While most mutual fund companies struggled in 2008, John Hancock Funds finished the year in solid standing, buoyed by a strong first half and careful strategic planning. President and CEO Keith Hartstein recently spoke with Money Management Executive's John Morgan about the key areas that drove Hancock's record $8.5 billion in sales, some regulations he would like to see changed and his outlook for the rest of 2009 and beyond.
MME: What are you doing to help John Hancock stay relevant in these turbulent times?
Hartstein: We have an award-winning marketing group that has done an outstanding job anticipating things. We launched a volatility kit in April of last year, and in June we dedicated a section of our website as the "Volatility Center." That volatility kit had huge demand. More than 300,000 brochures were requested by advisers and distributed in 2008, a lot of it in the fourth quarter. We are in the midst of coming out with a complementary piece called "Where Do We Go from Here: A Plan for the Changing Financial Landscape." We expect that will be very well received as well.
In something we call "History Lessons," we've armed our wholesalers with presentations on the history of bear markets, bull markets and market recoveries. There's another one called "Creating Confidence in the New World," that deals with the whole issue of how to deal with clients' emotions and the lack of confidence they may have in their portfolios.
It is very much a focus of ours to be relevant and to be more than just a provider of financial products. We want to be a real partner to the financial advisers who sell our funds.
MME: What were some of your best-performing areas in 2008?
Hartstein: 2008 was our third consecutive record year for sales. Given everything that happened in the market in 2008, a record year in sales was nothing short of remarkable. We did it on the back of a strong first half, but then things fell dramatically, especially in the fourth quarter.
We closed two fund adoptions in 2008. In April, we completed the adoption of the Rainier Large Cap Growth Fund and in December, we closed the adoption of the Robeco Boston Partners Large Cap Value Fund, what we now call the John Hancock Disciplined Value Fund. That added two core products, both four-star funds-one in large-cap growth, one in large-cap value - to our product line, and brought in two new subadvisory relationships that we're very pleased to have.
The other thing that happened in 2008 is that we completed the refinancing of our auction-rate preferred securities on our closed-end funds. One hundred percent of our auction-rate shareholders got back 100% of their money, with the last checks going out in early July. To date, we continue to be one of the only major fund companies to completely solve its auction-rate preferred situation. All in all it was a busy year, and then dealing with the whole financial markets coming unraveled was a whole other thing.
MME: What drove your record sales in the first half of 2008?
Hartstein: Our record sales were driven by the wholesaler expansion initiative we started four years ago.
We took our number of wholesalers in the field up from 28 in 2004 to about 55 at present. A lot of those folks weren't added at once; they were feathered in over the last several years. It takes 18 months or so for a wholesaler new to your company to really begin to hit their stride and gain critical exposure. You see a ramp-up in their sales after they've made the rounds a few times, and that's what took place in the first half of last year. Ameriprise became our distribution partner a couple of years ago, and they were our No. 1 seller of mutual funds in 2008. That relationship has really come a long way, as well.
We continue to have a long-term objective of being a top 10 player in the retail mutual fund space. We plan to do additional adoptions of funds in specific asset classes with proven and repeatable strategies, long-term track records and of course capacity to grow.
MME: What were some disappointing areas in 2008?
Hartstein: Profitability. I am responsible for the bottom line, and our bottom line took a significant hit. We did a pretty good job managing our bottom line in terms of expense management, but still, as fast and as furious as the decline came, there wasn't a whole lot we could do about it. Everybody in the industry certainly saw lower revenue than in 2007. In our case, it put us in the red for the year.
MME: What are some areas of the market that concern you the most, and what are some possible solutions?
Hartstein: One of the things you see in this kind of environment is that people make adjustments to portfolios based on events. What we've discovered in this bear market is that the only thing that goes up in a bear market is correlation. All these asset classes that were supposedly non-correlated all went down in 2008 and the first two months of 2009. There was no safe harbor unless you were in Treasuries.
We've heard a lot of concern about asset allocation in the last few months, with shareholders asking if the portfolio managers should have gone to cash earlier, for example.
Our view is that the decision to raise cash is a personal one best left to the financial adviser and client. We ask our portfolio mangers to run "fully invested" portfolios-no more than 5% or so in cash. After all, the reason you buy large-cap growth stock funds is to be in large-cap growth stocks. If you want a manager to determine whether it's time to raise cash or not, that's a completely different vehicle. That's a tactical asset allocation fund. If the market were to go up 25% and your manager had 15% to 20% in cash and wound up lagging the market, shareholders would be screaming about underperformance.
The risk right now and our area of concern is that investors might react emotionally to this tail event. We've only had three down 30% years in the last 100 years. To make adjustments on your portfolio based on a three-in-a-hundred-year event just doesn't make sense.
MME: What steps is John Hancock taking to prepare for the rest of 2009 and beyond?
Hartstein: We have had to tighten our belts a bit. We've had a hiring freeze on for the last year and have had to adjust our distribution model, restructuring some of our wholesaler territories. Tightly managing expenses has become the way of life around here. Overall, we're remaining focused on communicating messages of positive outlook. We are continuing to hone our marketing message.
If the market is not at the bottom, we're certainly a whole lot closer to the bottom than we were six months ago. In fact, here's a little nugget for you: The six-month return for the period ending February 2009 was the worst six month stretch for the S&P 500 since 1932. In the six months ending in May 1932, the market was down 51%; the six months that just ended in February, we're down about 42%.
Over the ensuing five years, from mid-1932 to 1937, in the midst of the Great Depression, stocks were up 367%. The average annual return was 36% a year over for five years. The last time we saw a market as bad as it's been in the last six months, there was a screaming bull market on the other side. Now I'm not forecasting a 36% average return for the next five years-I would take a third of that and be very happy-but I do believe there is a turn out there and we will only see it clearly in the rearview mirror. And that's been our message to financial advisers and to shareholders as well.
MME: Do you think the U.S. financial regulatory system needs a complete overhaul?
Hartstein: A complete overhaul? No. Do they need to make some changes? Absolutely. Like many other firms in our industry, we support the reinstatement of the uptick rule. It's puzzling that the government spends billions and billions of dollars on financial bailouts, and here's something that costs nothing. It can be implemented with little costs-there's some infrastructure costs and programming costs-but it doesn't cost the government anything. Regulators should reinstate the uptick rule, crack down on naked short selling and make adjustments to mark-to-market accounting. Those are three things that could be reversed or changed that we think could have a profound impact on the financial markets, at little or no government cost.
MME: How have your retirement income products been performing this past year?
Hartstein: It's a mixed bag. It's one of those "relative performance is good," but absolute performance, not so much. It's hard to say we've lost 20% to 24% and that's good, but that's kind of the situation here. Our Retirement Rising Distribution fund was in the second percentile in its Morningstar peer group, and it went down 23%. Our Retirement Distribution fund was also in the second percentile, and it was also down about 20%. It was a tough year to come out with a product like that.
MME: How can these products evolve to better help Baby Boomers recover their losses?
Hartstein: I don't think retirement products are recovery vehicles. Because of their nature, they have more of a balanced fund structure, so there is more fixed-income exposure. If you're looking to get back what you've lost, you probably need to be in something that has a higher concentration in equities. Or you've got to take a very long time horizon.
MME: When do you think things will start turning around? What does your gut tell you?
Hartstein: I am the eternal optimist. I thought Nov. 20 was the low. I'm hopeful March 9 will have set a new low for this market, down 56.8% peak to trough. I'm hopeful that we'll look back someday and say 676 on the S&P 500 was the bottom. But we'll only know in hindsight. Could we go lower? Certainly.
But without a doubt, we'll look back five years from now and say what a great buying opportunity there was in late 2008 and the first part of 2009.
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