Leo Zerilli could be forgiven for being sick of the sight of Boston Logan International Airport. It dominates the view from his office at John Hancock’s Seaport District headquarters. Also, given the head of investments’ focus on finding top portfolio managers from across the world, he is likely a frequent visitor.
But Zerilli is enthusiastic about the view and even more so about his international hunt for top investors to manage strategies for John Hancock Investments.
‘We are not limited to managers who have product here in the US,’ he says. ‘Thinking that all the investment talent in the world resides in your own home country is a bit naïve. There are obviously very good investment professionals and firms located outside of the US. We are looking for the best teams we can find wherever they reside.’
Zerilli and his team of 61 are responsible for finding new managers and monitoring existing ones who run and subadvise John Hancock Investments’ 118 funds, which has $136 billion in assets under management. Around 46 of these funds are run by the firm’s affiliate company Manulife Asset Management. The remainder are run by 28 external asset managers.
Zerilli says the affiliate company does not get an easy ride and undergoes the same due diligence process as any other manager would before being appointed to run a fund.
‘The due diligence is the same and is as robust regardless of whether it is an external or internal affiliate manage,’ he says.
A personal process
The firm starts with a quantitative approach and looks at managers’ track record over as long a time frame as possible to evaluate performance over different maret environments.
This can involve stitching together a manager’s performance from across various shops and products.
As ever though, the final decision comes down to people.
‘Ultimately, you are hiring the person,’ Zerilli says. ‘You are trusting those people that they have a process, that they have a philosophy that they follow and do not deviate from.’
In order to best understand how a manager works, Hancock interviews their whole team.
‘You want to talk to the portfolio manager but we also get deeper with other individuals,’ Zerilli says. ‘We often ask for several meetings, one with the portfolio manager by themselves and then we meet with analysts without the manager there so we can ask similar questions and figure out how the whole thing operates. We are really trying to get a 360 degree view of that whole team before we hire them.
‘It’s a very intense personal process to see how the manager thinks about investing. What we are really looking for is conviction and whether they add alpha to client portfolios. You don’t need to be a good presenter, you just need to be able to communicate what you do on a daily basis.’
Thinking that all the investment talent in the world resides in your own home country is a bit naïve
One manager who he believes fits this billing is Citywire AAA-rated John Boselli of Wellington Management.
‘He is so passionate about his product and the way he invests,’ Zerilli says. ‘The way he talks about the markets and individual stocks is very confidence inspiring. We hired him to manage that international growth portfolio and have had tremendous success with him.’
The fund is up 6.6% over three years on a total return basis, placing it eighth out of 108 fund in its Citywire category, Equities – International Multi-Cap Growth.
For both international and US growth funds, Boselli took over as manager after Hancock decided to switch from GMO.
Wellington won the international growth mandate in 2014 but the US growth fund was a much more recent change, coming in September of this year. The fund was previously called the John Hancock US Equity fund and was managed by David Cowan, Chris Fortson, Ben Inker, and Sam Wilderman of GMO.
In June this year GMO announced plans to cut its workforce by around 10%, which led to all the above bar Inker leaving the firm. The information on GMO is not from Zerilli but from news reports and regulatory filings.
Another successful Hancock fund has come from Zerilli and his team’s global approach. The John Hancock Global Absolute Return (Gars) fund is subadvised by Edinburgh-based Standard Life Investments follows the same strategy as that firm’s wildly popular offering, which is available outside of the US.
‘Gars is an interesting case study,’ he says. ‘We were thinking about our own product line and after 2008 wanting to offer some sort of protection to clients in target risk and target date portfolios. We came across Standard Life and visited them and they had a lot of resources managing this and we found they were second to none. It just hit that nexus where there was a lot demand and we were bringing a firm like Standard Life to market, which was very well known in Europe but not well known at all in the US, and it’s been a tremendous success.’
The fund has suffered a dip in performance in 2016 but Zerilli is unworried by this. He argues that clients will always need downside protection and that the more fundamental approach favored by the fund’s manager Guy Stern and his team will likely come good again.
Closer to home Zerilli highlights Boston Partners, which runs four funds for Hancock, as another selection that has worked out.
‘Boston Partners has been unbelievably successful for both our firms,’ he says. ‘We were looking for a manager in the value space and Boston Partners had a mid-cap and large-cap value portfolio, which were relatively small, they were in the $50 million to $120 million range.
‘We liked the way they invested and adopted their funds. Between the mid cap and large cap we have $24 billion of assets under management.’
Two more recent additions to the platform have been Dimensional Fund Advisors, which subadvises all Hancock’s range of multi-factor exchange-traded funds (ETFs) and Trillium Asset Management, which runs the firm’s first two environmental, social and governance (ESG) funds.
The first six ETFs were launched in September last year with a further five added since. The firm has filed with the Securities and Exchange Commission to launch a 12th: the John Hancock Multifactor Developed International ETF. Dimensional funds are available to US investors, but while factor-based they are active funds in a 40 Act wrapper. The Hancock funds are ETFs that follow indices built by Dimensional.
‘We like Dimensional’s approach to multi-factor investing and we can see the history of success both from performance and the trust that clients have given them,’ Zerilli says.
‘We have over $500 million. I think that is a success for a brand new ETF provider and we are approaching a tipping point where we will start to see lots more success.’
It's a very intense personal process to see how the manager thinks about investing
A number of active managers have launched passive offerings, largely smart beta, in the last year or so as active revenues continue to come under threat from the rise in popularity of passives.
Zerilli acknowledges the difficulties faced by some active managers but believes they are likely to see flows again as the market environment shifts back to one where fundamentals matter more.
‘We have been in a prolonged period where active management has struggled versus the benchmark, but I don’t think that lasts forever,’ he says.
‘The industry is still hiring active managers where they can truly add value over a passive approach. But where active managers have been hiding behind small amounts of alpha or factors – a lot of that money has moved. Why pay 80 basis points when you can pay eight? It seems reasonable. But I do think things could go too far where money moves all to passive market cap weighted indexes. All ETFs that track a benchmark underperform, by design, and at some point that will become unacceptable to clients.
He adds: ‘There will be a lot of growth in strategic beta as an alternative to active management while not going all the way to passive.’
Meet the team
An ESG future
Another trend which Zerilli believes is here to stay is ESG. In June it launched its first two ESG funds: the John Hancock ESG All Cap Core fund and the John Hancock ESG Large Cap Core fund, both of which are subadvised by Trillium Asset Management’s Stephanie Leighton, Cheryl Smith, and Elizabeth Levy.
It has also filed for a further two: the John Hancock ESG International Equity fund, which will be subadvised by Boston Common Asset Management, and the John Hancock ESG Core Bond fund, which will be subadvised by Breckinridge Capital Advisors.
‘It’s early days for our products but it's a real trend today,’ he says.
Although many have focused on millennials’ preference for this funds, Zerilli highlights that flows are also likely to come from women, who control an increasing amount of household wealth, and high-net-worth investors with philanthropic ambitions.
Some professional buyers spoken to by Citywire are sceptical about ESG funds and argue their offerings have seen low flows, but Zerilli does not agree.
‘The fact we will have launched four products by the end of the year is an indication that we think it’s real and it will be growing over time.’