Torsten Asmus
Just a few months in the past, I wrote articles reviewing the John Hancock Preferred Income Fund (HPI) and the John Hancock Preferred Income Fund II (HPF). Total, my view on the John Hancock most well-liked earnings funds weren’t beneficial. In my view, each HPI and HPF are amortizing ‘return of principal’ funds that don’t earn their distributions. To spherical out my evaluation, I’ve determined to evaluation the John Hancock Most well-liked Revenue Fund III (NYSE:HPS), to find out whether or not it shares the identical issues as its sibling funds.
Fund Overview
The John Hancock Most well-liked Revenue Fund III is a closed-end fund (“CEF”) centered on excessive present earnings from a portfolio of most well-liked shares and most well-liked convertible securities.
The HPS fund is managed by the identical group behind HPI and HPF (Determine 1). Nonetheless, it’s the largest of the three funds with $428 million in internet property. The HPS fund makes use of leverage to boost returns. As of March 31, 2023, the fund’s efficient leverage is 39.2%. The fund charged a 1.81% internet expense ratio in fiscal 2022.
Determine 1 – HPS managed by the identical group behind HPI and HPF (jhinvestments.com)
Portfolio Holdings
The HPS fund has 129 positions with an efficient period of three.2 years. Determine 2 exhibits the fund’s asset allocation as of March 31, 2023. 42% of the fund was invested in company bonds and 56% was invested in most well-liked shares. HPS’s asset allocation is similar to its sibling funds HPF and HPI.
Determine 2 – HPS asset allocation (jhinvestments.com)
The fund’s 10 largest issuers are proven in Determine 3. Total, these comprise 56.8% of the fund, which is pretty concentrated.
Determine 3 – HPS largest issuers (jhinvestments.com)
Returns
Traditionally, the HPS fund has delivered very modest returns, with 3/5/10/15Y common annual returns of 8.5%/1.6%/4.3%/6.1% respectively to March 31, 2023 (Determine 4).
Determine 4 – HPS historic returns (morningstar.com)
Traders ought to notice that the 3Yr quantity could also be flattered by the beginning interval, March 2020, which coincided with the underside of the COVID pandemic. I consider longer-term 5 and 10Yr common annual returns is extra consultant of HPS’ earnings potential.
Distribution & Yield
The HPS fund pays a beneficiant month-to-month distribution of $0.11 which annualizes to a 9.4% ahead yield. On NAV, the HPS fund is yielding 9.9%.
Like its sibling funds HPI and HPF, the HPS fund has used return of capital (“ROC”) to fund a part of its annual distribution (Determine 5).
Determine 5 – HPS monetary abstract (HPS 2023 semi-annual report)
Given its beneficiant 9.9% of NAV distribution however mediocre long-term returns of 1.6% over 5 years and 4.3% over 10 years, the HPS fund seems to be one more amortizing ‘return of principal’ fund that doesn’t earn its distribution.
Whereas HPS’ NII shortfall relative to its distribution just isn’t enormous at $0.11 or 8.3% in fiscal 2022, traders may lose in different methods with out even realizing it. The most effective measure of whether or not a fund earns its distribution is to take a look at the fund’s long-term NAV efficiency. A high-yielding fund that earns its distribution ought to have a flat to rising NAV over time. Sadly, the HPS fund has a damaging trending NAV (Determine 6).
Determine 6 – HPS has a damaging trending NAV (morningstar.com)
HPS’s distribution historical past additionally confirms my issues, because the fund’s distribution has shrunk from $2.14 / share in 2004 when the fund was first launched to $1.32 since 2020 (Determine 7).
Determine 7 – HPS has reduce its distribution over time (In search of Alpha)
Lengthy-term traders in HPS have ended up shedding each principal and earnings.
Up to date Peer Comparability
Along with analyzing funds by themselves, I usually evaluate funds utilizing a proprietary ‘scorecard’ that traces up the necessary returns and danger metrics between totally different funds for simple comparability and distinction (Determine 8).
Determine 8 – HPS vs. friends (Creator created with knowledge from Morningstar, In search of Alpha, and firm stories)
The three John Hancock most well-liked earnings funds all carry out comparable to one another, with the HPS fund delivering barely larger returns and barely decrease volatility. Nonetheless, traders ought to notice that in comparison with friends, the John Hancock funds have a lot larger volatilities.
Returns-wise, the lively CEFs all have comparable long-term returns, with 5-Yr common annual returns clustered round 1.5% p.a. In distinction, the passive Invesco Variable Fee Most well-liked ETF (VRP) has a 5-Yr common annual return of three.4%. This result’s as a result of the VRP ETF didn’t have as massive a decline because the lively CEFs in 2022 as a result of floating price nature of its returns. Mounted price most well-liked equities commerce like bonds and declined in value when rates of interest rose.
Though the John Hancock funds pay the best distribution yields, additionally they have the most important hole between their distribution charges as a % of NAV versus their 5-Yr common annual returns of the fund.
Total, I discover the HPS fund performs barely higher than its siblings,. Nonetheless, by way of general returns and danger, it lags behind the passive VRP ETF.
Conclusion
As I suspected, the John Hancock Most well-liked Revenue Fund III is one other amortizing ‘return of principal’ fund characterised by excessive distribution yields that outpace its common annual complete return. In comparison with its sibling funds HPI and HPF, the HPS fund does carry out barely higher by way of returns and danger. Nonetheless, all of the lively CEFs centered on most well-liked shares underperform the passive VRP ETF.