Monday, August 24, 2009

John Hancock Technical Opportunites Fund (JCTAX) Becomes 2nd Technical Analysis Based Mutual Fund to Launch

Good things are finally happening in the mutual fund world - albeit slowly. We've seen a slew of offerings of more "hedged" type variety (long v short) [Aug 4, 2009: WSJ - Mutual Funds Try "Hedge" Approach in Effort to Trim Stock Losses] although they still make up a tiny fraction versus the "long only" cadre ... and now we have the 2nd technical analysis based mutual fund launch. The more variety of choices of strategies... the better.

The fund, John Hancock Technical Opportunities Fund (JCTAX),[link] is already quite popular pulling in $1 million a day, despite a 5% front end load (or one could say due to that load) and a resounding 2.05% annual expense ratio. I am quite taken aback by that level of ratio by a company as large as John Hancock who has a huge asset base of assets to spread the costs of this new fund over.

As with any fund, of course the proof will be in the pudding and as with a fundamentally based fund, the talent of those running the fund will determine if their brand of TA is successful. Personally I think a mix of both fundamental and technical analysis is best, but if someone is a success solely focused on one or the other, more power to them. I am very curious to see what instruments this fund will hold but since it is not even a month old we don't have any historical reference yet.

The fund invests in equity and equity-related securities of companies located throughout the world, including the United States and emerging countries, and denominated in any currency. The technical indicators that the subadviser may consider include, but are not limited to, price, volume, momentum, relative strength, sector/group strength and moving averages. It may invest in cash and other liquid short-term fixed-income securities within a wide range.

Via Bloomberg
  • John Hancock Funds is betting its money-management clients are ready for Bollinger bands, Moving Average Convergence/Divergence and the Relative Strength Index.
  • The John Hancock Technical Opportunities Fund, started this month by the Boston-based unit of Canada’s Manulife Financial Corp., is the second in the U.S. to rely solely on stock charts for investment decisions, according to data compiled by Bloomberg. It’s among the 10 most-popular of John Hancock’s 54 funds, attracting about $1 million a day, said Keith Hartstein, the company’s president and chief executive officer.
  • John Hancock Technical Opportunities, which has a minimum investment of $10,000, can shift all its assets into cash when the managers foresee a slump in stocks. Only one other U.S. mutual fund, the $8.6 million Huntington Technical Opportunities Fund begun in May 2008, uses technical analysis exclusively.
So you can see the difference in distribution - never heard of Huntington Technical Opportunities and despite being part of a relatively large bank, it only has $8.6M in assets in about 15 months of life. Meanwhile the John Hancock fund, with an army of brokers pushing a product (to share in the load) can acquire that much within 9 days. If you are curious the Hutington fund is down 24% in the past 1 year period and has a whopping 2.94% expense ratio. (from it's holding list it simply holds various ETFs - which makes sense since that seems to be all anyone is doing nowadays when not speculating in Fannie Mae or AIG)

What was the impetus at John Hancock? One of the reasons actually is one of my main beefs with the industry - the fact a cash holding is considered "wrong", when in fact it can be a "position".
  • Hartstein developed a fund that could shift all its money out of equities after attending a conference of financial advisers at the Ritz-Carlton in Boston in January. “Listening to those folks talk about their frustrations about managers not being able to raise cash, I came back from that and starting asking, ‘Who out there has a strategy that we could leverage, that has the flexibility to raise cash?’” he said.
How did Wellington's TA strategy (the basis for the Hancock fund) do over the past year? Not great but 6 % better than the S&P.
  • Wellington’s technical analysis strategy for institutional clients lost 22 percent in the year ended June 30, beating the S&P 500 by 6 percentage points.
  • Teixeira avoided losing as much as the S&P 500 last year by boosting cash to more than 90 percent of assets and owning fewer than 15 stocks.
  • Teixeira, 42, invests in companies of all sizes and from all over the world. The fund is unlikely to own more than 75 stocks at a time, and the average holding period is less than two months.
Not too disimilar to what we're employing actually although we're even more concentrated.

  • Technical analysis, ridiculed as “alchemy” by Burton Malkiel in his 1973 book “A Random Walk Down Wall Street,” is attracting investors after techniques based on profits and valuations failed during the worst year for stocks since the Great Depression. In an e-mail today, he said he still holds that view, “except that there is some momentum at various times.”
  • “Ultimately the skepticism toward technical analysis will completely disappear,” said Jasmina Hasanhodzic, who has a Ph.D. from the Massachusetts Institute of Technology and co- wrote a book on technical analysis. In recent years, “a number of academic studies have provided both the theoretical foundation for the existence of patterns in price data and empirically validated technical trading rules,” she said.
  • Technical analysts decide what to buy and sell using price and volume trends. They shun strategies based on company financial statements and valuations pioneered by Benjamin Graham and David L. Dodd in their 1934 textbook “Security Analysis.” That puts its adherents at odds with so-called fundamental analysts who manage most U.S. mutual funds.
  • “At the core of technical analysis is the study of supply and demand, but also the risk-control aspect of it, which a lot of other disciplines don’t necessarily use,” said Frank Teixeira of Wellington Management, which runs the John Hancock fund. “That’s why technical analysis is having a little bit more of a rebirth.”
  • Technical analysis “becomes more popular the more difficult the market is,” John Roque said. “When stuff is undecipherable with regard to fundamentals, people tend to look to it for some sort of insight.”
Here is a cute side note in the Bloomberg story - just keep it in mind as you listen to analysts, pundits, and strategists wax poetic about targets.
  • In August 2007, with the S&P 500 at about 1,450 and headed toward a record 1,565.15 on Oct. 9, the average year-end forecast among Wall Street strategists surveyed by Bloomberg was 1,592.
  • At the end of the year, with the index at 1,468.36, the average forecast was for an 11 percent advance in 2008.

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