From the July 2009 issue of Investment Advisor • Subscribe!

July 1, 2009

Catching Up With...

Jeff Mortimer

These are challenging times for the mutual fund industry. Once upon a time, fund companies worried that their best money managers were deserting '40 Act funds for the greener fields and greater compensation afforded by hedge funds. These days, advisors are increasingly using exchange traded funds to give their clients not just access to specific slices of the market, but perhaps to provide some investing alpha as well. In many conversations over the past year, advisors have told me that they're questioning the wisdom of outsourcing money management, since the reputations of even big mutual fund shops were tarnished in the carnage of 2008.

Some mutual fund managers speaking during the Morningstar Investment Conference in late May were defensive about their performance in 2008. Chris Davis, for one, displayed returns data from some notable money managers, such as Charley Munger, who underperformed for long periods of time in their careers, to argue that "if clients can't deal with three years of underperformace from an active manager, then they should be in index funds."

But Jeff Mortimer, chief investment officer of Charles Schwab Investment Management, remains serene, if realistic. Speaking during the Morningstar show on May 28 with Editorial Director Jamie Green, Mortimer drily noted that these days "the market environment is lending itself to greater interest in active management."

Since he was an advisor himself for 10 years, Mortimer has "walked in their shoes," he likes to point, and thus understands their pain. In 1994, Mortimer helped develop a 19-variable model the Schwab team uses to help predict the S&P 12-months out. Using that model allows Mortimer to say that he's seen a change in the risk/return equation, and that while the March bottom may be tested again, "when everybody says there's a dead cat bounce," that's not enough for him to doubt the rally. The markets will recover first, he suggests, followed by the economy.

Advisors are questioning much about the way they invest. Has what advisors look to you for changed?

Periods of low absolute return mean we need alpha, and you've got to follow the institutions. You've got to realize what game you are in--it is a brutal period. But as a fiduciary, what you do in this environment is critical. Yes, the market has risks, but with current valuations...is this the time to nibble at the equity markets? After all, there's risk in cash as well, which investors don't realize. The market has to double from the low to get people back into the markets. I've studied individual investors for 20 years, and some people are better at learning from the recent past than others.

How are fund flows?

There's a slight inflow into funds that have performed well since March 9, and outflow from money funds from March 9 [the putative bottom of the market], but not a lot. It's very quiet; it's fairly smart money [getting back into the market]. Our balanced fund (SWOBX) has become more aggressive, with the percentage of stocks increased since March.

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