Partnerships Have Improved John Hancock

Morningstar recently issued a new Stewardship Grade for John Hancock. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a C. What follows is Morningstar's analysis of the firm's corporate culture, for which John Hancock receives a B. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

John Hancock outsources its fund management to subadvisors, and this business model steers its corporate culture toward partnerships with industry-leading management. As such, the firm’s culture exceeds the industry standard for its focus on fundholders.

The subadvisors managing Hancock’s funds include independent, well-known firms, such as GMO and Wellington, as well as smaller boutiques, like Boston Partners and Sustainable Growth Advisors. Hancock also hires managers who work for Hancock’s parent company, Canadian insurance giant Manulife. Hancock’s due-diligence team reviews affiliated subadvisors with the same scrutiny as nonaffiliated managers. The firm has beefed up resources dedicated to the subadvisor-oversight effort in the firm’s Investments Department, appropriately adding staff as the lineup and assets at the firm have grown. The firm has more than 160 people dedicated to investment manager research and oversight.

On balance, the Investments Department 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. The researchers seek to gauge whether a management team accustomed to investing smaller sums can continue to execute its strategy effectively as assets under management rise. Once the researchers make those assessments, the team offers recommendations to Hancock’s fund board of directors.

The team also provides ongoing due diligence on the managers Hancock hires. In this capacity, the researchers' primary responsibility is to ensure that the subadvisors stay true to the strategies for which they were chosen. The team adds scrutiny when performance patterns deviate from expectations or from a fund’s historical norms. Members of the team (and sometimes members of Hancock’s fund board as well) then conduct interviews and onsite visits in an effort to determine whether a management team is drifting away from the strategy for which it was hired. In cases where underperformance is persistent, a team is called to Hancock’s Boston headquarters for talks with the researchers and board members. 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, they will be dismissed.

Andrew Arnott, who was named president and CEO of the firm’s retail mutual fund division in 2012, previously ran what's now the Investments Department and is committed to this operational model. Arnott began his career 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 he led the Investments Department from 2010 until his current appointment.

Since taking over the CEO’s role, Arnott increasingly has driven the firm’s lineup toward the portfolio-construction needs of the firm’s experienced multiasset management team and its advisor clients. The firm has steadily launched new strategies with established partners. For example, the firm has rounded out its non-U.S. offerings, launching JHFunds2 International Growth Opportunities with Baillie Gifford in 2012 for internal fund-of-funds strategies and a few Manulife-subadvised strategies, including JHancock Fundamental Global Franchise JFGAX (an internal-use fund) and JHancock Global Equity JHGEX in 2013 and JHancock Emerging Markets Equity JEMQX in 2015. The firm also has added alternatives strategies, including Neutral-rated JHancock Global Absolute Return Strategies JHAIX, which launched in 2011, and JHancock Global Conservative Absolute Return JHRAX, circa 2013, both of which are run by an established team at Standard Life.

These new offerings are often used in the target-date and target-risk portfolios run by the veteran multiasset team, led by Bob Boyda and Steve Medina. The team manages the JHancock Retirement Living Through target-date series, which earns a Morningstar Analyst Rating of Bronze. The firm has expanded its lineup for retirement plans as well, having launched the JHancock Retirement Living thru II target-date series and the JHancock Lifestyle II series in 2013, so plans have additional choices when it comes to asset mixes and underlying holdings. (Both series feature Hancock- and Vanguard-run investments.) All told, about half of the firm’s assets under management are in asset-allocation investments.

Arnott and his team have worked to get the firm’s funds broader distribution on broker/dealer platforms, and the funds are included in 252 recommended lists or model placements, up from 42 in 2010. They’ve also been gaining popularity among defined-contribution plans, which represent 20%-25% of new cash coming into the firm’s funds. Hancock also is exporting its strategies, having just launched a set of Dublin-registered UCITs--copies of existing U.S.-based strategies aimed at foreigners living in the United States and eventually non-U.S. distribution. The firm also is eyeing the exchange-traded fund market.

Since Arnott took over, Hancock’s assets under management have doubled to about $185 billion as of May 2015, because of both strong market performance and steady inflows. Top winners of new cash include Silver-rated

This swift expansion of assets and funds may suggest the firm is more sales-focused than fundholder-focused, but the subadvised model allows Hancock to develop its new products around experts rather than extending with a home team into areas that are beyond its core competencies. It’s not surprising, therefore, that the subadvised funds have performed reasonably well in a period when most actively managed funds have struggled, even with average and some higher costs. The funds run by nonaffiliated subadvisors have beaten their typical peers, on average, over the three- and five-year periods through May 2015. Only a handful of the nonaffiliated subadvised funds have 10-year records, and they range from the dismal--JHancock Classic Value PZFVX, a deeper value strategy run by Pzena Investment Management, which sustained steep losses around the 2008 financial crisis--to the topnotch (Boston Partners’ Disciplined Value strategies).

The funds run by affiliated managers, most of which are multiasset strategies, have done about as well for the three-year period and have been competitive over the five-year time frame. There are about a dozen funds run by Manulife managers with 10-year records, and more than half of those have outperformed over the decade.

Hancock’s combined results are measured in the firm’s Morningstar Risk-Adjusted Success Ratios, which considers funds successful if they survive and outperform peers in their Morningstar Category on a risk-adjusted basis. Hancock’s Morningstar Risk-Adjusted Success Ratios show improvement. The three-year figure of 52% is strong relative to other top 20 asset managers receiving Stewardship Grades from Morningstar but gets increasingly weaker over longer-term periods and is among the worst for the largest asset managers for the past decade through May 2015.

To be sure, Hancock is still in the early stages of its success, especially relative to other top asset managers who have been establishing their reputations and success over decades. Recent trends are encouraging, however. The firm’s corporate culture appropriately stresses good outcomes for fund investors, and it is focused on its strengths--asset allocation and hiring strong subadvisors. It has shown signs that it is placing more emphasis on lowering the cost of its funds. Lower cost and better long-term performance would continue to strengthen this firm’s corporate culture.