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Portfolio > Mutual Funds > Equity Funds

Catching up with... Jeffrey Mortimer

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How can advisors justify why it makes sense–and cents–for investors to work with them? One concrete way to show clients how you add value can be with investment ideas that might not occur to them. Jeff Mortimer talks–and listens–to a lot of advisors in his role as CIO-Equities at Schwab Investment Management and Laudus Funds. He sat down with IA Editor-in-Chief Jamie Green and Senior Editor Kate McBride on March 13.

Tell us about your new fundamental index funds.

We’re in the quiet period; they’re launching April 2. There are three: the RAFI 1000 domestic; a small-mid domestic product; and an international version.

What’s the RAFI?

It’s an index by FTSE and Rob Arnott’s Research Affiliates Fundamental Index–RAFI.

Have you had clients ask about fundamental indexes?

That’s not where it came from. In our product line we have about $24 billion in cap-weighted indexes, but there’s an issue in the market about cap-weighted indexing: is it the best way to index, is it the only way to index? Cap-weighted indexing has been around for 50 years and it has really never been challenged. Along comes a very bright man [Arnott] who is challenging it. We want to offer these other indexes so investors have a choice.

Will fees be comparable to typical cap-weighted index funds?

We can’t go into detail about the fees, but I’ll say we’ve certainly looked around the competitive landscape and I think you’ll find them fairly priced.

What Schwab funds do advisors use now?

They use our Hedged Equity product (SWHIX, SWHEX), which retail investors do not. Schwab has an Equity Ratings System methodology that rates 3,200 domestic stocks from best to worst [A through F]. It is 100% long [stocks rated] As and Bs, and then it shorts off between 20% and 60% of the portfolio so its equity ratio or long exposure could range between 40% long to 80% long. Currently, we’re 35% short, 65% long. It doesn’t use any derivative product. This is a pure and simple long-short fund.

What else are advisors asking for?

They’re after another fund, Laudus International MarketMasters Fund (SWOIX, SWMIX). This is sub-advised by five advisors in the international space and includes people like David Herro at Oakmark Funds, George Greig at William Blair, and Federico Laffan at American Century. These are interesting sub-advisors but they’re all closed to new investors. I think a lot of advisors are using it as a conduit to managers that [they otherwise] cannot get to. [Advisors] are attracted to both the instant diversification of the product, and the fact that it allows them entree into something that a retail investor could not get. Again, it’s the value add that an advisor brings to the table.

(For more on fundamental indexing, please go to for November 2006′s Fundamental Indexing Goes Main Street article, or an interview by Kate McBride with Rob Arnott in the Podcasts section of the site.)


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