive media firms have been among the biggest beneficiaries of low inflation and low interest rates. Just five tech-related stocks–Apple, Microsoft, Amazon, Google and Facebook—account for more than half of the $11 trillion gain in the S&P 500’s market cap since 2015. The trend accelerated during the current crisis. Year-to-date, performance of these stocks account for more than 100% of the S&P gain. Given their large weighting and strong performance, they have increased the entire Index return by 8.5%, while the other 495 stocks collectively lost 2.9%. They are now the five largest stocks by market capitalization in the S&P 500.
There are good reasons for these stocks’ market leadership:
- The current crisis has fueled their growth by making on-line activity a larger share of everyday life;
- Massive scale, technological advantages, and network effects provide greater protection from competition than was available to leading companies of the past; and
- With intellectual property the main input of their products and services, they can boost output at low marginal costs.
But even leading companies’ shares can become overvalued. Indeed, they are more likely to become overvalued than others. Historical examples include the Nifty Fifty in the 1960s, oil companies in the 1970s, Japanese equities in the late 1980s, tech and telecom in the late 1990s, and U.S. residential real estate in the mid to late 2000s.
Trends don’t last forever. Sectors that appear to be noncyclical often turn out to be more cyclical than investors anticipate. The latest fad loses its appeal. Remember the Palm Pilot and Blackberry? Someday, the iPhone may be old-hat too. As one character in Michael Lewis’s The Big Short said: “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”
While we admire these five big companies and hold some of them in client portfolios, we think their valuations are high. And since these five companies represent 23% of the S&P 500’s market cap, though only 1% of its constituents, their eventual fall might drag the market down.
The last time the largest stocks in the S&P 500 made up such a large share of the index’s market cap was near the end of the tech bubble. After the March 2000 high, the Index fell for three years–and seven of the nine largest-cap tech stocks (Cisco, Nortel, Intel, Lucent, Oracle, Sun and Hewlett Packard) have yet to regain their peak market cap. IBM and Microsoft were the two exceptions, but their investors had to wait a very long time to recoup their declines. IBM surpassed its bubble high in 2012, Microsoft, in 2017.
In the third quarter, we trimmed overall equity exposure modestly, and within equities, reduced exposure to the U.S. and the technology sector, in particular. In retrospect, some of these moves were premature. Nonetheless, we think these actions were prudent, even if early.
We expect to continue overweighting healthcare and increasing non-U.S. exposure. We also expect to further reduce large-cap technology. If Democrats win the Presidency and gain control of the Senate, the capital gains tax rate may increase materially next year, which could put downward pressure on highly appreciated tech stocks in early 2021.
We also expect to increase exposure to companies that benefit from inflation, particularly Japanese industrials and both U.S. and emerging-market materials firms. Given the valuations of many of these companies, we think the risk/reward is favorable.
We have increased portfolio exposure to companies we view as long-term, but often indirect, beneficiaries of the crisis. Recessions tend to reshuffle the deck and only a few companies emerge as winners, as the chart below shows.
Nike is one likely long-term beneficiary. Its revenue from online sales soared from 8% of total revenue for fiscal year 2019 to 30% in its most recent quarterly report, three years ahead of plan. Selling directly over the Internet improves margins by cutting out middlemen, such as Foot Locker and Kohl’s. We think many customers who were previously reluctant to buy online may become accustomed to the convenience of having sneakers delivered to their front door. If so, this margin-enhancing trend should continue after the pandemic ends.
Estée Lauder may benefit from the same phenomena. Cosmetic companies have long sought to sell directly, but customers were reluctant to stop shopping for makeup and face creams at their favorite department store, even though most high-end cosmetic sales are repeat purchases. People seldom change face creams, or where they buy them. Covid-19 forced change. Consumers stuck at home learned that the Internet was a simple, efficient way to reorder. While the pandemic may depress sales in the short-term, because people apply make-up less often when they stay at home, eliminating the middleman should improve profitability for years to come.
The pandemic-induced surge in internet sales is also causing companies to rethink supply chains and business practices that evolved over decades. For example, using ultra-high radio frequency identification (RFID) quickly became a necessity for many firms seeking to manage inventory more fluidly across physical stores and rapidly grow online operations. We are invested in companies that make and help implement this technology, as well as companies on the leading edge of adopting it for supply-chain management.
Crises lead to change. We do not subscribe to the theory that everyone will work from home forever and in-person business meetings are a thing of the past. We think companies benefitting from what may turn out to be temporary behavioral changes may find it hard to beat this year’s strong results and will face competition from new entrants to their markets. For example, Microsoft Teams is vying to catch Zoom Video Conferencing’s early dominance in video conferencing. Often, the obvious short-term beneficiaries of a crisis aren’t the long-term winners. Rather, companies with the infrastructure and management foresight to alter their operations to meet the moment and create sustainable competitive advantages will come out on top. Our research is seeking to identify these long-term winners.
Despite the volatility in equity markets and uneven economic backdrop, bond prices were remarkably stable during the third quarter. U.S. 10-Year Treasury yields started the quarter at 0.66% and ended the quarter at 0.68%, and remained in a relatively narrow range of 0.51% to 0.75% throughout the quarter. Such low yields virtually guarantee negative real returns. Nonetheless, in aggregate, money is still flowing into fixed-income markets.
In the near term, we expect short- and long-term interest rates to remain very low. However, once the pandemic ends, the enormous increase in money supply may lead to inflation and higher rates.
- Amy Raskin discusses the TINA argument, current valuations, bubble territory and much more. Posted in: Latest News, Noteworthy, People - Amy Raskin, Chief Investment Officer, was a featured panelist on Pillsbury’s webinar on Thursday, September 24. The topic was “Where to from here? Capital markets, credit, and the economy as of September 24, 2020."
- Chevy Chase Trust Ranks: Barron’s Top 100 RIA Firms 2020 Posted in: Insights, Latest News, Noteworthy - At Chevy Chase Trust, we specialize in global research and thematic investing informed by careful planning, and it's working. Barron's just named us to their 2020 list of Top 100 RIA Firms.
- Chevy Chase Trust supports ACTEC and The Mid-Atlantic Fellows Institute Posted in: Community, Noteworthy - Chevy Chase Trust was proud to sponsor the inaugural class of the Mid-Atlantic Fellows Institute, created by the American College of Trust and Estate counsel.
Chevy Chase Trust was proud to sponsor the inaugural class of the Mid-Atlantic Fellows Institute, created by the American College of Trust and Estate counsel. The purpose of the Institute is to identify and develop future leaders in the trust and estate field who will one day become ACTEC Fellows.
- Q & A with Dan Serra CFP®, Vice President Posted in: Latest News, Noteworthy, People - At Chevy Chase Trust, we help clients maintain and grow their long-term wealth. Meet Dan Serra, CFP® and Vice President.
Describe your role at Chevy Chase Trust.
My main role is helping clients maintain and grow their long-term wealth through analysis of their cash flow, investments, insurance, taxes and estate planning. Retirement planning is an important part of our work. Clients often seek assurance that they can live the life they want after they stop earning income. I offer guidance to make sure clients are prepared for the unexpected and protect family legacy goals.
What led you to a career in financial services?
Before becoming a Certified Financial Planner®, I was a journalist for major daily newspapers where I developed an interest in business news. I remember interviewing financial planning professionals for my column and being impressed with how they improved people’s lives. Having a helper’s soul, I wanted to join them and went back to college to get my Master’s in financial planning.
What’s the most rewarding part of the job?
It’s absolutely the feeling that you helped someone feel confident and less stressed about their personal finances. Sharing the benefits of a positive relationship with money gives meaning to my work, especially when I witness someone reach their goals. And there’s the additional reward of being surrounded by colleagues who also put clients’ interests before their own.
What would you do if not this?
I would be a teacher. A couple times a year I instruct an online class for Southern New Hampshire University as an adjunct finance professor. I love sharing my knowledge with others and this includes being a role model to those who want to explore a career in financial planning or just learn how all this stuff works!
Do you have a book to recommend?
I gravitate toward spiritual and goal-oriented topics to learn how to live a more fulfilling life, both mentally and physically. I am not a Buddhist but I find the teachings uplifting. Charlotte Kasl does a wonderful job writing about our spiritual paths in her “If the Buddha…” book series. She explains how life is about overcoming its demands and experiencing the natural essence of who you are. Physically, I know the advantage of connecting health with wealth so often I seek out books on healthy eating and exercise. I’ve found success following the guidelines of Dr. Dean Ornish through his excellent book “UnDo It” on the benefits of lifestyle changes to prevent and reverse chronic diseases.
What advice would you give to someone considering a career in investment management/financial services? What personal attributes are essential for success?
Be curious. The industry loves stacks of paperwork so be willing to spend the time studying it carefully to understand how things work, and don’t be afraid to question it. While social interaction is enjoyable, it’s what goes on behind the scenes that makes a successful financial professional– that constant drive to know more.
- Food For Thought: Estate Planning Posted in: Latest News, Noteworthy, Video - With interest rates low, now may be a good time for transfer of wealth. Learn about some compelling options.
With interest rates low, now may be a good time for transfer of wealth.
- Chevy Chase Trust: Financial Times 300 Top Registered Investment Advisers 2020 Posted in: Featured, Insights, Latest News, Noteworthy - Chevy Chase Trust is proud to announce its top ranking in the 2020 edition of the Financial Times 300 Top Registered Investment Advisers.
- Q & A with Marc K. Wishkoff, Head of Business Development Posted in: Latest News, Noteworthy, People - At Chevy Chase Trust, Marc oversees the delivery of Chevy Chase Trust services to clients and coordinates with their legal, accounting and other third-party advisors.
Head of Business Development
Marc Wishkoff joined Chevy Chase Trust as Managing Director in 2009, having spent the previous nine years in business development and relationship management with Citi Private Bank and U.S. Trust Company in Washington, DC. At Chevy Chase Trust, he guides the business development process and is responsible for presenting the firm’s capabilities to individuals, families, trusts, and select non-profit clients. He leads the firm’s Wealth Advisory team and advises clients in the areas of investment management, financial planning, estate planning, and trust administration. We sat down with Marc to find out how and why he pursued a career in wealth management and what he does in his spare time.
Tell us about your background.
I have spent most of my life along the east coast of the United States and grew up in Wilmington, Delaware. My parents and extended family members are from New York City and this provided me a big city perspective with the benefits of a small town childhood. I am a graduate of the University of Delaware, and the majority of my career has been spent in New York City and the Washington, DC metropolitan area.
From where did your interest in the financial world come?
From an early age, I had an interest in business, banking, and financial markets. I am analytical by nature and was influenced by my father’s interest in the stock market. I can still remember copies of ValueLine Investment Survey and Investor’s Business Daily laying around the house and CNN’s MoneyLine playing in the background during dinner. Several family members had built and run successful businesses and this combination of good examples and broad interest in the stock market led me to study business in college.
At the University of Delaware, I obtained a degree in business administration with a concentration in finance. My career has been singularly focused in investments, banking, and finance.
How did your career get started?
I worked from an early age and can hardly remember a time where I wasn’t doing something at least part-time. From the age of 13 and throughout high school, I had jobs after school or over summers. In college, I worked evenings reconciling cash and check deposits for Wilmington Trust and on the weekends was as a waiter at a local restaurant.
In my junior year of college, I interned with Dean Witter for an up-close view of the brokerage industry and in my senior year as a credit analyst for a credit card company. Starting after college graduation, I worked for PNC Bank in the group that did accounting work for the mutual fund industry and worked closely with a New York City based asset manager. I was eventually hired by them directly and moved to New York.
When did you move to wealth management?
At Warburg Pincus Asset Management, I was drawn by the intrigue of each private client’s personal story. I worked directly for the partner in charge of marketing and I never looked back. At the end of 2000, after Warburg Pincus Asset Management had been through two corporate reorganizations, I joined an energetic group of people building a wealth management business in Washington, DC.
U.S. Trust had just been acquired by Charles Schwab. I moved to the DC area to help open the Tysons Corner office and market our firm through our parent company’s offices in DC, Maryland, and Virginia. I had great support from dynamic local leaders and was surrounded by a team of people who provided me with boundless help and resources. I worked with Schwab brokers and learned how together we could build the brokerage and wealth management businesses to fuel the expansion of US Trust.
My Chevy Chase Trust experience has been highly rewarding. We offer top-tier, customized, think-tank quality investment solutions to new and long-time clients. It has been personally satisfying to be a part of a capable, driven, and collegial group. As time has passed, I have made a greater impact on our firm’s direction and am pleased to be a part of a growing, energetic, and successful business.
What do you enjoy doing when you’re not at work?
I am blessed with an amazing wife and family and the majority of my time outside of work is spent keeping up with the frenetic pace of a busy family life. We are big baseball fans, are active in local sports leagues, and root for our Washington Nationals. We are also a beach family and enjoy frequent trips to Bethany, Rehoboth, and Fenwick Island.
I am active in the community and have served on numerous non-profit boards. I currently serve on the board of the Community Foundation for Northern Virginia.
If you weren’t in wealth management at Chevy Chase Trust, what would you be doing?
That’s a hard one to answer after twenty-five years in one industry! I could see two possible courses. I am relatively handy and enjoy seeing an end-product, so real estate development would be a challenging and fun endeavor. I also enjoy politics and history and would have a grand time teaching one or both topics. This is Washington, DC, after all!
- Q & A with Jessica Frommer, Managing Director, Client Services Manager Posted in: Latest News, Noteworthy, People - World-class client service and the day to day client experience set Chevy Chase Trust apart from other Investment Advisory firms. Meet Jessica Frommer, Client Services Manager.
World-class client service and the day to day client experience set Chevy Chase Trust apart from other Investment Advisory firms. Meet Jessica Frommer, Client Services Manager.
Tell us about your role here at Chevy Chase Trust.
I run the client services team. We are responsible for all administrative aspects of the client relationship, which constitutes a wide range of things – from asset transfers to gifting to helping resolve complex issues. We partner with their attorneys and CPAs and family offices to ensure we are always working with the most up-to-date information.
Tell us about your background.
I spent most of my career in wealth management and my roles have ranged from client services to relationship manager to client experience to onboarding.
What led you to a career in financial services?
My father owned a muni bond business in the 80s and was a financial advisor up until his retirement a few years ago. He was incredibly talented when it came to the markets and investing, and he also understood the importance of good client service. I wanted to be like him, and felt my passion and interests would be best served with the client experience.
What’s been the biggest surprise about your career?
I lived through the Lehman bankruptcy and came out standing tall. That experience has made me better, braver, more resilient and compassionate.
What’s the most rewarding part of the job?
The tenure of the men and women who work in the Client Services Group is impressive. In fact, some of the team members have been with the firm for 20 years. When I arrived earlier this year, I had a one-on-one with each team member and immediately noticed the passion they had for their jobs. They are learning from each other, helping each other and taking courses to improve their capabilities. They understand the importance of a quick turnaround and know how to do it with kindness. It makes my job easy!
What makes Chevy Chase Trust different?
Chevy Chase Trust is the smallest firm I’ve ever worked for and I wasn’t sure what to expect. My colleagues are a wonderfully collegial group of people who all have the same goal of wanting their clients to feel cared for and appreciated. We all go the extra mile for our clients. One of our Senior Trust Officers works with a client who does not have any family. She regularly visits the client in her nursing home (pre-COVID) and works closely with her legal team to ensure everyone has her best interests at heart. The result is a client who understands she is important to us and that she can rely on us. Because of our size, we are able to keep it personal with clients instead of them being on a long list of tasks to complete before the day’s end. I am grateful to work here.
What would you do if not this?
I would be running a non-profit focused on childhood hunger and homelessness.
What are your interests in the community?
I am still relatively new to the area and have 2 small children. I have done some volunteer work with Hope for Henry, a DC based organization that is reinventing how hospitals care for seriously ill children and their families. I look forward to getting more involved in the community in the near future.
Do you have a book or podcast to recommend?
I have been listening to a lot of audio books lately and a few I love are Where the Crawdads Sing, Little Fires Everywhere and Open Book. I especially appreciated Jessica Simpson’s book because many of us think celebrities have the best lives, devoid of challenges. Her story was surprisingly relatable as she described the struggles she had growing up that were common to so many.
What advice would you give to someone considering a career in investment management/financial services?
It’s a great sector to work in and provides a lot of upside and opportunity. I recommend starting in a role where you can become a generalist learning many different areas of investment management. This will help you figure out which area draws you in.
What attributes do you believe are essential for success?
The most successful people I’ve seen in this industry have many, if not all of the following: Strong work ethic, ability to manage change and multitask/thrive in a fast-paced environment, have a willingness to learn, aspire to be better and, most importantly, to be a team player.
- A Conversation with Amy Raskin, CIO Posted in: Insights, Latest News, Noteworthy - Listen to excerpts from a conversation with Amy Raskin on June 18, 2020.
Listen to excerpts from a conversation with Amy Raskin on June 18, 2020.