Alternative assets. Alternative styles. Absolute return.
Those are the three bases of John Hancock Mutual Funds newly launched effort to set itself apart as, in itself, an alternative to larger mutual fund creators, marketers and managers.
Alternative assets can be anything from gold to real estate investment trusts to energy to the debt of emerging market nations.
Alternative styles can be anything that breaks from the buy-and-hold strategies involving stocks that have long characterized mutual fund investing.
For this, you have to have "managers who have the freedom to go anywhere,'' said Robert M. Boyda, co-head of global asset allocation for John Hancock Asset Management. "They can go into emerging markets. They can go wherever the markets take them, busting outside of a style box. Again, not a whole lot of capability out there because many managers have gotten used to the notion that, "I live inside of a style box."
Then, there is the most demanding "A" in the alphabet. Absolute return.
Absolute return says: to heck with benchmarks. It doesn't matter if the whole market and every mutual fund in it is down 10% for the year. All you care about is the absolute return you gave back to your investors. And that return mighty well better be positive, not negative, in absolute terms.
Fund managers seeking absolute returns typically use a lot of so-called alternative investing techniques. These include selling shares of publicly traded companies short, trading in future and options contracts, investing in interest-rate swaps and other derivative forms of bonds, the simultaneous buying and selling of a single security or other asset to profit from arbitrage in its price and investing in unconventional assets of various sorts.
Putting all three "A"s together, John Hancock created the Alternative Asset Allocation Fund, which reached its three-year anniversary on December 31, 2011. Such investing in alternative styles, alternative assets and absolute return funds has been a part of the John Hancock approach to target-risk investing that it calls its Lifestyle funds, since their inception in 1998. "We have a core capability in the organization in asset allocation,'' said Boyda. "We run 65 billion dollars in asset allocation funds. Target risk, target date, and in emerging asset classes, like alternatives.''
Such investing in alternative assets has been a part of the John Hancock approach to target-date investing that it calls its Lifestyle funds, since their inception in 1998.
Examples of alternative investments include the alternative-style John Hancock Technical Opportunities Fund, launched in August 2009, the alternative-asset John Hancock Natural Resources Fund, launched in May 2003, and the absolute return John Hancock Currency Strategies Fund, launched in August 2010.
The AAA Fund may invest in U.S. and foreign stocks, of various sizes. The fund also invests in bonds and other fixed-income securities, which are not subject to any credit rating or maturity limitations, issued by companies and government and supranational entities around the world. These include high-yield non-investment grade securities.
The fund may invest in emerging as well as developed markets. The fund also may invest in derivative instruments, which are generally financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate, or index, and may relate to equity securities, fixed-income securities, interest rates, total return rates, currencies or currency exchange rates, and related indexes.
At the start of January, John Hancock launched a Global Absolute Return Strategies Fund to be part of its AAA strategy. The fund is managed by Standard Life Investment in Scotland, which has more than $19 billion in assets under management in its global absolute return strategies. The John Hancock Global Absolute Return Strategies Fund has a broad mandate that lets it invest in a wide spectrum of equity and fixed-income securities, as well as derivative instruments.
This "global multi-asset strategy" is part of John Hancock's overall emphasis on making sure its customers have the ability to spread out their investment dollars and allocate their money into as wide a variety of assets as makes sense. Or is appealing.
"We have a core capability in the organization, in asset allocation,'' said Boyda.
The John Hancock Global Absolute Return Strategies Fund is part of a fund-of-funds called the John Hancock Alternative Asset Allocation Fund.
That fund invests in alternative assets such as currencies, real estate, commodities, natural resources, and emerging market debt. The array of funds within AAA are managed by a variety of asset management firms such as Pacific Investment Management Company (PIMCO), Wellington Management Company, Dimensional Fund Advisors, Stone Harbor, Deutsche Asset Management, First Quadrant, and John Hancock Asset Management.
"With more investors looking for ways to decrease volatility in their portfolios, the John Hancock Alternative Asset Allocation Fund offers a 'one-stop' solution delivering exposure to various alternative asset classes and alternative strategies that act as diversifiers, and may help to improve the risk-return profile of a traditional investment portfolio," said Keith F. Hartstein, president and chief executive of John Hancock Funds.
This is "really an entire strategic design begun 15 years ago, targeted at making life easier for participants, advisors and everyone along the advice chain,'' Boyda said. The three "A"s at the core "are built from a standard, a high level of institutional standards for oversight, performance, and in our case, diversification, he said.
John Hancock, he said, had to develop a skill at managing investment services, to oversee the activities of specialized asset managers, to make this work.
"We had to develop unique portfolio construction techniques,'' Boyda said, "because you have different asset classes. You have the quirks of the managers who are managing those asset classes for you."
But "the wonderful part of this is, if you have a big enough franchise you can go and find managers in unique market areas where you can leverage their expertise where others may not be able to go,'' he said.
The goal is to produce 4% to 7% annual return, but "with the volatility at a third of what investors have been experiencing in the equity markets.''
A world of stocks with wild swings in prices and low overall returns and 2% Treasury bonds is what the Triple A strategy is trying to combat.