BTO - BTO: Consistent Relative Performance But When Is The Question

2023-08-03 14:50:53 ET

Summary

• John Hancock Financial Opportunities Fund focuses on the financial industry with a portfolio of 177 stocks, primarily regional banks.
• The BTO closed-end fund has demonstrated strong relative performance and consistent returns over the past decade.
• The fund's heavy exposure to regional banks poses risks, but it has fared better than the S&P Regional Banking ETF in recent years.

I saw a bank that said "24 Hour Banking," but I don't have that much time. - Steven Wright.

The John Hancock Financial Opportunities Fund ( BTO ) is essentially a closed-end fund, or CEF, that focuses on the financial industry. With a portfolio comprising 177 stocks, primarily regional banks, it offers investors an opportunity to gain exposure to this particular sector.

Financials have broadly been beat up but had a nice comeback in July, and I'd rather be in Financials than Technology here for a relative trade long term. I'm just not convinced the timing for an absolute bet is here right now.

BTO's Performance: An Overview

Over the past decade, BTO has demonstrated an impressive annualized return and consistently outpaced its peers. Strong relative performance is an encouraging sign.

BTO's Portfolio: A Snapshot

Although BTO's name doesn't explicitly state it, the fund is heavily inclined towards regional banks. However, the latest holdings do spring up a few surprises. The fund's top five holdings include:

1. Ares Management Corp.
2. KKR & Company, Inc.
3. M&T Bank Corp.
4. WSFS Financial Corp.
5. Regions Financial Corp.

The fund has not significantly altered its sector allocation. Banks, Capital Markets, and Thrifts & Mortgage Finance continue to dominate the fund's portfolio.

The Regional Banks Conundrum

BTO's significant exposure to regional banks has brought along its share of risks and rewards. While the fund has benefited from the positive performance of these banks in the past, the recent crisis in the regional banking sector has posed a challenge.

For instance, the unfortunate demise of Silicon Valley Bank, which was heavily reliant on its venture capital and technology company clientele, brought to light the inherent risks associated with regional banks. This event has led to speculation about potential similar scenarios in other regional banks, causing a ripple effect in the market.

The primary concern is that banks are not offering investors enough interest relative to Treasuries. Simultaneously, banks have experienced mark-to-market losses on their bond holdings, leading to further stress in the sector. And if we do get a credit event, I suspect there's a lot more pain to come to broader risk-assets, where regional banks certainly would not be spared.

If we look at how BTO relative to the SPDR® S&P Regional Banking ETF (KRE), we can see it has fared a lot better since 2020.

What Lies Ahead for BTO?

Given the current scenario, BTO's ability to weather the storm and deliver consistent performance will be closely watched. The fund has recently decided to invest more in fixed income for lower volatility and yields that potentially meet or exceed the fund's distribution.

While John Hancock Financial Opportunities Fund has effectively managed the premium to a small discount, the regional banking issues are still in the early phase. As net interest margins compress and recession write-offs surface, BTO's performance likely becomes challenged in the context of what I expect would be a period of secular outperformance in the sector overall. Nevertheless, John Hancock Financial Opportunities Fund remains a fund to watch, armed with a robust track record, and a strategic approach towards navigating the financial sector.

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