BPOPO - BTO: Continual Failure To Cover The Distribution Means That Caution Is In Order

2024-06-05 15:17:25 ET

Summary

• John Hancock Financial Opportunities Fund invests primarily in the banking sector, which historically has shown a positive correlation between interest rates and net interest margins.
• The fund has a high current yield of 9.33%, making it attractive for income-seeking investors compared to other sector-specific funds.
• The fund employs leverage but maintains a reasonable level of debt compared to its peers, reducing potential risk. However, it has struggled to cover its distributions and may need to reduce its payout in the future.
• The banking sector as a whole may not be as risky as is widely perceived, but there are some risks among banks that have commercial exposure.
• The fund's premium valuation has faded, but it still seems pricey right now, given the distribution problems.

The John Hancock Financial Opportunities Fund ( BTO ) is a closed-end fund that invests primarily in the banking sector of the economy. This is not exactly the most popular sector right now, as banks are generally perceived to deliver better performance during periods of low interest rates. However, historically, this is not exactly correct. This chart shows the net interest margin of U.S. banks over the 2000 to 2021 period (unfortunately, more recent data is not available from either the World Bank or the Federal Reserve):

It is difficult to see a negative correlation between interest rates and net interest margin. After all, interest rates in 2000 were at higher levels than they are today, but net interest margins were at the highest levels that were seen at any time during the 21st century. We also see net interest margins rising over the 2016 to 2019 period, which also saw the Federal Reserve slowly raising interest rates from all-time lows. Then, we also see the net interest margin hit a two-decade low in 2021 despite interest rates being basically zero....

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