Hancock's Evolving Culture

With a new CEO at the helm of its retail funds division and a more streamlined board structure now in place, positive changes are afoot at John Hancock. Andy Arnott, the new CEO, was selected from the ranks of the firm's investment research group and brings a well-informed and shareholder-centric perspective to bear on his new role. Similarly, Hancock's decision to consolidate its two fund boards should result in greater consistency in the way the firm develops, prices, and distributes its products across retail and institutional channels.

While recent developments at the firm seem promising, substantial challenges remain. Hancock's funds are too expensive on average, and the managers who run them invest too little. The firm's subadvised business model may be costlier to run than one executed with in-house resources, but Hancock could address both issues by lowering fees. Shareholders would benefit from the economies of scale the firm enjoys as a top-20 fund shop by assets. Lower costs might also encourage Hancock's subadvisors to invest more in the funds they run for the firm.

Overall, we're optimistic about Hancock's potential for improvement as a steward. For now, though, the firm remains a promising work in progress.

Corporate Culture
One consequence of John Hancock's subadvised business model is that its culture is shaped by the shops it hires to run its mutual funds. The subadvisors in Hancock's lineup are a wide-ranging group, running the gamut from well-heeled behemoths such as GMO to boutiques like Rainier Investment Management and Sustainable Growth Advisers. Even the managers who work for Hancock's parent company--Canadian insurance giant  Manulife (MFC)--are officially subadvisors to the Hancock-branded mutual funds that they lead. That distinction is no mere technicality. At Hancock, affiliated subadvisors are subject to the same scrutiny and due diligence that nonaffiliated managers receive.

Hancock's approach to staffing its funds therefore raises the profile of the internal team responsible for manager research at the firm, Investment Management Services. That team, which boasts a large staff and a seasoned leadership group, is also central to the firm's culture and status as a steward of shareholder wealth. If IMS does its job well, Hancock's shareholders reap the benefits of the firm's wide-ranging approach to manager selection. Conversely, if the team misses the mark, shareholder wealth is jeopardized.

On balance, IMS does its job well. In its initial vetting of portfolio manager candidates, the team doesn't focus narrowly on performance but on whether a manager's process is repeatable. Capacity is another area of scrutiny, with IMS seeking to gauge whether a management team accustomed to investing smaller sums can continue to execute its strategy effectively as assets under management rise. Once IMS makes those assessments, the team offers recommendations to the members of Hancock's fund board.

The team also provides ongoing due diligence on the managers Hancock hires. In this capacity, IMS' primary responsibility is to ensure that the subadvisors stay true to the strategies for which they were chosen. Performance patterns deviating from IMS' expectations or from a fund's historical norms draw additional scrutiny, with members of the team (and sometimes members of the board as well) conducting interviews and on-site visits in an effort to determine whether a management team is drifting from the strategy for which it was hired. Persistent underperformance results in a team being called to Hancock's Boston headquarters for talks with IMS and board members. Dismissal can result if the managers' explanations fall short or if a fund continues to lag during parts of a market cycle that have historically been favorable for its strategy.

A thorough and thoughtful approach to manager research makes IMS perhaps the most impressive aspect of Hancock's operations. It's a positive sign, therefore, that IMS' former leader, Andy Arnott, was recently selected to succeed Keith Hartstein as president and CEO of the firm's retail mutual fund division. A 19-year Hancock veteran, Arnott began in the firm's customer service group before moving on to senior roles in Hancock's product management, business development, and marketing groups. Arnott became Hancock's chief operating officer in 2009, and from 2010 until his current appointment, he ran IMS.

Arnott's tenure at IMS, while brief, is encouraging. And while he hasn't spent his entire career in investment research, his involvement with that side of Hancock's operations has been both broad and deep. He has been instrumental, for example, in honing the firm's subadvised business model and seems well-prepared to bring an informed, investor-centric perspective to bear on, among other things, the fees and incentives in the management contracts Hancock inks with the shops that it hires. Arnott's background should also be a plus when assessing the suitability of potential new products and existing institutional funds for the firm's retail lineup. Vehicles that might make sense in the context of the shop's target-date offerings, for example, could introduce outsize risk if offered as stand-alone funds for individual investors.

Overall, the firm's decision to appoint Arnott inspires confidence. Hartstein's background was in marketing, and while Hancock improved as a steward on his watch, it continues to fall short on two key measures of shareholder alignment: fees are too high, on average, and managers invest too little in the funds that they run. These are early days for Arnott in his new role, but it's reasonable to expect that his experience will prove helpful on these fronts in particular and for Hancock's status as a steward of shareholder wealth more broadly.

There's no guarantee, of course, that the firm will become more shareholder-friendly on his watch. And while other aspects of Arnott's career--particularly his work in product development--may also prove beneficial, a longer tenure at IMS would inspire more confidence. Still, Arnott's appointment holds promise. Hancock can realize it by further tightening the connection between its interests and those of fundholders through lower fees and incentives that encourage its subadvisors to eat more of their Hancock cooking.