A number of ambitious plans are beginning to take shape at John Hancock Mutual Funds in Boston. The mutual fund group, which advises open- and closed-end funds, private accounts and retirement plans, and also sponsors the Freedom 529 plan, is an affiliate of John Hancock Financial Services. John Hancock Financial became a full-fledged subsidiary of Canada's Manulife Financial Corp. in April 2004.

John Hancock has just launched five multi-managed fund-of-fund lifestyle portfolios that utilize a "target risk" concept instead of specific target dates, and transitioned $15 billion into the funds from Hancock's similarly modeled retirement plan and annuity account offerings. The lifestyle funds range from an aggressive portfolio that allocates 100% into underlying equity funds, to a conservative one that invests 80% of assets in fixed-income funds.

But unlike other so-called lifecycle or target-maturity funds, these portfolios don't pigeonhole younger investors into accepting more equity market allocations, or steer older investors into a conservative, fixed-income-heavy fund. Instead, investors are free to choose which asset-allocation fund is right for them based upon their specific risk tolerance and goals, not age.

Furthermore, the John Hancock Lifestyle Portfolios diversify into more asset classes than many other lifecycle funds, including real estate and emerging-market debt securities, as well as Treasury Inflation-Protected Securities (TIPS).

That energetic launch comes on the heels of the firm's creation in September of two asset-allocation funds-of-funds that utilize proprietary John Hancock funds, two-thirds of which are sub-advised.

The group is also in the process of adopting eight diversified retail mutual funds from Grantham, Mayo, Van Otterloo & Co. (GMO), a Boston neighbor. John Hancock will become the advisor to the funds, while GMO will remain the sub-advisor on all. Another two funds will subsequently be added to the Hancock/GMO fund group.

To facilitate the broadening of Hancock's product line, the firm is expanding and realigning its internal and external wholesalers, who will soon become "channelized." To coincide with these changes, the mutual fund unit's corporate parent has recently rolled out a new multi-million dollar print and TV advertising campaign that will, at least through the first quarter of 2006, promote Hancock's various financial services capabilities, which naturally include this newly invigorated mutual fund lineup (see related article, page one).

All of these new initiatives are being spearheaded by a relatively new entrant to the C-suite who isn't new at all to John Hancock.

This past July, amid little fanfare, Keith Hartstein became president and CEO of the $33.8 billion mutual fund unit, replacing James (Jamie) Shepherdson, who had served as CEO since May 2004. Hartstein is a 15-year Hancock veteran who began as a fund wholesaler with the firm and most recently served as the head of its retail sales and marketing function.

Money Management Executive Editor-at-Large Lori Pizzani recently talked with Hartstein about his firm's current plans and long-term goals. An edited version of their conversation follows.

MME: You have some aggressive mutual fund initiatives in the works. What prompted these?

Hartstein: It began with the realization of the synergies between Manulife and John Hancock after the close of our 2004 merger. One of the first things that Manulife did was undertake a strategic review of John Hancock's mutual fund business. They looked at what we had and what it was worth. Then they looked at what they could get from a willing buyer if they were to exit the mutual fund business. They used that six-to-nine-month review to weigh options.

Ultimately, Manulife decided it wanted to be in the mutual fund business. They saw that it could be a profitable business if it had scale. Then they began considering how to grow the fund business. Back then, John Hancock had $17 billion in open-end fund assets and $8 billion in other assets, including institutional money and closed-end funds.

The firm considered other acquisitions or mergers as a method of growing, but the costs are high and there are usually control issues to contend with. At that point, we looked at what we have done in the past to successfully grow our business. That led us to the successful fund adoptions that Hancock has done and the lifestyle portfolios that were being offered under variable annuities and within 401(k) retirement plans. Manulife had this core competency, but they didn't have a mutual fund group.

We decided to capitalize on the strengths of the existing lifestyle portfolios, which have been hugely successful, and leverage them into mutual funds. Hancock is now the third-largest provider of lifestyle portfolios. My goal is to let the world know about this capability and bring it into the open-end fund world.

MME: That's only part of the growth. In addition of the new lifestyle funds you are also in the process of adopting the GMO funds. And you assumed the role of president and CEO in July.

Hartstein: Yes. In my 15 years here, there's never been a more exciting time. We've never had this depth and breadth of core products. Now we have the lifestyle portfolios and some internal proprietary funds in addition to the new GMO funds, which is a large part of our growth plans, too.

As I look back over my career, for a number of fund companies, there's always been a time when it's been their turn. Right now it's American Funds' turn. In the late 90s, they had lost market share. Then they just exploded in terms of growth. Others have had their time in the spotlight, too, including Putnam, Alliance and MFS before that.

John Hancock had a spin like that in 1997 and 1998, with sector funds and our bank fund doing well. But then, we had a slump. We bounced off the bottom in terms of sales in 2002. My gut tells me that we are now positioned for that same type of parabolic lift-off.

MME: How are you changing and expanding your wholesaling staffs and what other changes are you making?

Hartstein: We are doubling the number of both our internal and field wholesalers from 30 to 60 by early 2006. We've grown to about 40 field wholesalers now, and we match internal and field wholesalers one-to-one. We continue to have a prospecting desk and will double that staff to four. We are also growing our inbound marketing desk.

We have split the product management function entirely from the marketing function. We looked at how the top companies operate, and that is how the top-tier firms operate. What separates a top-tier company from the next 20 companies is the depth and breadth of their product lines. Tier-two companies have one or two hot products that drive most of their sales. Top players have a much deeper bench.

MME: You are also channelizing your external wholesalers. Why?

Hartstein: Our 60 field wholesalers will be split evenly, with 30 dedicated to the wirehouses and regional broker/dealers and the other 30 dedicated to financial planners, independent firms and bank representatives. We are splitting the ranks because I was a wholesaler.

If it comes down to a choice between a three-man LPL Financial Services branch or a 30-man UBS office, it's always more convenient to call on that 30-man UBS office. There is a lot of persistence from the BoA, Wells Fargo and LPL-type offices, but the wirehouses drive sales. Now that we have a broader product line, we need a sales force dedicated to each channel.

We are also making a point of differentiating "investment managers" from "relationship managers" in order to offer each the best products for them and their clients. Investment managers are quasi-portfolio managers who want to assemble a portfolio and desire to choose the best-of-breed funds. These are the ones who want to dig into alpha and beta and Sharpe ratios. For them, we can offer individual portfolios like our Classic Value Fund and our U.S. Global Leaders Fund.

But there are also the relationship managers, and these are more holistic financial planners or risk managers who want solutions to work for their clients. We don't necessarily break them out by which channel - registered investment advisor or wirehouse - that they work from. Both types need different products.

For the second group, they can now get the best lifestyle funds. Nowhere else can you get five portfolios comprised of between 20 and 30 underlying funds from a who's who of investment advisors. A broker could not assemble a roster like this on his own. And the portfolios span across 22 individual asset classes. We can wrap the best in the business into these funds with REITs, natural resources, TIPS and others included.

MME: What's on tap for 2006?

Hartstein: Next year will be the realization of all of the hard work we've done since the Manulife acquisition.

We are looking at our product line post-lifestyle and GMO funds. I think we are about to see a turn in the market. If there is any clear change in market leadership toward large, quality companies, we are well positioned for that change. But if there is any gap in our product line that we need to shore up, it is in the aggressive large-cap growth sector and maybe a small-cap deep value or just value capability.

(c) 2005 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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