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. Today is April 5th, 2022 and I've invited back two very popular guests, Emily Roland and Matt Miskin, our co-chief investment strategists here at John Hancock Investment Management. As you may remember, Matt and Emily are the architects behind our quarterly capital markets outlook piece titled Market Intelligence. And we're going to talk today about Market Intelligence.

John Bryson:
Hey, Emily, I want to start with you. We just finished the first quarter, and it was a tough one for both stocks and bonds. What stood out to you in terms of cross asset class performance and how did your calls turn out in Market Intelligence?

Emily Roland:
Sure John. So, thanks for having us today. And I think investors have been conditioned to expect pretty remarkable returns since the height of the pandemic about two years ago, and they got a little bit jostled to start the year as we're actually seeing pain across both stocks and bonds. To end the quarter, we saw a nice little rally in US equities. We had been down as much as 13% in terms of the draw down this quarter but ended the quarter down just about 4%. US value stocks were just about the best place to hold up over the course of the quarter, they were essentially flat.

Emily Roland:
But when we look at sector performance, it was just all about energy stocks. 40% return year to date across energy stocks and just seeing a backup or a rise in oil prices to start the year, on top of the Russia Ukraine crisis, which exacerbated those gains. So, definitely a challenge. Energy just simply not being a big enough sector to meaningfully help out US equities broadly. We did start to see some participation across sectors like utility and staples to end the quarter. But again, just all about those energy names.

Emily Roland:
When we look across some of the more challenged areas in the US, we saw really any place where investors were paying up for growth. Some mid and small cap growth were challenged over the quarter as some pressure came into play around that unprofitable growth space. Liquidity being removed the market. I know we'll talk about the Fed today, but that being an issue with investors pulling away from those more speculative areas. We also saw some risks present themselves as it relates to Europe. They had been doing pretty well, European Equities to start the year. And then of course the war emerged. Europe's been challenged by the more close geographic proximity to Russia, Ukraine.

Emily Roland:
The emphasis within European indices on areas like financials, where we expect to see some fairly significant write-downs or risks as it relates to Russian assets. And then again, just a really intensified lower growth backdrop playing out in Europe as a result of some of those issues related to the geopolitical conflict. And then China, really just tough, tough quarter for emerging market equities. China in particular, zero COVID restrictions in China have definitely dampen global economic or Chinese economic growth with the PMI data falling there below 50. So that's an indication to us that their economy is in contractionary territory and that's certainly being reflected in lower equity prices.

Emily Roland:
But I haven't even gone to the really bad news yet, which was that bonds really, really struggled over the course of the quarter as well. The aggregate bond index was down 6% in the quarter. And that is the third worst quarterly return since the inception of the index. The worst return was in Q1 of 1980. So inflation, rising rates, certainly eating away at bonds over the course of the quarter, making it a tough period for fixed income investors.

Emily Roland:
There was a couple places to hide. Bank loans in particular with that lower or zero duration profile, helping investors out. TIPS, doing okay as inflation came back into the forefront, but areas like emerging market debt, really taking it on the chin as a result of significant spread widening in those areas. So we did also see a major development as it relates to treasury yield curve. We saw an inverted curve at the very end of the quarter, which has some pretty significant implications, really notable dynamic there.

Emily Roland:
And then we've talked a lot about commodity prices, but again, that being a standout in terms of positive returns. As it relates to our calls and Market Intelligence, we were able to outperform modestly over the quarter. We've had an overweight to US large and mid-cap equities that's relative to treasuries, emerging market debt, international developed bonds, which are underweight for us. Within bonds we have had an overweight to bank loans, which has helped. The one real lagger there has been our overweight to investment grade corporate bonds.

Emily Roland:
So that did not help us in the quarter, but we were able to overcome that. So, I think we're pretty happy about the way we did, but of course broadly a pretty challenging backdrop.

John Bryson:
Yeah, no doubt. And there's a lot that you covered. And I want to dig in on one because on our side, on the investment consultant team, we are having a lot of conversations. And I know you two are both having a lot of conversations around fixed income. It was a really tough quarter. There's a lot of pressure, a lot of stress, and a lot of people asking, "Hey, with rising rates happening and, in the future, should I own bonds right now?" Matt, what are you telling people if they're really stressed about their bond portfolios?

Matt Miskin:
So there's two major risks that you're trying to consider in a portfolio. And one is inflation risk and purchasing power risk for clients, which is usually able to be managed through the equity side of the portfolio. And then there's recession risk. And what we're seeing investors more broadly is really not considering much their recession risk. And there's not a lot of defense left in portfolios. There's a lot of offense because if you're selling your bonds and you're moving into another asset class that does better in higher inflation, it's usually more risk on asset class.

Matt Miskin:
And what we're seeing is a very aggressive Fed. We just had another Fed speaker today saying they're going to methodically raise interest rates. And they likely need to tighten policy quite a bit to bring down inflation. And in our view that likely decreases economic activity. And over time, the Fed has never been able to take down inflation without creating a recession. Every time that there's been runaway inflation, the Fed has had to raise rates and then create a recession.

Matt Miskin:
Now we're not there yet, but we do believe you need a part of your portfolio that is there for if the Fed raises rates aggressively and does cause a recession. And so, I know it is difficult to hold bonds through this part of the cycle where the Fed is ratcheting up their hawkishness. They're telling you rate hikes are coming, bond markets pricing that in, but in the next recession, perhaps you get that return back. If you think about it, the duration component of the bond market, you're losing it on that now. But if the 10-year treasury yield goes back down in the next recession, if the Fed funds rate goes back down to around the 0%, then that return kicks back into your portfolio in a time when you really need it.

Matt Miskin:
Because that's when a recession, when your equities are actually down. I mean, stocks, I know it was a tough quarter, but I mean, they're only down 5% from all-time highs roughly now. Your bond part of the portfolio has been struggling, but we would not relinquish that part of the portfolio. We want to have that for recession risk, which we think could actually be, as soon as 2023. You're getting some really high income now, so we're looking about 4% income in parts of the bond market. Higher quality parts of the investment great corporate bond market. That's a compelling income stream.

Matt Miskin:
So we would not remove that. If anything, we'd look at it opportunistically as the year goes on. So, you can balance that portfolio and actually think about the next risk that could be on the horizon.

John Bryson:
That makes sense. And with yield at 4% right now, where we're starting to see in bonds, patience will pay off, you can make that money back, make that volatility back over time. So, nice. Hey Emily, you mentioned another thing that's more of a hot topic over the last couple of weeks, an inverted yield curve. So historically we've talked about when the curve inverts, it's been a classic signal that a recession is forthcoming. Now is it time to build in some defense or position a portfolio for recession? Matt hinted at it. I want to hear your thoughts.

Emily Roland:
So there's been a lot of inks filled over the last couple of weeks for the yield curve inversion. And to just lay out what that is. So, when we think about the two-year, 10-year treasury spread, which is the classic way to look at it, there's a number of different cuts you can take, and they all lead you to the same place. But what happens in every cycle is that the two-year treasury or the shorter end, which closely reflects Fed policy or expectations for Fed policy moves higher as the Fed starts their tightening campaign. And ultimately the 10-year treasury says the Fed's going to be moving too far, too fast based on the path of economic growth.

Emily Roland:
So that's really essentially what we've seen this time with additional really aggressive rate hikes being priced into the shorter end, the bond markets pricing in eight-ish rate hikes this year. And the 10-year treasury in our view chopping along here sideways, but ultimately moving lower as the cycle progresses. So, the thing to think about in terms of the inverted yield curve is it doesn't necessarily mean that you have to hit the panic button. It does lead to recession. Every inverted yield curve that we've had has ultimately led to a recession, but you do have some time.

Emily Roland:
In fact, we looked at the last eight major rate hike cycles in the US, and we found that equity markets peaked after the yield curve inverted, actually. So, on average 10 months after the yield curve inversion is when the equity market has peaked historically. Now averages are tricky. You don't want to get too cute with it, but it's a playbook to consider here. Remember the Feds raising rates into a solid growth backdrop, perhaps it's not accelerating quite as meaningfully right now, as it has in previous cycles due to elevated inflation.

Emily Roland:
But earnings estimates are still moving higher and there is fundamental support for stocks right now and for credit. So, the basic playbook, again, 10 months after the recession, you get the market peak. And then on average, you see recession four months later. And that fits pretty well with what Matt was talking about in terms of our base case of a recession in 2023. And I think the idea again, and Matt highlighted this, is we're not there yet. Matt joked the other day thinking about his kids in the back of the car asking, "Are we there yet? Are we there yet?" And it's just what it reminds us of right now.

Emily Roland:
We're not. Right now, we want to continue to emphasize stocks. We want to be careful about how we do that. We want to continue to emphasize parts of the credit market, core plus bond strategies. We have a satellite to bank loans right now. We still feel that's appropriate, but we want to start looking at where the puck is going and in periods where the yield curve inverts, we know there's ultimately going to be a late cycle dynamic playing out. And then a recession. You want to start thinking about incrementally adding duration to portfolios.

Emily Roland:
You want to start thinking about being a little bit more defensive on the equity side. So, over the coming quarters, as this trajectory continues to play out, that's what we'll be doing. Again, just thinking about not necessarily where we are right now, we're positioned comfortably for this current environment, but thinking about, again, leaning into those bond positions. Which is exactly frankly, John looking at the flow data, the opposite of what investors are doing. So, we're seeing everybody throwing their hands up, fleeing bonds.

Emily Roland:
It's probably going to prove to be just about the wrong time to do that. And we know from experience that investors tend to hate bonds right before they love them again. So, we're mindful of that and we want to help investors potentially avoid making any mistakes by doing that.

John Bryson:
It's a classic pattern we see over and over again unfortunately. Hey Matt, I do want to go a little bit deeper. Emily had mentioned potentially eight rate hikes by the Fed, play it forward for us. How aggressive do you see the Fed this year and into next year? What are you anticipating?

Matt Miskin:
So we're skipping a... Well, we don't have an April meeting, but then there is the May meeting. And we do see them raising rates, obviously at this point and introducing quantitative tightening. So, they're going to start unraveling the balance sheet. And if FMC, Vice Chair today, Lael Brainard 00:14:32 quoted aggressively unraveling the balance sheet. So, they could go 50 basis points. Also, we'll have to see in terms of the April data, we'll have some data here, at least in between, but they're basically again, willing to almost create a recession to dampen this inflation.

Matt Miskin:
And to us, it's really a difficult position they're in, because a lot of this inflation is supply driven. Meaning it's not a demand. It's not that it's over demand. I mean, you could say it's perhaps parts of the housing market, but the commodity spike as off late is really because of the Russia, Ukraine, war. And oil prices rising because of that. You had supply chain disruptions still, as it relates to China and COVID and lockdown, and that's causing semiconductor shortages. Which is then again, the car manufacturing is being stunted because of that.

Matt Miskin:
So raising rates, isn't going to help the supply side. It's not going to help the supply inflation that's happening. So, they're going to try to bring down the demand side of the equation and to us, it's a matter of duration, not magnitude here in rate hikes. Because the two-year yield again is already pricing in eight rate hike. So, if they do eight, then that's already priced in the bond market. If they do less than that, though, then that means a two-year treasury yield is actually too high and as is the 10-year treasury yield.

Matt Miskin:
So there's two basic scenarios we see that could happen here. One is they actually do less rate hikes than the bond markets pricing. And this would be the soft landing camp. This would be awesome. So basically, the supply chain disruptions come off, the commodities come down because the war is resolved and we're in a much better place. Inflation comes down, the Fed doesn't rates as much. But then actually that means treasury yields fall. And that's good for bonds.

Matt Miskin:
That's a soft landing. We're not putting that as a high probability at this point because COVID is really bad in China. And this war is not unfortunately improving much at all. It's still an awful situation. The hard landing camp is the Fed just got to raise rates until basically they cause a recession. And they're going to do QT, all these things. The other side of this though, again, it's brutal in 2022, probably for bonds, but then we're probably looking at a recession next year and then bonds come back. So there's two different scenarios that really could play out, but hardly enough because bonds have priced in such strength and tightening so much hawkishness from the Fed.

Matt Miskin:
There's room for disappointment, I guess in terms of rate hikes, which would be bullish for bonds. But our outlook is they're right now, not playing the soft landing game. They're playing the hard landing game and they're going to be raising rates aggressively over this year. They're going to start unraveling the balance sheet. But in our view in the next six months, they're going to realize that growth is slowing significantly and that eventually they pull off the breaks and they let the economy run on its own two feet, which I think they should actually do sooner, but because inflation's elevated, they don't have another choice.

Matt Miskin:
And then eventually we have to see where the economy stands then. Emily highlighted a lot of the cross-asset implications of that, but that's our outlook in essence for the Fed from here.

John Bryson:
So just to clarify, Matt, what is your higher probability, a soft landing or a harder landing? Just want to make sure I heard you right.

Matt Miskin:
Hard landing is the higher probability.

John Bryson:
Is the higher. Okay. All right.

Matt Miskin:
I wish that soft landing was a bigger probability and things change here quickly. COVID came, left, came again I mean, things change quickly as relates to COVID. Things change quickly as it relates to geopolitical risk. You could wake up tomorrow and there could be a huge diminishing of this war. It doesn't look like that at this moment, but those would be really welcome developments for everything else, obviously.

John Bryson:
Right. And all in all, if in this environment you'd probably rather be better positioned, slightly defensively than aggressively, prepare for the worst-case scenario, if it's more likely than not. So good overview. Last question. So, Emily, I know that the Q2 version of Market Intelligence was just release. Any big changes you want to highlight for our listeners.

Emily Roland:
So we are staying pat right now. What we're doing in Market Intelligence is we are continuing to emphasize stocks modestly over bonds. We do think that equities can do the heavy lifting here. In portfolios we look at economic growth still being solid, although decelerating and still solid. We see next 12-month earnings growth continuing to move up. So, the fundamental backdrop is there more so in the US than anywhere else. So, we are emphasizing the US in portfolios based on those better earnings growth prospects. But there is potential slowdown ahead, as we've been highlighting on call today.

Emily Roland:
And we want to be careful about how we position portfolios for that. It's a bit of an unusual backdrop because you have elevated inflation. So, you want inflation protection, but you also have decelerating growth. It's a kind of odd combination. So, for inflation protection, we're still looking at an overweight to US value stocks. We actually want to move down in market cap to midcap equities. On the value side, that's really where you're going to get a lot of that great operating leverage, industrial sector exposure. And it's going to allow companies that have greater pricing power to potentially outperform as inflation persists here.

Emily Roland:
But we want to barbell that with quality. So, we want to own sectors and stocks that have great earnings prospects, good organic growth drivers, great balance sheets and return on equity. So that's bringing us to a combination of value and quality. We and then on the fixed income side, we've talked a lot about this progression of the cycle yield curve inversions. And we want to look at areas like core and core plus bonds that tend to do better across fixed income in these periods.

Emily Roland:
So again, a difficult quarter, really difficult quarter for investment grade corporate bonds, but we do see them to have the potential to rebound as the cycle moves into the later stages here. So, we're excited about the new version of Market Intelligence. We have a lot of new content, particularly in our fixed income section. So please check it out on our website.

John Bryson:
Well, folks, it's a delicate time to be investing, but Matt and Emily are all over it. So, you should check out their next call. You should follow them on LinkedIn and on Twitter. And if you are interested in more volatility management, reach out to your local business consultant, John Hancock's here to help. Our investment consultants can look at your portfolio and our website's got a bunch of great information keeping you up to speed.

John Bryson:
So everybody thanks for listening to the podcast. Matt and Emily, thanks for sharing your insights today. We very much appreciate it. Folks, if you want to subscribe, please subscribe to Portfolio Intelligence on iTunes or visitor our website, jhinvestments.com. And thanks so much as always for listening to the show.

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. Today is March 17, 2022. Happy St. Patrick's Day to all the Irish out there. I am joined today by David Cohen and Josh White of Boston Partners, who are both managers on John Hancock Disciplined Value Fund. Earlier this year, the fund hit its 25th anniversary, and we're very excited about the success it's had and the opportunities going forward. Just to give you a little bit of info, since fund launched in 1997, it's outperformed its benchmark by 30 basis points, and the large value peers by 150 basis points each year, so we're very happy with the performance. So I have David and Josh on. Guys, welcome to the podcast.

David Cohen:
Hey, John.

Josh White:
Hey, John. Thanks for having us on today.

John Bryson:
All right. Excellent. I want to talk about the opportunity in value, and maybe David, I'll start with you. What's the short-term and the long-term case for value right now?

David Cohen:
Sure. I think to really understand the short- and the long-term cases, you need to understand the context of growth versus value in the markets. Everyone knows we've gone through this unprecedented period of outperformance of growth stocks over the past decade, particularly from 2017 through 2021, but why? Really, if you rewind the clock, we were in a disinflationary environment. You had interest rates that were very low around the world; negative in Europe. You had low levels of inflation, scarce growth that was focused almost exclusively in the tech sector. That forced investors further and further out the risk curve, and they started to capitalize earnings far into the distant future, which led to this massive expansion in multiples for growth stocks.

David Cohen:
If you look at where we are today, the investment landscape completely changed during COVID. You had massive stimulus during COVID, which included the Fed's balance sheet doubling. You had stimulus checks being handed out to consumers and support provided to businesses. Then, if you fast-forward to really the fall of 2020, we got the vaccines, and demand recovered very, very quickly. Today, where are we? We have record job openings with just 4% unemployment, CPI of 8%, a housing market that's on fire, spiking oil and gas prices, with very high food and materials prices. And then you have persistent supply chain issues that are likely to continue for at least the next 12 to 24 months. That backdrop is very supportive for value investments.

David Cohen:
So over the short term, growth is in price discovery mode. I have a former colleague and a good friend that runs a high-profile growth fund at a competitor shop, and he used to tell me that the old rule of thumb was you buy growth stocks at five times sales, and then you sell them when they get to 10 times. Well here we are; last cycle we got to 30 to 80 times sales multiples for hyper-growth stocks. That's unsustainable, and it's unwinding, and we think over the short term, that'll continue to unwind as the Fed tightens. Then on the flip side of that, value is attractive. If you look at the P/E multiples for large-cap value, it's in line with its historical mean, as opposed to these growth stocks, which are trading well above long-term multiples.

David Cohen:
Then if you just look over the longer term, we think that the setup for value has some very attractive sectors. You have a mix of secular and cyclical drivers in the healthcare, tech, energy, and industrial space, which we think are going to play out over time.

John Bryson:
Excellent. I think we can dig into some of those going forward. But Josh, I want to pull you into the conversation. Let's talk about the Boston Partners value approach. How did it start, and maybe how has it evolved over time?

Josh White:
Sure. Boston Partners was founded over 25 years ago, and we really had one investment philosophy and process across all of our strategies. That remains as true today as it was back then. We invest exactly how we tell our clients that we invest. We don't drift from our process or philosophy, no matter what the market throws at us. And really, our specialty is value investing, with an equal emphasis not only on value, but also business fundamentals and business momentum.

Josh White:
I think a few key points to sort of take away from this discussion, for each stock that's in our portfolio, we have a clear alpha thesis that's developed by analyzing the business fundamentals, the business momentum, and the valuation. We have very low employee turnover and a lot of investing experience within our organization, so personally, I've been with Boston Partners for almost 16 years now, beginning as an analyst and then working my way up through the system internally. We joke that we like to find people early in their career and sort of brainwash them into our style of investing, and it's a joke, but there's some truth to that joke as well.

Josh White:
But I think that when you look across all of our products, there's very consistent trends in performance, and I think that that just shows that our results are driven more by the consistent application of our philosophy and our process by the entire investment team rather than the contributions of a key person. Then finally, we invest a lot of our own money into our funds, so our interests are very much aligned with those of our clients.

Josh White:
When you think about the style of value investing that Boston Partners employees, it's really rooted in a concept that we call the three circles. You should expect our funds to have more attractive valuation, quality, and momentum characteristics than the market and the benchmark. We think this is important, because stocks that generally trade at a discount to their intrinsic value outperform expensive stocks over longer time periods. Second, companies that have very strong business fundamentals outperform lower-quality businesses. Then third, stocks with positive momentum and tangible catalysts will outperform stocks with negative momentum. If you can be better on all three of those factors, you've tilted the probabilities in your favor before you even layer in the bottom-up alpha thesis on each individual holding.

Josh White:
Very early in the value cycle, you tend to see deep value outperform dramatically for a short period of time. Then as you move into the middle innings, you want to own good businesses with positive business momentum that trade at valuations below their intrinsic value. That's where we think we are right now, and it's really the sweet spot for our strategy, but we'll talk about, in a little bit more detail, about different markets and how our strategy performs in those markets historically. But we think our style generally has a more consistent return characteristic and is less prone to sort of those feast and famine periods in a way that a deep value investor might be.

John Bryson:
David, you were on my podcast at the beginning of the COVID pandemic. That was a period of stress, and I want to ask, in these periods of stress, there's going to be this pressure to keep up with what's going on in the market. How do you and the team manage that pressure and stick with your approach versus trying to chase opportunities and returns?

David Cohen:
I think it comes down to the discipline of the organization. I mean at Boston Partners we really have one specific process and philosophy that we've employed since the beginning of the organization, since it was founded in the '90s, and we just go back to that. We're looking for very specific things in stocks and investments. We're looking for attractive valuation, we're looking for quality businesses, and we're looking for businesses that are improving. We easily keep ourselves on track by just focusing on those things, and if we can do that, and everybody in the organization is focused on working the process, we think that we can continue to deliver for shareholders.

John Bryson:
All right. That makes sense. Josh, I want to talk to you and maybe start around current opportunities. We've seen a lot of volatility. Are opportunities popping up? What do you like? Josh, talk to us about healthcare.

Josh White:
Sure. So when we look at some of the more traditional defensive sectors in the marketplace, healthcare really stands out to us as one that has the most attractive valuation characteristics. A lot of the others, consumer staples and utilities and rates, they've been bond proxies for the past decade plus. So as interest rates have been falling toward zero, the valuations at these businesses have expanded and are not as attractive as they have been historically. On the flip side of that, healthcare really today represents in new attractive value opportunity, but also has those defensive characteristics that we're looking for. So within healthcare, I think you can really break down the universe of stocks into two momentum buckets. The first would be the COVID beneficiaries. You could include companies that produce COVID vaccines, companies that produce COVID tests, companies that process COVID tests, and then you have those that have had COVID-related headwinds.

Josh White:
And for those companies that have headwinds, the last two years have seen some issues either in the form of higher costs for healthcare services or slower growth at pharmaceutical and med device companies. And this is just because doctors’ visits were slower than usual, healthcare facility staffing has been an issue, and there's really a long laundry list here of issues that these companies have been facing.

Josh White:
So what we're seeing right now is that earnings momentum is starting to recover while many of these businesses are trading at very inexpensive valuations. And then in addition, as I mentioned, they have those defensive attributes that are going to serve us well, if the economy slows going forward. So we've been adding to our exposure in this sector.

John Bryson:

David, again, back to the podcast we had, you had me thinking about buying oil around 30. I wish I had listened. Let's talk about energy right now. It's a really interesting sector. What's going on there? Where are you finding opportunities? Where are you being careful?

David Cohen:
Yeah. John, I remember doing the podcast with you. It was late spring or early summer of 2020, the day that oil prices went negative in the United States.

John Bryson:
Yeah, yeah.

David Cohen:
As a long-term energy analyst, I never thought I'd see that, but we did. And we had believed as an organization for a few years now that we were entering a period of sustainably higher oil and gas prices, and that's certainly materialized particularly over the past few months. Underinvestment in energy infrastructure over the past decade has finally caught up with the world. We have a full-blown energy crisis in Europe, with skyrocketing gas prices, high oil prices, fears of just shortage. Russia is a major oil and gas supplier to Europe and the rest of the world, and there's a threat to that source of supply, and we just haven't invested enough to come up with alternative sources of oil and gas supply.

David Cohen:
Replacing that production if Russia happens to go off will be virtually impossible. We're drawing down inventories rapidly. We're scrambling to bring back production from Iran and Venezuela. The Saudis are reluctant to grow production, and the U.S. investors have become very disciplined. So as long as demand stays strong and capital investment in the sector stays disciplined, we're likely to see high prices with the potential for spikes.

David Cohen:
You know, if you look at it from an investment perspective, energy stocks, particularly the exploration and production companies, represent extraordinary value. A lot of these stocks trade at 15% to 20% free cash flow yields, some of them as high as 30%, and the balance sheets are phenomenally strong, and they have great cash return profiles. Many of the companies moved to defined cash distribution frameworks. They invest to hold oils flat, or for modest growth for oil volumes, but the vast majority of free cash flow goes back to shareholders, through dividends and stock buybacks. That's a profile we like a lot at Boston Partners, and we've invested fairly heavily in the E&P sector.

David Cohen:
If you think about it from a risk perspective, the main risk is that demand falls due to a recession, but there needs to be a structural fix for this problem. We have to invest, or we have to find substitution, and either of those things is going to require significant CapEx over the next several years, and it's not going to be coming from the U.S., so we think that the energy tightness and the potential for spikes is going to go on for several years.

John Bryson:
Now, David, Josh had actually mentioned tech as one of the best opportunities, so energy's a classic one, healthcare we talked about, but tech you don't hear a lot, and I think a month ago, maybe two months ago, he would never have said tech is an interesting value opportunity. Dig into that for our clients. What's going on right now that really identifies some options for you?

David Cohen:
Yeah. We like the setup for technology a lot. On a secular basis, we think that these companies are set up to grow faster than the market, and to deliver very high margins and be very cash generative over time. And really, it starts with what's going on in the broader economy in terms of digitization and just this move to a data economy. Every sector of the economy is becoming digitized and electrified. If you look at consumer devices, it's obvious with cellphones, but even in the industrial space. I had a call with a large industrial company yesterday, and they were talking about how they need to hire 15,000 people over the next five years, and there just aren't that many people around, so they're looking heavily at automation and robotics to help offset some of the labor demands.

David Cohen:
Well, what needs to happen for that technology to be deployed? You need to invest in semiconductors, because semiconductors are the enabling technology for everything that's going on in terms of this digitization trend. We have a very heavy weight to semiconductors in the portfolio, semiconductor capital equipment companies. These are very high-quality businesses, high margins, gross and EBITDA margins, very cash generative, great cash conversion, and they give a lot of the cash back to shareholders. We think the secular trends in technology are strong, and the valuations are quite attractive. We see low- to mid-teen P/E multiples with sort of 6%, 7%, 8% free cash flow yields in some cases, for businesses, again, that have high returns, high margins, that are likely to outgrow the economy for the better part of the next decade.

John Bryson:
Love it. At the beginning of the podcast, I mentioned it's the 25th year anniversary of the strategy, and we actually had a podcast scheduled for earlier in the year, but with all the volatility going on, as we talked, we said, "You know what? We got work to do." You guys had work to do, finding opportunities. "Let's push the podcast a little bit." But what I'd ask both of you, and David, maybe I'll start with you, is as we face these volatile times, and volatility's not going away, you've been doing this for decades. What's your advice for investors to navigate these volatile times?

David Cohen:
I think the main thing that comes to mind; it's really two things. One is stick with what you do best, and as I mentioned earlier, Boston Partners has a very defined process, and I think particularly now, that momentum circle is what keeps us out of trouble. You might have a stock that's extremely high quality or that is extremely attractively valued, but the momentum is just negative, and sometimes you have to take shots on stocks that have negative mo. if they're unusual opportunities, but I think being disciplined around all three circles for us is really the thing that keeps us on track.

John Bryson:
Excellent, excellent. Josh, what would you share with our listeners about what you've learned; how to navigate these volatile times?

Josh White:
Yeah, so I would just, again, reiterate what David said, is you need to have a disciplined process and you need to stick to it. When you spend years and decades developing and refining a process, you just have to recognize all the time, and effort, and brainpower that went into developing that process, and when something in the market catches you by surprise or you start to doubt it, you just have to stick to it and realize that you've been through periods like this before. You've stuck to this process, and it's worked in your favor, so I think avoiding emotional decision-making and really trying to understand the way that markets work, the way that investor psychology works, and just trying to keep your head above that and not get caught up in the noise is super important in times like this.

John Bryson:
It's great advice. Guys, I want to congratulate you and the team on a great 25-year stretch. Looking forward to another 25. Thanks for joining me today as always. Nice to connect with both of you. Folks, if you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes or our website at jhinvestments.com. You can catch up with all the stuff that we're talking about. There's a lot of things going on in the marketplace. We want to keep you up to speed. Thanks for listening to the show. We'll talk to you next time.

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.
Price to earnings (P/E) is a valuation measure comparing the ratio of a stock’s price with its earnings per share.
The Russell 1000 Value Index tracks the performance of publicly traded large-cap companies in the United States with lower price-to-book ratios and lower forecasted growth values. It is not possible to invest directly in an index.
Value stocks may decline in price. Foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability. Large company stocks could fall out of favor, and illiquid securities may be difficult to sell at a price approximating their value. Please see the fund’s prospectus for additional risks.

Clients should carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. To request a prospectus or summary prospectus with this and other important information, please call us at 800-225-6020, or visit us at jhinvestments.com.
All data is as of 3/31/22.

John Hancock Disciplined Value Class I performance without sales charge. One year return 13.73%, three year 14.27%, five year 11.10%, 10 year 11.66% since inception 9.11%. Russell 1000 Value Index, one year return, 11.67%, three year 13.02%, five year 10.29%, 10 year 11.70% since inception 8.77%. The large value category performance one year 12.97%, three year 13.21%, five year 10.56%, 10 year 10.87%. Expense ratio Class I gross 0.77% net 0.77%.
The past performance shown here reflects reinvested distributions and the beneficial effect of any expense reductions, and does not guarantee future results. The sales charge for Class A shares, reflects the maximum sales charge of 5.0%. For Class I shares, there is no sales charge. 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. For the most recent month-end performance, visit jhinvestments.com.

Returns prior to the commencement dates of Class A and Class I shares are those of Robeco Boston Partners Large Cap Value Fund (the predecessor fund) and have not been adjusted for expenses; otherwise, returns would vary.

The Russell 1000 Value Index tracks the performance of publicly traded large-cap companies in the United States with lower price-to-book ratios and lower forecasted growth values.

It is not possible to invest directly in an index.

Performance data shown excludes fees and expenses. The performance data would be lower if such fees and expenses were included. Past performance does not guarantee future results.