December 2014

Viewpoints
Elements of style: diversifying
by investment philosophy

Manager A Peer Group percentile

83
Robert M.rank:
Boyda
1/1312/31/13
Head of Global
Manager B Peer Group percentile
rank: 18
Asset Allocation
John Hancock
Asset Management
1/1410/31/14

/0910/31/14
-10

In managing target-date and target-risk portfolios, we go beyond combining different asset

classes. Our edge includes an ability to allocate to multiple portfolio teams with distinct,
harmonizing philosophies and investment stylesall within a consolidated one-fund solution.
Manager
A PeerHancock
Group percentile
rank: 28
At John
Asset Management,
weve built a $120 billion asset allocation business upon
Manager B Peer Group percentile rank: 97
the belief that a fully diversified portfolio should incorporate multiple investment styles into
each asset class.1
Manager A Peer Group percentile rank: 35

This nuanced approach

to diversification affords
-5
0
an advantageous
perspective on how
different styles of
management interact
with one another in an
asset allocation portfolio.

Our multi-asset, multistyle,

approachrank:
also36brings together a range of
Managermultimanager
B Peer Group percentile
complementary
investment10strategies into a 15
single portfolio. This
nuanced approach
to
5
20
25
diversification affords an advantageous perspective on how different styles of management
interact with one another in an asset allocation portfolio. Over the years, weve found that, no
matter how sound its merits or skilled its manager, no single investment strategy works all of
the time. Diversifying by investment philosophy can make a portfolio more durable.
No one strategy fits all markets
To illustrate the point, lets look at two different approaches to investing in international value
stocks. While each one falls within the same Morningstar category, foreign large value, neither
fund shares the same pattern of returns. They posted similar returns for the five-year period

Manager A complements Manager B

24.40%

n Manager A

22.78%

n Manager B
n MSCI EAFE Index

15.21%
6.65%

1.31%

6.62%

6.52%

2.81%
6.41%

Peer group percentile rank

1/1/1312/31/13
1/1/1312/31/13

1/1/1410/31/14
1/1/1410/31/14

11/1/0910/31/14
11/1/0910/31/14

Manager A

83

28

35

Manager B

18

97

36

Source: John Hancock Asset Management, 2014. Past performance does not guarantee future results.

ended October 31, 2014, but they took different routes over
the course of that time horizon. When the market, which well
define as the MSCI EAFE Index,2 went up, Manager A tended to
trail its peers, including Manager B. In 2013, when the market
returned nearly 23%, Manager A landed in the bottom quartile
of its peer group while Manager B was a top-quartile performer. On the other hand, when the market declined, Manager
A held up better than most of its peers, including Manager B.
This pairing is a good example of the stabilizing benefit that
two different philosophies, practiced within the same asset
class, can bring to a portfolio. Manager A runs an all-weather
value style, which seeks to outperform over time by limiting
downside risk in falling markets. Manager A is the better bet
during the late stages of a cycle and heading into the next
downturn. Taking a different approach, Manager B runs a
deep value strategy that seeks stocks trading at temporarily
depressed prices. In the early rebound phase of a market cycle,
Manager B ought to do quite well.
While each of these styles had bright and dull moments over
the past five years, the combination fostered patience and a
smoother ride, allowing us to realize the full value of the
underlying managers outperformance; both managers ended
up near the top third of their shared peer group.
Intra-asset class tilts emphasize themes
We can also fine-tune a portfolios exposure by allocating to
managers with philosophies that fit a particular investment
theme. Each portfolio we manage has a specific objective, and
we tend to keep the broad, strategic asset allocation relatively

stable in order to meet the expectations for the mandate.

However, we can be more nimble and tactical in making
portfolio adjustments within asset classes. Indeed, the mix of
underlying styles and managers representing each asset class in
the portfolios we manage does tend to shift more frequently,
depending upon the ebb and flow of the markets and changes
in our outlook.
For example, in 2011, we began incorporating what we call a
defensive equity theme into client portfolios throughout our
asset allocation suite. We expect most defensive equity styles to
deliver stock market-like returns over a full cycle, with perhaps
20% or 30% less volatility. This exposure, which we continue to
maintain as of this writing, provides additional ballast to the
portfolios at a time when we feel the incremental stability will
benefit shareholders.
We can make granular adjustments within themes, too. We
have exposure to a range of different strategies under the
broader defensive equity umbrella, from those emphasizing
stocks of high-quality, dividend-paying companies with
long-lived assets on their balance sheets to those that tactically
manage downside risk through short positions or options
contracts. We continually refine substyle weightings to reconcile
a portfolios mandate with our latest market views.
A well-constructed multi-asset portfolio is more than the sum of
its parts. When brought together, multiple managers that view
the world differently can generate complementary patterns of
return that increase a portfolios resilience and provide a
broader range of potential sources of uncorrelated alpha.

1 John Hancock Asset Management, as of 9/30/14.

2 The MSCI Europe, Australasia, and Far East (EAFE) Index tracks the performance of publicly traded large- and mid-cap stocks of companies in those regions. Total returns are calculated net of
foreign withholding tax on dividends. It is not possible to invest directly in an index.
Diversification does not guarantee investment returns and does not eliminate the risk of loss.
This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. The information contained herein is based on sources believed
to be reliable, but it is neither all inclusive nor guaranteed by John Hancock Investments.

Foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social
instability. Value stocks may decline in price. Hedging and other strategic transactions may increase volatility and result in losses if not
successful. The stock prices of midsize companies can change more frequently and dramatically than those of large companies. Please
see the funds prospectuses for additional risks.
A funds investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus
contains this and other important information about the fund. To obtain a prospectus, contact your financial professional, call
John Hancock Investments at 800-225-5291, or visit our website at jhinvestments.com. Please read the prospectus carefully
before investing or sending money.

John Hancock Funds, LLC Member FINRA, SIPC

601 Congress Street Boston, MA 02210-2805 800-225-5291

jhinvestments.com

NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE. NOT INSURED BY ANY GOVERNMENT AGENCY.
MF208654

MSAAVP 12/14