My series evaluating the performance of the market’s most prominent actively managed mutual fund families continues today with an in-depth analysis of the John Hancock Group.
Why John Hancock? In February, the firm ranked second (out of 48) on Barron’s annual list of best-performing mutual fund families for the latest 10-year period. For the latest five-year period, John Hancock was ranked 18th (out of 56 fund families). And in the one-year rankings, based on 2014 performance, the firm placed 40th (out of 65 fund families), although one-year performance really should be treated as anecdotal in nature.
According to Morningstar, as of July 31, 2014, the John Hancock family of funds had $184 billion in assets under management, almost double the $94 billion that the firm had at the end of 2011. While John Hancock’s total assets under management don’t quite qualify it for the list of the top 10 mutual fund managers by size, they are still one of the market’s largest fund families, and their results impact lots of investors.
The John Hancock investment approach
John Hancock is quite clear on its investment approach. In fact, their website states: “Our approach to money management begins and ends where it should: with investors. We build funds based on investor needs, then go anywhere in the world to find specialized managers with proven track records in those strategies. As one of the longest-tenured manager of managers, we apply vigorous oversight to ensure that our funds continue to meet our uncompromising standards and serve the best interests of our shareholders.”
The firm goes on, asserting that its “manager-of-managers approach is designed to marry the innovation, agility, and conviction of boutique managers with the oversight and risk controls of a large, institutional asset manager.”
Finally, the firm states that it is a “premier asset manager” with: a more than 25-year track record of employing a “unique manager-of-manager approach,” more than 250 meetings every year to identify proven managers, more than 165 investment professionals dedicated to research and oversight and more than 100 in-person oversight meetings with managers annually. The firm adds that it has 73 proven portfolio teams with 27 elite asset managers overseeing 105 investment strategies.
That certainly represents a tremendous amount of resources at the fund family’s disposal. There is, however, a critical question: Has all this effort and expense added or subtracted value?
To find the answer, I’ll compare the performance of John Hancock’s actively managed equity funds to the similar offerings from two prominent providers of passively managed funds, Dimensional Fund Advisors (DFA) and Vanguard. (Full disclosure: My firm, Buckingham, recommends DFA funds in constructing client portfolios.)
To keep the list to a manageable number of funds and to ensure that I examine long-term results through full economic cycles, I will analyze the 15-year period ending June 30, 2015. Furthermore, we’ll use the lowest-cost shares available for the full period when more than one class of fund is available. In cases where John Hancock has more than one fund in an asset class, we’ll use the average return of those funds in our comparison.
The table below shows the performance of eight funds offered by John Hancock in five domestic asset classes and one international asset class. As you review the results, keep in mind that I’m injecting some hindsight bias into my analysis. There is no way anyone could have known that the John Hancock family of funds would end up earning the number-two spot on Barron’s most recent list of top-performing firms for the prior 10-year period.
July 2000-June 2015
|
Fund
|
Symbol
|
Expense Ratio (%)
|
Annualized Return (%)
|
|
U.S. Large-Cap Blend
|
|
|
|
|
John Hancock Large Cap Equity Fund
|
TAGRX
|
1.06
|
5.13
|
|
DFA U.S. Large Company Portfolio
|
DFUSX
|
0.08
|
4.34
|
|
Vanguard 500 Index Fund
|
VFINX
|
0.17
|
4.24
|
| |
|
|
|
|
U.S. Large-Cap Growth
|
|
|
|
|
John Hancock Select Growth Fund
|
RGROX
|
1.20
|
1.20
|
|
John Hancock U.S. Global Leaders Growth Fund
|
USGLX
|
1.19
|
5.04
|
|
Average
|
|
1.20
|
3.12
|
|
Vanguard Growth Index Fund
|
VIGIX
|
0.08
|
3.28
|
| |
|
|
|
|
U.S. Large Value
|
|
|
|
|
John Hancock Classic Value Fund
|
PZFVX
|
1.19
|
8.31
|
|
John Hancock Disciplined Value Fund
|
JVLIX
|
0.82
|
8.83
|
|
Average
|
|
1.01
|
8.57
|
|
DFA U.S. Large Cap Value III Portfolio
|
DFUVX
|
0.13
|
9.26
|
|
Vanguard Value Index Fund
|
VIVIX
|
0.08
|
6.00
|
| |
|
|
|
|
U.S. Small Blend
|
|
|
|
|
John Hancock Small Company Fund
|
JCSAX
|
1.43
|
9.28
|
|
DFA U.S. Small Cap Portfolio
|
DFSTX
|
0.37
|
9.27
|
|
Vanguard Small Cap Index Fund
|
VSCIX
|
0.08
|
8.54
|
| |
|
|
|
|
U.S. Small-Cap Growth
|
|
|
|
|
John Hancock Small Cap Equity Fund
|
SPVAX
|
1.23
|
3.38
|
|
Vanguard Small Cap Growth Index Fund
|
VSGIX
|
0.08
|
8.64
|
| |
|
|
|
|
International Large Value
|
|
|
|
|
John Hancock International Value Equity Fund
|
JIEAX
|
1.36
|
4.55
|
|
DFA International Value III Portfolio
|
DFVIX
|
0.24
|
6.43
|
The following is a synopsis of the most important takeaways from this data:
- Of the four asset classes for which there are comparable DFA funds, John Hancock funds outperformed in two – though in one of those two cases it was by just one basis point (0.01 percentage points). In the two asset classes in which John Hancock funds outperformed, the average margin of that outperformance was 0.5 percentage points. In the two asset classes in which John Hancock funds underperformed, the average underperformance was much greater at 1.3 percentage points. This differential is consistent with research finding that, when actively managed funds outperform, the margin of outperformance tends to be smaller than the margin of underperformance.
- Of the five asset classes for which there are comparable funds from Vanguard, the John Hancock funds provided a higher return in three. In the three cases in which the John Hancock funds outperformed, the average margin of outperformance was 1.40 percentage points. In the two cases in which John Hancock’s funds underperformed, the margin of underperformance was greater at 2.7 percentage points.
- A portfolio of John Hancock funds, equal-weighted in the four asset classes for which there are comparable DFA funds, returned 6.9%. The average expense ratio was 1.22%. An equal-weighted portfolio of DFA funds, again in the same four asset classes, returned 7.3% a year and outperformed the comparable John Hancock portfolio by 0.4 percentage points a year. The DFA portfolio’s average expense ratio was 0.21%. The underperformance of the John Hancock portfolio was more than fully explained by the difference (1.01 percentage points) in the average expense ratios.
- In the five asset classes for which comparable Vanguard funds are available, an equal-weighted portfolio of John Hancock funds returned 5.9%. The average expense ratio was 1.19%. An equal-weighted portfolio of the Vanguard funds, again in the same five asset classes, returned 6.1% a year and outperformed the comparable John Hancock portfolio by 0.2 percentage points a year. The Vanguard portfolio’s average expense ratio was 0.10%. Again, the underperformance of the John Hancock portfolio was more than fully explained by the difference (1.09 percentage points) in the average expense ratios.
Factor analysis
We’ll now take another look at the performance of the seven domestic funds from John Hancock funds included above using the analytical tools and data available at Portfolio Visualizer. Factor analysis provides important additional insights because Morningstar asset class categories are very broad and actively managed funds often style drift.
The table below shows the results of the three-factor (beta, size and value), four-factor (adding momentum) and six-factor (adding quality and low beta) analysis for the firm’s U.S. funds. Due to limitations, the data covers the period from July 2000 through April 2015. Each t-stat is in parentheses.
July 2000-June 2015
|
Fund
|
Symbol
|
Three-Factor Annual Alpha (%)
|
Four-Factor Annual Alpha (%)
|
Six-Factor Annual Alpha (%)
|
|
John Hancock Large Cap Equity Fund
|
TAGRX
|
1.1
(0.5)
|
1.1
(0.5)
|
2.4
(1.0)
|
|
John Hancock Select Growth Fund
|
RGROX
|
-1.6
(-1.2)
|
-2.2
(-1.8)
|
-1.3
(-1.0)
|
|
John Hancock U.S. Global Leaders Growth Fund
|
USGLX
|
0.8
(0.4)
|
0.9
(0.5)
|
-3.4
(-2.1)
|
|
John Hancock Classic Value Fund
|
PZFVX
|
0.0
(0.0)
|
0.9
(0.5)
|
-2.0
(-1.2)
|
|
John Hancock Disciplined Value Fund
|
JVLIX
|
2.4
(2.2)
|
2.6
(2.4)
|
0.9
(0.8)
|
|
John Hancock Small Company Fund
|
JCSAX
|
1.0
(0.6)
|
0.1
(0.0)
|
-2.2
(-1.4)
|
|
John Hancock Small Cap Equity Fund
|
SPVAX
|
-3.5
(-1.6)
|
-3.7
(-1.7)
|
-3.6
(-1.5)
|
|
Average
|
|
0.0
|
0.0
|
-1.3
|
When we examine the results from the three-factor analysis, we find that four of the seven John Hancock funds were able to generate positive annual alphas – one of which (JVLIX) was statistically significant at the 5% level. The average annual alpha, however, was 0.0%.
When we look at results from the four-factor analysis, we find that five of the seven John Hancock funds generated positive annual alphas – one of which (also JVLIX) was again statistically significant at the 5% level. Again, the average annual alpha was 0.0%.
When we include all six factors in our analysis, we find that just two of the seven John Hancock funds generated positive annual alphas, and the one fund (USGLX) for which the t-stat was statistically significant at the 5% level produced a negative alpha. The average annual alpha was -1.3%.
A fund can show alpha in the factor analysis but underperform a similar fund from the same broad asset class (even if this second fund has a lower alpha) because the first fund has lower exposure to factors that had generated premiums (or higher exposure to factors with negative premiums).
There are two more important points to consider. All of the above data is based on pre-tax results. For investors holding these funds in taxable accounts, the active management of John Hancock funds very likely would have produced more negative tax consequences than the passively managed alternatives of either DFA or Vanguard.
Morningstar provides us with the average turnover of the funds we analyzed: John Hancock, 63%; DFA, 11%; and Vanguard, 11%. This great disparity is likely to leave taxable John Hancock investors with a greater tax bill, more negatively impacting their after-tax returns (the only kind you get to spend).
Second, Morningstar data unfortunately contains survivorship bias, which may or may not exist in this case. Some John Hancock funds may have closed or been merged into other funds during this time period because of poor performance. I have no way of knowing.
Whether one compares the results to passively managed funds in the same asset class or examines the results from the factor analysis, there is no evidence that, despite all the efforts and resources John Hancock expended, its investors were receiving added value. Investors would have been better off choosing lower-cost (and likely more tax efficient) passively managed alternatives.
While investors weren’t benefiting from the selection of John Hancock as their investment manager, the John Hancock fund family was clearly benefiting from their higher fees.
Had the John Hancock funds come with expense ratios similar to those of Vanguard or DFA, they not only would have outperformed, but they also would have generated alphas using either the three- or four-factor analysis, though that would still not have been the case when it came to the six-factor analysis.
A fourth conclusion is that the evidence presented supports the concept that, while it’s possible to identify the fund managers who have outperformed in the past, it’s much harder to do so ex-ante – which is why the SEC requires its warning about relying on past performance.
And finally, ask yourself this: If the number-two fund family, as ranked by Barron’s, didn’t show value added, just how badly did other fund families perform? This type of evidence is why Charles Ellis called active management the “loser’s game.” It is one that you can win, but the odds of doing so are so poor that investors shouldn’t even try (unless, of course, you place a high value on the “entertainment” aspect of the “game” of active management).
P.S. It is ironic that recently John Hancock announced that they were partnering with DFA to bring to market a suite of ETFs. John Hancock's active management strategies are attempts to exploit market mispricing. They are in direct conflict with DFA's investment philosophy, which is based on the premise that the market's price is the best estimate of the right price for a security.
Larry Swedroe is director of research for the BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.
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