Interview: Jeff Mortimer, CIO of Charles Schwab Investment Management

Jeff Mortimer

Jeff Mortimer is Senior Vice President and Chief Investment Officer—Charles Schwab Investment Management, Inc. (CSIM). Mortimer has overall responsibility for approximately $240 billion in Schwab Funds and managed accounts. He joined CSIM in October 1997.  Jeff earned an MBA degree, with an emphasis in finance, from the University of Chicago Graduate School of Business, in 1992; and a BS degree from Babson College, in 1986. He is a Chartered Financial Analyst (CFA) and a member of the Security Analyst Society of San Francisco.

We spoke with Mortimer on September 14 at the Schwab Impact conference.

What is your assessment of valuations in the US equity markets?

I think the bottom made on March 9 is still not understood in its significance.  The modeling that our group has done shows that it was as significant as the lows made in 1973-1974 and 1982. 

During market cycles like 1973-1974 and 1982, investors were very slow to buy into the strength of the economy or the argument that things were not as bad as they thought.  Now investors continue to sit on the sidelines.  Flows in mutual funds are still going into fixed income investments.  People are fighting the last war instead of the next one, and that is the unfortunate nature of investor behavior.

Markets have to typically double for investors to become emotionally engaged again.  We all unfortunately chase performance.

Although I am not a raging bull, I am here to provide an understanding of the markets – that they are a discounting mechanism.  People forget that the Dow is at 9,500 and not 14,000 any more.  Yes, the economy is growing more slowly and we still have issues, but the market reflects that.

What are the key metrics you look at to assess whether the market is fairly valued?

PE numbers are one of them.  Looking back historically, it would be very easy to buy when PEs were below a certain level or not buy too much when they were above a certain level, especially when they were at their frothy levels of the late 1990s.   People look back and ask “how could they not have seen that coming?”  But we don’t see extreme under- or overvaluation at today’s levels.

We look at cycles to see what types of stocks do best at market bottoms.  We look to see what rallies best off market bottoms, and it’s always the junk.  That has been the case with this rally.

In 2003 we were up 50% off the low and stocks like Intel doubled.  You don’t have to look beyond the large caps or ex-large caps to find stocks that will perform well at this stage of the cycle.