Star Players Have Upped John Hancock's Game

About six years have passed since Canadian insurance company  Manulife (MFC) purchased John Hancock Financial and began putting its stamp on the firm. Keith Hartstein, who came up through Hancock's marketing and sales division, assumed the role of president and CEO shortly after the deal closed. Hartstein inherited funds that were managed by in-house management teams with mixed results. Historically, the fund family's fixed-income lineup had been stronger than its equity offerings, which sported mediocre or subpar performance records. High manager turnover and relatively high fees were additional strikes against the firm. Hancock did, however, have a number of talented subadvisors running some of its funds, including Pzena Investment Management on  John Hancock Classic Value (PZFVX), and Sustainable Growth Advisors, which runs  John Hancock U.S. Global Leaders (USGLX).

Following the firm's 2004 sale, Manulife shifted the John Hancock funds toward a subadvised model. John Hancock's former in-house portfolio managers transitioned to MFC Global Investment Management, a Manulife subsidiary that subadvises a number of John Hancock funds. John Hancock can hire additional external subadvisors to run its remaining lineup, creating an open-architecture framework that allows the firm to choose the best managers available for its funds. With the new model, John Hancock continues to oversee the distribution, marketing, and operation of the funds.

Hancock's in-house managers at MFC now compete against external subadvisors to run Hancock's funds, and underperforming MFC strategies can be easily replaced. Hancock's lineup of subadvisors is impressive. Investors can gain access to other notable firms such as Grantham, Mayo, Van Otterloo & Co., Rainier Investment Management, and Robeco Boston Partners.

Upon moving to the subadvisory model, John Hancock Investment Management Services--the Manulife unit that oversees the subadvisors running Hancock's funds--replaced several lackluster John Hancock management teams with external subadvisors. For instance, near the end of 2008, a number of poorly performing funds, including John Hancock Growth Trends and John Hancock Technology, merged into  John Hancock Rainier Growth .

MFC continues to oversee most of the firm's bond funds, including  John Hancock Bond (JHNBX) and  John Hancock Strategic Income (JHFIX), which have been solid performers. On the equity side, the MFC teams have been building their case, but with less consistency than their fixed-income counterparts. For example,  John Hancock Large Cap Equity (TAGRX) has had some management turnover in recent years, and a new captain took over lead duties at  John Hancock Small Cap Equity  in the second half of 2008.

Nonetheless, JHIMS appears to pick subadvisors objectively and its performance-evaluation processes seem comprehensive and consistent. It has continued to show that investment-management decisions are being made at arm's length from John Hancock. JHIMS also delivers information on subadvisors' performance to the funds' boards of directors to aid in the annual review of portfolio-management contracts. For John Hancock's Lifecycle and Lifestyle suite, JHIMS determines the funds' allocations, and despite a relatively aggressive asset-allocation glide path, has put together an attractive product set with talented subadvisors, including Chris Davis of Davis Selected, Bill Gross of PIMCO, and Brian Rogers of T. Rowe Price. Furthermore, Hancock hasn't been particularly aggressive in launching new, trendy mutual funds, as has been the case for a number of its competitors.

John Hancock also has made notable strides in its communication with investors. Its revamped Web site is comprehensive and easy to navigate. It contains a wealth of information and tools that investors can use to make better-informed investing decisions, especially with regard to the fixed-income exposures in the firm's bond funds. The fund family's shareholder reports have undergone a similar makeover. Management's discussions of market conditions and fund performance are more informative than in the past, and the board's explanation of its rationale in reviewing the funds' management contracts is detailed and clearly spelled out. Similar transparency at other fund companies would be a welcome change.

Still, material concerns remain. The largest factor detracting from the funds' appeal is their higher fees. Neither the firm nor the funds' boards have demonstrated a commitment to lower fund expenses, and most funds in the lineup sport lofty price tags. For example, the majority of the funds subadvised by Grantham, Mayo, Van Otterloo & Co. carry above-median expense ratios for their respective categories. In addition, a number of the John Hancock funds carry relatively high 0.30% 12b-1 fees, making sales of John Hancock funds more lucrative to financial advisers, compared with the 0.25% industry norm. Investors would be better served by 12b-1 fees that are in line with the competition and let the funds stand on their own merit based on performance and cost.

What's more, manager investment in John Hancock funds does not reflect industry best practices. Managers who invest in the funds they run align their own financial interests with those of investors. Excluding the firm's Lifecycle and Lifestyle lineups, which are overseen by the same group of managers--who were all named fairly recently--Hancock's average manager investment clocks in below the average for the top 30 asset managers, even though its average manager tenure of about six years is just above the group's median.

These shortcomings are certainly notable, but John Hancock deserves credit for the steps it has taken to make its corporate culture shareholder-focused in recent years. The firm's subadvisory model has incorporated a number of skilled managers who have perked up many funds' performances. JHIMS has proven that it can select accomplished portfolio managers and remain focused on delivering results to shareholders. If Hancock were to take additional shareholder-friendly steps, such as reducing fees and encouraging manager ownership of fund shares, its stewardship profile would stand among the industry's leaders.