Measurement and oversight of alternative strategies. Leo M. Zerilli, CIMA, Head of Investments, John Hancock Investments

Transcription

1 Measurement and oversight of alternative strategies Leo M. Zerilli, CIMA, Head of Investments, John Hancock Investments

2 Over 25 years of manager research experience Oversee nearly 30 manager relationships Advisor to over 100 different mutual funds Gatekeeper for $80B 401(k) platform Includes JH retail funds and assets advised by Investments team as of December 31,

3 Over 15 years experience in liquid alts Utilizing alternative strategies since 1997 Managing over $15B in alternative assets today Global REITs Alternative allocation Long-short currency REITs Global natural resources TIPS International small caps Emergingmarket equities Floating rate bonds Technical opportunities Global absolute return Buy-write option strategy Long/short hedge fund/strategy approach Inflation hedge Timeline of when new alternative strategies were added to the John Hancock Investments line-up or as an underlying investment for fund-of-funds. Not all categories are considered alternatives today, but were at the time of launch. Assets as of 12/31/

4 Setting expectations Performance blueprint What is it? Description of how a fund should perform in a variety of market environments Why is it important? Sets appropriate expectations as the hiring decision is made Integral to the ongoing evaluation of managers Appropriately measures success beyond percentile ranks Required to understand a fund s position in a portfolio and ensure proper diversification 4

5 Some components of blueprints Potential Protection Accumulation Distribution Potential Protection refers to the fact that some funds may potentially reduce risk and provide downside protection from a specific investment risk, such as rising interest rates, it does not refer to any type of guarantee. 5

6 Performance blueprint examples Performance Blueprint Seek positive returns over all market cycles with less volatility than traditional equities Exploit inefficiencies in the global currency markets to generate positive returns with low correlation to traditional and non traditional investments Seeks to outperform when stocks price and volume momentum are trending in a consistent direction Seeks to outperform global equities over a complete market cycle by limiting losses in down markets and protecting during inflationary periods Strategy Type Global Macro Absolute Return Long/Short Currency Global Tactical Equity Infrastructure 6

7 Monitoring considerations for alternatives 1. Portfolio construction 2. Performance analysis 3. Exposure analysis 4. Liquidity 7

8 Average Correlation 1a. Portfolio construction Importance of low correlations across components AVERAGE CORRELATIONS TO OTHER PORTFOLIO COMPONENTS: LAST QUARTER 70% 60% 63% 57% 50% 40% 30% 20% 10% 43% 34% 0% Component1 Component2 Component3 Component4 This is a hypothetical illustration which demonstrates the criteria that is used by John Hancock Investments for the monitoring portfolio construction and risk. The data is not representative of any mutual fund or investment strategy. 8

9 1b. Portfolio construction Greater diversification benefits that can weather turbulent markets and provide better outcomes 9% DIVERSIFICATION BENEFITS 8% 7% 6% 5% 4% 3% 2% 1% RISK could be over 7% without portfolio construction awareness 3.87% 3.83% 0% Component1 Component2 Component3 Component4 Component5 Component6 Component7 Diversification Fund Volatility This is a hypothetical illustration which demonstrates the criteria that is used by John Hancock Investments for the monitoring portfolio construction and risk. The data is not representative of any mutual fund or investment strategy. Diversification does not ensure a profit or protect against loss. 9

10 1c. Portfolio construction Risks associated with each component can vary from cash allocation to each component RISK VS. CASH PORTFOLIO WEIGHTS 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 40% Cash allocation Risk weight 35% 25% 24% 20% 19% 20% 17% Component1 Component2 Component3 Component4 This is a hypothetical illustration which demonstrates the criteria that is used by John Hancock Investments for the monitoring portfolio construction and risk. The data is not representative of any mutual fund or investment strategy. 10

11 2a. Performance analysis By separating performance into alpha and beta effects: We understand the true drivers of performance We understand if we are paying for beta timing or true alpha ALPHA BETA SEPARATION Attribution Effects Beta Alpha Total Total Health Technology Consumer Discretionary Industrials This is a hypothetical illustration which demonstrates the criteria that is used by John Hancock Investments for the monitoring of risk. The data is not representative of any mutual fund or investment strategy. Alpha is defined as a measure of performance on a risk-adjusted basis. Beta is defined as a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Alternative investing typically is subject to increased risk and loss of principal. Alternative mutual funds may not be suitable for all investors. You should consider your client's long-term investment objectives and risks before investing in an alternative investment strategy of fund. 11

12 2b. Performance analysis We can also separate the value added by long and short positions: To indicate the origin of the true alpha engine To assess manager ability to protect in downturns ANNUAL CONTRIBUTION TO RETURN (CTR) Long - Total CTR 12.8 (23.2) Short: Single Name Equities (inc. Options & Swaps) (3.5) 25.1 (18.5) (8.3) (3.3) (9.4) (15.2) ETFs, Equity Index/ETF Options, and CDS (0.3) 2.3 (4.6) (3.8) (1.5) (4.2) (7.7) Other (0.7) Short - Total CTR (3.8) 27.8 (23.1) (12.9) (4.9) (13.4) (22.7) Total Gross Performance This is a hypothetical illustration which demonstrates the criteria that is used by John Hancock Investments for the monitoring of a strategies return contribution over time. The data is not representative of any mutual fund or investment strategy. 12

13 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Market Stress Level 2c. Performance analysis A regime based analysis based on market stress can: Indicate whether diversification benefits exist when you need them most Aid the analysis of risk management techniques MARKET STRESS MONTHLY PERFORMANCE BY STRESS Europe banking uncertainty Post debt ceiling woes Program trades 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.46% 1.26% % 0 0.0% High Stress Low Stress Financial Analysts Journal September/October 2010, Volume 66 Issue 5 Previous Next Skulls, Financial Turbulence, and Risk Management Mark Kritzman, CFA and Yuanzhen Li DOI: Published Online: August 04,

14 2d. Performance analysis An analysis that is conditioned on a strong and weak factor returns: Allows us to understand the true (non-linear) distributions of returns Allows us to construct better blueprints PERFORMANCE QUINTILES RELATIVE TO U.S. DOLLAR Fund Bench Weak Dollar Strong Dollar This is a hypothetical illustration which demonstrates the criteria that is used by John Hancock Investments for the monitoring of risk. The data is not representative of any mutual fund or investment strategy. 14

15 12/20/ /31/2013 1/31/2014 2/28/2014 3/31/2014 4/30/2014 5/30/2014 6/30/2014 7/31/2014 8/29/2014 9/30/ /31/ /28/ /31/2014 1/30/2015 2/27/2015 3/31/2015 Exposure 3a. Exposure analysis Understanding how a manager adjusts exposure: Provides insight into timing ability Portfolio construction with beta-adjusted net exposure 200% 150% 100% 50% 0% -50% -100% -150% Gross long Gross short Beta Adj. Exposure This is a hypothetical illustration which demonstrates the criteria that is used by John Hancock Investments for the monitoring of a strategies net exposure over time. The data is not representative of any mutual fund or investment strategy. 15

16 1/1/2014 1/8/2014 1/15/2014 1/22/2014 1/29/2014 2/5/2014 2/12/2014 2/19/2014 2/26/2014 3/5/2014 3/12/2014 3/19/2014 3/26/2014 4/2/2014 4/9/2014 4/16/2014 4/23/2014 4/30/2014 5/7/2014 5/14/2014 5/21/2014 5/28/2014 6/4/2014 6/11/2014 Exposure 3b. Exposure analysis However, liquid alternative exposures can be difficult to measure: Due to the non-linearity of portfolio securities, Beta might not help Daily upside/downside capture relative to index provides exposure clues CREDIT EXPOSURE February downturn Poor economic news Ukraine uncertainty This is a hypothetical illustration which demonstrates the criteria that is used by John Hancock Investments for the monitoring of a strategies net exposure over time. The data is not representative of any mutual fund or investment strategy. Calculation: Average portfolio performance when credit premium is up less average portfolio performance when credit is down 16

17 4. Liquidity How many illiquid securities do you own? How long to trade? Will the trade make up more than 20% of daily dollar volume? What is the price impact (returns sensitivity to dollar volume)? Days to Price Impact % Dollar Security liquidate Percentile volume Aisin Seiki Co Ltd Cambian Group PLC Fuji Heavy Industries Ltd ITV plc Liberty Global Plc Class C Nippon Television Holdings, Inc ProSiebenSat.1 Media AG Shenzhou Int l Group Holdings Ltd Swatch Group Ltd. Registered TS Tech Co., Ltd WH Smith PLC WPP Plc day trade, but: Large relative price impact Greater than 20% volume This information should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. Risk controls and other proprietary technology do not promise any level of performance or guarantee against loss of principal. Past performance is not indicative of future results. The securities identified and described do not represent all of the securities purchased, sold or recommended for the portfolio. It should not be assumed that an investment in these securities or sectors was or will be profitable. 17

18 Evaluating alternatives Liquid alts bring a new set of challenges Robust due diligence needed Need to understand the performance blueprint Important to set expectations High potential value to be added Improved risk/reward for shareholders 18

19 For more information, contact your John Hancock Investments Business Consultant at or visit jhinvestments.com. A word about risk Clients should carefully consider a fund s investment objectives, risks, charges and expenses before investing. The prospectus contains this and other important information about the fund. To obtain a prospectus, call John Hancock Investments at or visit our website at jhinvestments.com. Clients should read the prospectus carefully before investing or sending money. John Hancock Funds, LLC Member FINRA, SIPC 601 Congress Street Boston, MA jhinvestments.com NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE. NOT INSURED BY ANY GOVERNMENT AGENCY. THIS MATERIAL IS FOR INSTITUTIONAL/BROKER-DEALER USE ONLY. NOT FOR DISTRIBUTION OR USE WITH THE PUBLIC. MF: