What's next for markets still grappling with coronavirus fears? Michael Scanlon and Jeffrey Given, portfolio managers of John Hancock Balanced Fund, explore strategic positioning amid recent volatility and discuss their outlook for equity and bond markets.
Speaker 1 – Michael J Scanlon, Jr., CFA: (00:02)
Well, Jeff, we've been doing this a long time together where we certainly haven't seen many weeks like what we saw last week. So we thought it would be a good idea to give everybody an update on the portfolio. So with the Balanced Fund we have quite a bit of flexibility, our ability to dial up and down the equity weight, the positioning of the equity portfolio in the fixed income portfolio. Late last year, December and into even the early part of 2020 we decided to reduce the equity weight in the portfolio. Our view really was that was that valuation had become stretched in the market had almost been priced for perfection. So as we looked at it, this was the first time since 2011 that we actually dropped the equity weight below 60/40 which would be our neutral benchmark on the fixed income side of things.
Speaker 2- Jeffrey N. Given, CFA: (00:42)
Yeah, very similar, it came to down to valuation. It was over the last several years we've seen valuations richen up, in specifically investment-grade corporate credit and high-yield corporate bonds to levels that we haven't seen in a long time. Over the last several years, we've been reducing our exposure there just because of where the valuations are and have gotten down, especially in high yield to the lowest levels that we generally get to around that 9% level.
Speaker 1 – Michael J Scanlon, Jr., CFA
Yeah. And as we talked a number of times about the decisions over making the portfolio similar to the valuation concerns that Jeff just expressed on the fixed-income side, the equity side was a lot of the same story. The positioning and the equity side, it really evolved to where we had a very material bias towards the U.S. We weren't using a lot of that flexibility to go outside of the U.S. and in addition to that, we had drifted up. in market cap and had a very material bias towards a megacap names in the U.S., which tend to have a little bit more stable of a return profile and that they do pay more material dividends and buy backs a lot of stock.
Speaker 2- Jeffrey N. Given, CFA: (01:45)
With the recent volatility we're seeing now, it turns all eyes are on the Fed to see what they're going to do. The market's starting to price in a near certainty that they'll cut rates in March. With expectations up to 50 basis points and a lot more talk around the concerted effort on a global basis to provide liquidity to the system, lower rates, some relief from the effects of the virus as well as any other monetary policies as they needed. So I think central banks in general are going to be very accommodative. That's led to the Treasury market really pricing in a lot of moves has seen rates drop to really all-time lows here in the U.S. and continued negative levels across the globe. Eventually that will mean a better environment for riskier asset classes. Right now what we were seeing is high-yield spreads have widened out quite a bit and growing to levels that are starting to look quite attractive. Investment-grade corporate bond spreads are have widened down. However, it's really been in the midpoint of the range that we've seen over the last three to four years.
Speaker 1 – Michael J Scanlon, Jr., CFA
Thanks Jeff. And on the equity side of things, you know, have certainly seen quite a bit of a correction in the last five business days or so. The multiple on the S&P 500 has dropped from about 19 times down to about 17 and a half times earnings. And we've only started to see the top down numbers for the S&P 500 start to come down. You haven't seen a lot of analysts start to cut estimates as much as they will be. So this could actually turn out to be another year where we have flat earnings growth in the S&P 500 and it's really hard to see us rebounding in a V-shaped formation back to kind of 19 times earnings.
So for us right now, we're continuing to focus on individual companies, trying to find the right names that fit how we invest in individual stocks. And if we do start to find those ideas and we want to increase the equity weight, we can really do it through adding to existing names, adding new names to the portfolio, or just overall adding to the equity weight in the portfolio.
Speaker 2- Jeffrey N. Given, CFA:
I think that's a very good point as well. I think bottom up analysis is even more important in this environment in fixed income as well as equities than other environments.