BOSTON, Sept. 19 /PRNewswire-FirstCall/ -- In the wake of the recent unprecedented and extreme volatility in the preferred stock market, John Hancock Funds Portfolio Manager for our equity closed-end funds, Gregory Phelps, offers the following observations:
Recent market turmoil
Historic events over the past week have caused the largest-ever sell-off among investment-grade preferred securities, especially those issued by financial companies.
-- On September 8th, the U.S. Treasury announced that Fannie Mae and Freddie Mac were being placed in conservatorship. In doing so, the government suspended dividends on a combined $36 billion of preferred shares outstanding, almost 10% of the entire preferred marketplace.
-- By the end of the day on September 9th, the Merrill Lynch Preferred Stock DRD-Eligible Preferred Index, which had included the above named preferred stocks, was down 11%, the biggest two-day drop in more than a decade. Just one week later, on September 15th, Lehman Brothers announced that it had filed for Chapter 11 bankruptcy, with $8 billion of its outstanding preferred stocks ceasing dividend payments.
-- More than $40 billion of outstanding preferred securities were wiped out in the space of a week, making it the worst crisis, by any measure, to hit the preferred market in its history. In response, selling pressures mounted as individual investors indiscriminately sold their preferred holdings and opportunistic hedge funds, short sellers and fund groups were forced to liquidate due to redemptions and the need to raise capital.
-- The recent announcement of the Federal Reserve Board's takeover of AIG also leaves that company's outstanding preferred stock in jeopardy of default.
Investment implications
While the incidence of investment-grade rated preferred stock defaults had been very rare, the last week has raised the risk of owning preferred stock, especially those issued by financial firms. While we believe these recent defaults are one-of-a-kind, special situations that are unlikely to be repeated, we also believe that it will take a sustained rally in financial common stocks before preferred stocks recover from their current volatility, because they are now being valued as common equity surrogates.
The top and bottom of any market cycle are difficult to call. We aren't aware of anyone who can do it consistently with any measure of accuracy over longer periods of time. What we do know is that the distribution rates on our closed-end funds that invest significantly in preferred-stock are at their highest levels in recent years. With preferred stock prices rebounding since September 18, 2008, consider the following:
John Hancock Fund Name (Ticker) Annualized Distribution Rate (as of 9/18/08) At Net Asset At Market Value Value Patriot Premium Dividend Fund II 6.39% 8.83% Preferred Income Fund 14.10% 13.64% Preferred Income Fund II 14.08% 17.02% Preferred Income Fund III 13.38% 16.83% Tax-Advantaged Dividend Income Fund 11.31% 14.87%
Current annualized distribution rate is the latest monthly dividend rate as an annualized percentage of net asset value/market value as of September 18, 2008. Distributions are made from current income, supplemented by realized long-term capital gains, to the extent permitted by law, realized short-term capital gains and, to the extent necessary, return of capital. Investors should understand that a return of capital is not a distribution of income or gains from the fund.
We think that these historically high distribution levels, coupled with preferred stocks' current historically cheap valuations, may make them compelling to investors with a longer-term horizon whose objectives combine high levels of income with the potential for capital appreciation. Please consult with your financial advisor before making an investment decision.
About John Hancock Funds
The Boston-based mutual fund business unit of John Hancock Financial Services, John Hancock Funds manages more than $54.8 billion in open-end funds, closed-end funds, private accounts, retirement plans and related party assets for individual and institutional investors at June 30, 2008. John Hancock Funds are distributed by John Hancock Funds, LLC, member FINRA. For more information, please visit http://www.jhfunds.com/.
John Hancock Financial Services is a unit of Manulife Financial Corporation, a leading Canadian-based financial services group serving millions of customers in 19 countries and territories worldwide. Operating as Manulife Financial in Canada and Asia, and primarily through John Hancock in the United States, the company offers clients a diverse range of financial protection products and wealth management services through its extensive network of employees, agents and distribution partners. Funds under management by Manulife Financial and its subsidiaries were Cdn$400 billion (US$393 billion) at June 30, 2008.
Manulife Financial Corporation trades as 'MFC' on the TSX, NYSE and PSE, and under '0945' on the SEHK. Manulife Financial can be found on the Internet at http://www.manulife.com/.
The performance data contained within this press release represents past performance, which does not guarantee future results. Performance, especially for short time periods, should not be the sole factor in making your investment decision. Statements in this press release that are not historical facts are forward-looking statements as defined by United States securities laws. You should exercise caution in interpreting and relying on forward- looking statements because they are subject to uncertainties and other factors which are, in some cases, beyond the fund's control and could cause actual results to differ materially from those set forth in the forward-looking statements.
