Fund Highlight: John Hancock Shareholder Yield Fund (JGYAX) - November 3, 2010
The management team of John Hancock Global Shareholder Yield Fund (JGYAX) takes a unique approach to stock selection. Many funds look at dividends and stock buybacks as important ways that companies “give back” to shareholders, but it is such a central tenant at this fund that they have included it in the name.
Shareholder yield in this instance “refers to the collective financial impact on shareholders from the return of free cash flow through cash dividends, stock repurchases, and debt reduction.” With a primary objective of providing investors with a high level of income (capital appreciation is a secondary objective), the fund focuses on companies that offer high cash dividends, are generating additional free cash flow, and have share buyback programs and debt repurchase plans in place. The belief is that a portfolio built around these items will result in less risk and, thus, higher risk-adjusted total returns.
The fund takes a global focus when investing and uses the MSCI World Index as its benchmark, seeking specifically to provide a yield in excess of that index. Under normal market conditions, at least 40% of the fund’s assets will be invested outside the United States, with up to 20% invested in companies within emerging markets. Management also has no limitations with regard to the market capitalization of the companies in which it invests, making this a true “go anywhere” fund. Up to 20% of the portfolio can be invested in debt securities, including high-yield, or “junk”, bonds. It is important to note that, despite the “go anywhere” nature of the fund, it is not a focused fund, as it holds a widely diversified portfolio.
When examining individual stocks, management seeks securities of companies with solid long-term prospects, attractive valuations, and adequate liquidity, in addition to the “shareholder yield” criteria noted above. A combination of bottom-up stock research and top-down analysis is used. Generally speaking, management favors investing in companies whose stock valuation is below what is believed to be the fundamental value of the company, using price-to-cash flow and price-to-book ratios, among other valuation metrics, as yardsticks.
Stocks will be sold, or a position reduced, if management doesn’t believe the company will be able to meet performance expectations or if management’s expectations have already been achieved.
From a top down perspective, management believes that the private sector is currently in a good position to make the spending and investment commitments necessary to foster economic growth. These underpinnings include, in management’s view, strong corporate balance sheets that possess substantial cash balances. However, there is a keen awareness of level of the debt being taken on within the developed nations of the world, on the whole, noting that the United States and governments across Europe are going to have to make difficult fiscal and monetary policy decisions to correct this situation. As such, management believes that high-quality, dividend-paying corporations are solidly positioned to profit and grow. This is particularly true for companies with global brands and platforms, such as recent holdings Anheuser-Busch InBev (BUD), Philip Morris International (PM), and Microsoft (MSFT – Free Analyst Report).
The fund’s global focus places it in Value Line’s Global Equity objective group. With a focus on dividend income, it isn’t surprising that the fund’s risk profile is well below that of stated the objective. In fact, the fund’s standard deviation, a measure of price volatility, is almost 30% below that of the group’s average. Beta, too, is well below the group’s norm (beta is a measure of price movement relative to a broader index).
Over the fund’s relatively short history, it has been at the head of the pack and brought up the rear. Through the first nine months of this year, however, it has been a top performer. Moreover, its trailing three-year performance through September puts it in the top 15% of all Global Equity funds that Value Line covers. Note, though, that this impressive relative performance is backed up by a 4% annualized loss.
The fund’s expense ratio is reasonable, but it is a loaded offering, making it only appropriate for those using a financial intermediary. Still, if a mixture of current income and relatively subdued risk is desired, this fund is worth further review.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.