Putting credit research at the center of a fixed‐income portfolio is the key to robust active management inside the $20 billion John Hancock Bond Fund. In his interview with Portfolio Intelligence host John Bryson, fund manager Howard Greene of Manulife Investment Management describes how he and his team do credit research differently than many competitors. With individual analysts providing full sector coverage up and down the credit‐quality spectrum, Howard outlines how this approach helps analysts evaluate the upper bounds of high yield and the lower tiers of the investment‐grade market segments. According to Howard, this can help uncover more frequently overlooked value opportunities while enabling more agnostic views on where to find the most attractive sources of yield.
John Bryson:
Hello, and welcome to the Portfolio Intelligence podcast. I’m your host, John Bryson, head of investment consulting at John Hancock Investment Management. As always, the goal of this podcast is to help investment professionals deliver better outcomes for their clients and their practice. Today, I’m joined by Howard Greene of Manulife Investment Management. Howard is a senior managing director and senior portfolio manager at Manulife. And he is the lead portfolio manager of John Hancock Bond Fund, John Hancock Investment Grade Bond Fund, and their counterpart SMAs. Howard and his team run over $20 billion globally, and he has over 40 years of investment experience. Howard, welcome to the show.
Howard Greene:
Hi, John. Happy to be here.
John Bryson:
All right, now, Howard, on this call, and in many calls in podcasts, you hear a lot about the importance of equity research, but rarely do we discuss the importance of fixed-income research. Can you tell us why it is important?
Howard Greene:
Oh yes, fixed-income research is just as important to us as equity research is to the equity side. And I guess credit research can get lost in the broader macro discussions that people always have around interest rates, but for us, it’s a very different game. For us, it’s very important because we’re really a bottom-up manager, and we really need to fully understand the credit fundamentals of the companies we invest in and recognize how they’re trending. Obviously, credit is a large source of our value added. We then really have to be comfortable with and identify the relative value of any given security and determine its place in the fund, because, as most people know, about 40% to 50% of our value added really comes from the security-specific aspect of our research, so clearly it’s critically important.
John Bryson:
So let’s talk about the structure. There are different ways to structure research. How does Manulife have it structured and why is that important?
Howard Greene:
I really believe that we look at credit a bit differently than many of our peers, and that’s a real hallmark and differentiator for us. We have a few large sector teams, each with a team sector leader, and inside those groups, each individual covers their entire industry, from AAA down through CCC. They’re really industry specialists as opposed to an investment-grade analyst or a high-yield analyst, and this really helps to provide a holistic assessment of their entire sector. I mean, for us in a core-plus fund that can use both investment-grade and high-yield assets, it’s that middle ground at the well-rounded BBBs, the higher-end BBs, that I think often gets overlooked by either investment-grade or high-yield analysts. The investment-grade analyst shies away from the bottom end of the spectrum.
Howard Greene:
High-yield analysts tend to be more yield oriented and focused more on maybe B and CCCs. We go up and down the entire spectrum, and we’re entirely agnostic as where we really get that next bit of value added. The other reason I think it’s really important is when you have a whole industry perspective, you understand the really large players in the space—they tend to be dominant investment-grade players. And then we also really understand the entire logistical and/or competitive supply chain and competitive environment that all these companies compete in. So we understand the impact of the large players against the small players in the sector. I think it gives us a much broader view and allows us to dig wherever we can find value added.
John Bryson:
So if the credit research is focused on sectors, how are they in portfolio management—yourself—working together?
Howard Greene:
Very closely. Now, I think we have all the critical touch points during the course of our day from our early morning trader-led meetings that identify what the flows have been overnight, what new issuers are coming to market that day that we’re already aware of. We gather again later in the morning for an analyst-led credit research meeting to do deeper dives on those new issuers that are coming into market or secondary issues that we see out there. We do ongoing broad sector reviews. All this research is memorialized in a research portal, but it’s really important to understand that no one area, whether it’s a portfolio manager, an analyst, or traders, has a lock or monopoly on idea generation for a portfolio. So, analysts need to be really sharp and understand the credits, the fundamentals, driving valuation. We work then very closely with them. Traders help us understand what we can source into the portfolio or source out when it’s time to sell, what type of float is available in credits. So it’s a fully integrated approach; everybody has a really vital role in that process.
John Bryson:
Now, I mentioned at the beginning, you have over 40 years of investment experience. How has fixed-income research evolved over those 40 years, and where do you see it going in the future?
Howard Greene:
Well, I think it’s evolved in so many different ways. I think that the greatest way that it’s evolved is that the size of the market is far greater than the number of markets we all participate in or exist. And I don’t want to date myself, but I think when I started in this business, the high-yield market was still quite young and immature and evolving. And then I look at the mortgage-backed securities market. We always think about credit research, but we shouldn’t forget securitized asset research, everything in mortgages and asset-backed securities—a lot of those markets were in their infancy or they didn’t even exist at the time. So the proponents of opportunities are far greater, your need and capabilities of a portfolio manager to understand how they all interplay matters, merging markets, global markets, and the breadth and depth of information out there is far greater.
Howard Greene:
Which I think also, perhaps, makes markets a little more efficient, which forces you to be a little sharper on your toes. And the reason that I do what I do—a lot of our team members do what we do—is we never tire of the hunt for sourcing value added and getting new ideas in the portfolio. And we’re structured in such a way, given the size of our portfolios and how we look at the view, but there’s really very few opportunities that we can take advantage of in the marketplace. And I think that’s the real driver and motivator for the members of our team. If they find opportunities that look good to them, and we think had value added, we can get those on the portfolios, and it matters. And I think that’s sort of the thrill of what we do and the big motivator every day.
John Bryson:
Great. Let’s keep talking about, going forward, as it stands right now, November 23, we’re hearing news of vaccines for COVID; we still don’t have the U.S. elections completely finalized. What are your thoughts on those two topics and their impacts to the fixed-income markets going forward?
Howard Greene:
Yeah, it’s interesting. I think the election’s over, this one person hasn’t quite realized it, although we obviously do have the senate races still to resolve in Georgia. I think we got a real balanced outcome here, and it’s typical of Americans. It’s always a battle toward the middle, so I think policies going forward would be a little more predictable, I hope. And with regard to whether it’s taxation, fiscal spending, things that can really impact the market, we’re kind of hopeful in that regard. There’ll be more predictability around it. We had someone in the White House who had a bit of an unorthodox management style the last four years, and I’ll leave it at that. As far as COVID, it looks like we’re really making phenomenal process with the vaccines, therapeutics, and diagnostics. So, as an individual and as an investor, you have to be really encouraged and optimistic about that, but it’s going to take a while to work out.
Howard Greene:
The important thing to realize from the investment perspective is the markets get there first. The markets will reprice and benefit, and we’re seeing that in various sectors of the market that are more reactive to a COVID solution, starting to reprice higher. It doesn’t mean we can all go outdoors and unmask and start traveling again, but we’ll get there. And that’s all a good thing. So,Ithink it’s a good thing. Remember, as investors, we’re always paid to peek around the bend as best we can. And I think the best thing I can say is better times are coming, we need to be patient. And once again, markets will get there before we truly get to experience it. But, you know, we’re always paid to observe change at the margin and everything is sort of pointing in a more favorable direction.
John Bryson:
Excellent. And I just want to take one step back. When I think about some of the investors that we talk to on a regular basis, they see headlines from the Fed: We’re going to keep rates low for longer. And if we look at this low rate environment, sometimes we hear people say, “Why bother having fixed income in the portfolio if yields are so low?” What would you say to that?
Howard Greene:
Well, you need to have fixed income because, first of all, it’s my livelihood [laughs]. Second of all, the Fed’s on hold for the next year, so they’ve pretty much told us as much. Powell, I think, has done a phenomenal job in transparency and has said we’re going to let the economy, should we get there, run a little hot, so to speak. We’re not going to start tightening as we think we get the 2% growth or 2% inflation, right? We want to get there and then we’ll react from there. Let the moving averages of either growth or inflation stay above the target for a little bit before we begin to tighten. That’s a different message than we’ve had in the past. They said we could be on hold until 2023, and if I’ve learned anything over all my years in this business, it’s don't fight the Fed, right?
Howard Greene:
And so interest rates, likely to stay very steady. Yeah, we have a zero lower bound, but we can still generate a decent amount of income. Again, portfolios we run can invest along the entire yield curve. That doesn’t mean we’re in invested at every point along the yield curve, but it allows us to generate some income, provide ballast against the equity market, and there’s no guarantee that that market only goes straight up. And it’s a market that, I’m not the best judgment, but may not necessarily be overly cheap and it may be priced into the bond market in a fuller valuation than perhaps we’re used to. I think there’s a more critical question. I think that’s really around cash and very short duration. We’re going to have to move out the yield curve to generate returns. We’re here, and we’re waiting for it, right? For all those investors to come in.
Howard Greene:
We do have ways to protect value, generate value, in this environment. Getting the right securities in the right sectors, buying the right parts of the yield curve, as we always say, goes a long way to adding value. We’re just trying to get small increments during, as we go along, during each investment period. And then be really ready to shift and reposition, anticipate the shifts and pitfalls. You know, that’s a way off, but credit markets will continue to improve from here. You don’t want to miss out. There’s a lot of investors still sitting in cash, a lot of money still in very short duration alternatives. And I think that’s very expensive insurance. And by that I mean you’re giving up a lot of yield income potential to carry in a market where, I think, for a while, we really don’t have to worry about interest rates going away from us to the high side.
John Bryson:
Well, Howard, it’s really fascinating to hear about your experiences and how the fixed-income research landscape has kind of evolved. I want to thank you for sharing your wisdom. And I want to tell our audience, if you want to hear more, please subscribe to Portfolio Intelligence on iTunes, or visit our website at jhinvestments.com to read our viewpoints on macro trends, portfolio construction techniques, business-building ideas, and much, much more. Thanks so much for listening to the show.
Disclosure:
This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA,SIPC. The views and opinions expressed in this podcast are those of the speaker, are subject to change as market and other conditions warrant and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.
Ratings are from Moody’s, if available, and from Standard & Poor's or Fitch, respectively, if not. Ratings composition will change. Individual bonds are rated by the creditworthiness of their issuers; these ratings do not apply to the fund or its shares. U.S. government and agency obligations are backed by the full faith and credit of the U.S. government. All other bonds are rated on a scale from AAA (extremely strong financial security characteristics) down to CCC and below (having a very high degree of speculative characteristics). “Short-term investments and other,” if applicable, may include fund receivables, payables, and certain derivatives.
Ratings are not meant as recommendations or intended to be a sole basis for investment decisions. Ratings are subject to change.