FIXED INCOME. Finding new strategies for uncertain markets

Transcription

1 FIXED INCOME Finding new strategies for uncertain markets

2 Three things to know about today s bond market 1 Declining interest rates have driven bond returns higher for more than 20 years In general, bonds prices move in the opposite direction of interest rates, and that s been good news for fixed-income investors. For the past two decades, longer-term interest rates have been steadily declining, sending prices on existing bonds higher. But it s a trend that can t last forever, and when rates do rise, bond investors could discover that their portfolios contained more risk than they intended. 2 With interest rates near historic lows, rate increases could lead to big losses Because the income offered today in many bond market sectors is so low, it could take years for coupon payments to make up for the capital losses bondholders could suffer due to rising rates. According to one study, in an average rising-rate scenario (where rates rise 3% over about three years), bondholders in the highest-rated securities would lose a total of more than 22% of their portfolios value during that time. 1 At today s levels, interest rates can t get much lower 3 n 10-year U.S. Treasuries DEC 1994 Mexican peso crisis 1995 n Federal funds rate 1996 OCT 1997 Asian currency crisis AUG SEP 1998 Long-Term Capital Management collapse MAR 2000 Tech bubble bursts 1999 DEC 1998 President Clinton impeached Pursuing higher income through longer duration is a risky proposition Reaching for higher yields by investing in bonds with longer maturities only compounds the problem. Longermaturity bonds have a higher duration, 2 which measures sensitivity to interest-rate changes. The higher a portfolio s duration, the bigger the loss it would suffer in a rising- rate environment. A long-duration strategy could be risky 4 n Duration (years) 1 n Expected price change (%) 2 if rates rise 3 3% Barclays U.S. Aggregate Bond Index 10-year U.S. Treasuries When Bonds Fall: How Risky Are Bonds if Interest Rates Rise? Welton Investment Corporation, Duration measures the sensitivity of the price of bonds to a change in interest rates. 3 U.S. Department of the Treasury, Federal Reserve Bank of St. Louis, as of 6/30/15. For illustrative purposes only. The benchmark for short-term lending, the federal funds rate is periodically set by the Federal Reserve Board and reflects the interest rate banks charge each other for overnight loans. 4 Barclays Capital, John Hancock Research, as of 6/30/15.

3 RECESSION 3/01 11/01 SEPT 2001 September 11 terrorist attacks DEC 2001, JUL 2002 Enron, WorldCom bankruptcies MAR MAY 2003 Iraq invasion AUG 2005 Hurricane Katrina RECESSION 12/07 6/09 SEP NOV 2008 Lehman Brothers bankruptcy, QE1 DEC 2009 European sovereign debt crisis begins MAR 2011 Tsunami hits Japan OCT 2010 QE2 AUG 2011 U.S. debt downgraded MAR 2012 Greece defaults MAY 2013 Fed s tapering comments OCT 2014 QE purchases end SEP 2012 QE Consider this: The Fed injected nearly $500 billion into the markets in to help keep interest rates low. U.S. Federal Reserve balance sheet (in trillions) $4.50 But the U.S. Federal Reserve (Fed), which is responsible for setting the nation s monetary policy, scaled back its monthly asset purchases throughout 2014 as it wound down the latest iteration of its six-year-old quantitative easing program, ending purchases altogether last October. $0.93 Without the Fed s purchases propping up demand and with many market watchers predicting an increase in the benchmark for short-term rates sometime this year the question for investors is, how can I prepare my portfolio for a rising-rate environment? Source: U.S. Federal Reserve, as of 12/31/14. 3

4 Look beyond the mainstream for new opportunities Over the past 20 years, during the four longest periods of broadly rising interest rates, U.S. Treasuries and core U.S. bonds were among the worst performers. More specialized sectors, on the other hand, generally fared well, in part because they are less reliant on declining interest rates to fuel performance. Not all sectors of the bond market are dependent on declining rates to generate returns Growth of $100,000 through various interest-rate cycles Periods of rising rates highlighted below $500, ,000 OCT 1998 MAY 2000 Change in: Fed funds rate +0.69% 10-year U.S. Treasuries +1.85% Best/worst returns: Emerging-market debt 19.58% 10-year U.S. Treasuries 3.12% JUN 2003 JUN 2007 Change in: Fed funds rate +4.03% 10-year U.S. Treasuries +1.66% Best/worst returns: High-yield bonds 9.86% 10-year U.S. Treasuries 0.75% JAN 2009 APR 2010 Change in: Fed funds rate +0.06% 10-year U.S. Treasuries +1.44% Best/worst returns: High-yield bonds 49.16% 10-year U.S. Treasuries 6.46% 300, , , Source: Morningstar Direct, Western Asset Management Company, as of 6/30/15. Emerging-market debt is measured by the J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified Ind High-yield bonds are measured by the Bank of America (BofA) Merrill Lynch U.S. High Yield Master II Index, which tracks the performance of globally issued, U.S. dollar-denominated high-yield bo grade bonds in government, asset-backed, and corporate debt markets. Mortgage-backed securities are measured by the Barclays U.S. Mortgage-Backed Securities Index, an unmanaged index com notes are measured by the S&P/LSTA Leveraged Loan Index, which tracks returns in the leveraged loan market and captures a broad cross section of the U.S. leveraged loan market, including dollar Credit 1 5 Year U.S. Index, which tracks the performance of U.S. government and international, U.S. dollar-denominated, investment-grade corporate bonds with maturities between one and five most recently issued 10-year U.S. Treasury note. The index is rebalanced monthly. In order to qualify for inclusion, a 10-year note must be auctioned on or before the third business day before the la * The rising-rate periods included in the illustrations above are 9/30/98 5/31/00, 5/30/03 6/29/07, 12/31/08 4/30/10, and 7/31/12 12/31/13, the four longest periods of broad interest-rate increa

5 AUG 2012 DEC 2013 Change in: Fed funds rate 0.06% 10-year U.S. Treasuries +1.53% Best/worst returns: High-yield bonds 9.68% 10-year U.S. Treasuries 6.11% $506,542 Expand your fixed-income horizons Not only have sectors beyond the mainstream tended to outperform the broad-based Barclays U.S. Aggregate Bond Index in rising-rate environments, today they generally offer higher yields as well. High-yield bonds Debt issued by lower credit quality companies, typically less sensitive to interest rates and driven more by corporate fundamentals Floating-rate notes Interest payments on these bank loans made to corporations float along with interest rates, paying higher coupons as rates rise Emerging-market debt Annualized return during rising rates* Yield 6.52% 6.59% 6.24% 5.25% Consider this: Not all bond market sectors move in unison. When it comes to building a diversified portfolio, correlation is one of the most important gauges. Correlation measures how similar the performance of two investments has been over time. Adding investments with low or negative correlations to a portfolio makes it more likely to weather a variety of market conditions. $347,768 $270,074 $268,639 $267,232 $252,851 $250,903 Debt issued by governments and corporations within developing economies, often buttressed by strong demographic trends, such as growing consumer classes Short-term credit Bonds with shorter maturities are less sensitive to rising rates since bondholders can expect to have their principal repaid relatively soon 6.09% 5.74% 4.29% 1.89% Correlation 10 years, as of 6/30/15 Floatingrate notes Barclays U.S. Agg Bond Index 10-year U.S. Treasuries Mortgage-backed securities Income payments to these bonds are derived from pools of mortgages, and as housing fundamentals improve, the risk of defaults tends to decrease Core U.S. bonds 3.48% 2.78% High-yield bonds Emergingmarket debt Short-term credit U.S. investment-grade bonds dominated by government securities whose returns are driven by rate movements 10-year U.S. Treasuries 3.18% 2.39% Mortgagebacked securities Core U.S. bonds Some of the most heavily traded securities in the world, 10-year U.S. Treasuries are the de facto proxy for intermediate-term interest rates 3.75% 2.35% ex, which tracks U.S. dollar-denominated Brady bonds, loans, and Eurobonds of external debt instruments in the emerging markets. nds. Core U.S. bonds are represented by the Barclays U.S. Aggregate Bond Index, which tracks the performance of U.S. investmentprising 15- and 30-year fixed-rate securities backed by the mortgage pools of Ginnie Mae, Freddie Mac, and Fannie Mae. Floating-rate -denominated, U.S.-syndicated loans to overseas issuers and excluding those in default. Short-term credit is measured by the Barclays years. 10-year U.S. Treasuries are measured by the BofA Merrill Lynch 10-year U.S. Treasury Index, a one-security index comprising the st business day of the month. It is not possible to invest directly in an index. Past performance does not guarantee future results. ses during the past 20 years. Source: Morningstar Direct, as of 6/30/15. Correlation is a statistical measure that describes how investments move in relation to each other, which ranges from 1.00 to The closer the number is to 1.00 or 1.00, the more closely the two investments are related. 5

6 Broadening your fixed-income portfolio can help you avoid concentrated risks Adding more types of fixed-income investments to your portfolio doesn t necessarily mean taking on more risk. In fact, in the example below, a broadly diversified bond portfolio generated more income and higher returns than an index-oriented portfolio over the past 10 years, and did so with comparable volatility. A diversified fixed-income portfolio produced higher returns with lower duration Performance results Traditional index-oriented portfolio Diversified bond portfolio n Core U.S. bonds n Emerging-market debt n High-yield bonds n Mortgage-backed securities 100% 50% n Floating-rate notes n Short-term credit Income generation 2.39% 3.42% Average duration 5.63 years 4.69 years 10-year annualized return 4.44% 5.24% Standard deviation (three years) 2.95% 2.70% Ending value of $100,000 invested 10 years ago (rebalanced quarterly) $154,379 $166,641 6 Source: Morningstar Direct, as of 6/30/15. This is for illustrative purposes only. Diversification does not guarantee a profit or eliminate the risk of a loss. Standard deviation measures performance fluctuation, may not be indicative of future risk, and is not a predictor of returns. Fixed-income investments are subject to interest-rate and credit risk; their value will normally decline as interest rates rise or if a creditor is unable or unwilling to make principal or interest payments. Investments in higher-yielding, lower-rated securities include a higher risk of default. Foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability. Certain market conditions, including reduced trading volume, heightened volatility, and rising interest rates, may impair liquidity, the ability of a fund to sell securities or close derivative positions at advantageous prices. Currency transactions are affected by fluctuations in exchange rates. Frequent trading may increase fund transaction costs and increase taxable distributions. The use of hedging and derivatives could produce disproportionate gains or losses and may increase costs. A portfolio concentrated in one sector or that holds a limited number of securities may fluctuate more than a diversified portfolio. Loan participations and assignments involve additional risks, including credit, interest-rate, counterparty, liquidity, and lending risk. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, and may be subject to early repayment and the market s perception of issuer creditworthiness. Absolute return funds are not designed to outperform stocks and bonds in strong markets. There is no guarantee of a positive return, of the fund achieving its objective, or that volatility-reducing strategies will be successful. Fund distributions generally depend on income from underlying investments and may vary or cease altogether in the future. Please see the funds prospectuses for additional risks.

7 A range of fixed-income investment options John Hancock Investments offers a range of traditional and alternative fixed-income portfolios that are designed to generate attractive returns in a variety of market conditions. Average annual total returns as of 6/30/15 1 (%) 1 year 3 year 5 year Life of fund Why this fund? John Hancock Bond Fund (JHNBX) Managed by John Hancock Asset Management 11/9/73 Class A (without sales charge) Class A (with 4.0% sales charge) Net expense ratio (what you pay): 0.93% 2 Gross expense ratio: 0.98% John Hancock Core High Yield Fund (JYIAX) Managed by John Hancock Asset Management 4/30/09 Class A (without sales charge) Class A (with 4.0% sales charge) Net expense ratio (what you pay): 1.08% Gross expense ratio: 1.08% John Hancock Emerging Markets Debt Fund (JMKAX) Managed by John Hancock Asset Management 1/4/10 Class A (without sales charge) Class A (with 4.0% sales charge) Net expense ratio (what you pay): 1.30% Gross expense ratio: 1.30% John Hancock Floating Rate Income Fund (JFIAX) Managed by Western Asset Management Company 1/2/08 Class A (without sales charge) Class A (with 2.5% sales charge) Net expense ratio (what you pay): 1.16% Gross expense ratio: 1.16% John Hancock Short Duration Credit Opportunities Fund (JMBAX) Managed by Stone Harbor Investment Partners 11/2/09 Class A (without sales charge) Class A (with 2.5% sales charge) Net expense ratio (what you pay): 1.17% Gross expense ratio: 1.17% John Hancock Strategic Income Opportunities Fund (JIPAX) Managed by John Hancock Asset Management 4/28/06 Class A (without sales charge) Class A (with 4.0% sales charge) Net expense ratio (what you pay): 1.11% 2 Gross expense ratio: 1.13% This high-quality core bond holding offers broad diversification across sectors while actively managing yield-curve positioning and overall risk exposure. This high-yield fund uses a value-oriented philosophy, combining top-down and bottom-up analysis to identify opportunities while also managing risk. This fund combines investments in sovereign and corporate debt from emerging-market countries where the managers believe improving economic fundamentals and favorable demographic trends provide attractive opportunities. The management team uses rigorous fundamental research to identify the most attractive opportunities in floating-rate loans, a unique asset class that can help reduce a portfolio s interest-rate sensitivity. The fund s flexible strategy can help diversify a core fixed-income portfolio, and the low duration target may help hedge against rising interest rates. This flexible multi-sector fixed-income fund invests in a variety of global credit sectors to pursue current income and seek to maximize total return. Ask your advisor Ask your financial advisor how fixed-income funds from John Hancock Investments can help you better position your portfolio for today s markets. 1 Prior to 3/12/12, John Hancock Core High Yield Fund was not open to investments from the general public. The inception date for John Hancock Strategic Income Opportunities Fund s oldest class of shares, Class NAV shares, is 4/28/06. Its Class A shares were first offered on 1/4/10. Returns prior to this date are those of Class NAV shares that have been recalculated to apply the gross fees and expenses of Class A shares. Effective 2/3/14, returns for Class A shares of John Hancock Bond Fund, John Hancock Core High Yield Fund, John Hancock Emerging Markets Debt Fund, and John Hancock Strategic Income Opportunities Fund have been adjusted to reflect the reduction in the maximum sales charge from 4.5% to 4.0%, for John Hancock Floating Rate Income Fund from 3.0% to 2.5%, and for John Hancock Short Duration Credit Opportunities Fund from 4.5% to 2.5% 2 Represents the effect of a fee waiver and/or expense reimbursement through 9/30/15 for John Hancock Bond Fund and 12/31/15 for John Hancock Strategic Income Opportunities Fund. Expenses are subject to change. The past performance shown here reflects reinvested distributions and the beneficial effect of any expense reductions, and does not guarantee future results. Returns for periods shorter than one year are cumulative, and results for other share classes will vary. Shares will fluctuate in value and, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance cited, and can be found at jhinvestments.com or by calling

8 John Hancock Investments A trusted brand John Hancock has helped individuals and institutions build and protect wealth since Today, we are one of America s strongest and most-recognized brands. A better way to invest As a manager of managers, we search the world to find proven portfolio teams with specialized expertise for every fund we offer, then apply vigorous investment oversight to ensure they continue to meet our uncompromising standards. Results for investors Our unique approach to asset management has led to a diverse set of investments deeply rooted in investor needs, along with strong risk-adjusted returns across asset classes. A fund s investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the fund. To obtain a prospectus, contact your financial professional, call John Hancock Investments at , or visit our website at jhinvestments.com. Please read the prospectus carefully before investing or sending money. Connect with John Hancock jhinvestmentsblog.com 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. MF PIFIBR 7/15