How John Hancock's DFA ETF deal is really the culmination of an old and effective Manulife strategy

Brooke’s Note: When we wrote about the a launch of DFA ETFs back in September, I took extra notes about John Hancock Funds CEO Andrew Arnott’s unusually atavistic career trajectory and his unit’s rather unusual success. See: How DFA is putting its John Hancock on the ETFs category. But my desk clutter swallowed the notes and they never re-emerged. I finally confessed this fact to Arnott last week and did the interview again. It serves as an interesting little story on a Wednesday afternoon.

John Hancock Funds ETFs, subadvised by Dimensional Fund Advisors, has gathered about $100 million of new assets since its September launch.

It’s neither a huge nor small amount of inflows for a new fund in its first six months of existence.

But having the Boston-based insurer’s first exchange traded funds achieve liftoff with investments piloted by Austin, Texas-based DFA, is right on schedule as far as Andrew Arnott is concerned.

“The reception is very good but it’ll take time to get a groundswell,” says the president and CEO of John Hancock Funds, which is a wholly owned subsidiary of John Hancock Financial, which in turn is owned by Toronto-based Manulife Financial Corp. See: The 10 biggest RIA moves of 2015 and what conclusions to draw from them.

Long hot streak

Arnott, who has held his current title since 2012, bases his optimism on 13 years of launches similar to this one in the sense that they were advised by non-Hancock employees — and that have enjoyed a rather remarkable track record. Highlights of that track record include growth in his division from $19 billion to $80 billion today,17 quarters straight of net inflows and an intangible morale boost — respect from the club of esteemed fund firms in Boston.

“The head of a big Boston asset manager came up to one of my guys and said: You are doing fantastic.”

To many, the Hancock-DFA deal and Hancock’s curve-busting growth at a time when mutual funds in aggregate are bleeding assets come out of a clear blue sky.

But as it turns out, the approach has been honed in Arnott’s unit since 2004 — and really stretching back to 1993. See: Is your alpha big enough to cover its taxes? A classic journal article, revisited.

When Manulife absorbed John Hancock Financial Services in 2004, the latter Boston-based insurer had a fledgling fund group with about $30 billion of managed assets.

But the good news was that the giant Canadian insurer decided to invest in the mutual fund business. That capital infusion came with a radical revamp to a structure that had worked well back in Toronto — namely outsourcing fund management to top-tier subadvisors. Manulife had employed that strategy in, for example, managing 401(k) assets since 1993. See: NextCapital raises $16 million as its founder goes where Financial Engines’ 401(k) robo strategy didn’t.

DFA connection

Yet things would get worse before better. The 2008-'09 crash took John Hancock Funds’ assets down to about $19 billion.

The strategy has been to get subadvisors that retail clients would not otherwise have much access to — like Wellington Management.

“We wouldn’t add value if we sold [advisory services of] Franklin Templeton or American Funds who are already in the space,” says Arnott. See: The 'other’ Morningstar conference shaped up as a true ETF summit with principals of exchange traded fund programs on the prowl.

Though DFA is “in the space,” most of its distribution is through just a handful of big RIAs — around 1,700 of them in total. See: Dimensional’s co-CEO tells clients at Monterey event that DFA is changing its Classic-Coke intellectual fund recipe.

In fact, DFA management is virtually unavailable to wirehouse brokers. “They’ve been very intrigued,” Arnott says.

Watchful eye

Still, Arnott allows that the marketing process of DFA has a long way to go.

“They’re not known by as many people as you might think.”

Arnott’s first job out of Boston University was with Hancock and he’s risen through the ranks ever since. He was executive vice president of John Hancock Investment Management where he was responsible for all third party and internal asset manager relationships across the John Hancock and Manulife investment platforms in the United States and Asia. This included the selection, monitoring and ongoing review of more than 450 strategies managed by 80 asset managers. These firms managed more than $160 billion for John Hancock and Manulife products

But though Arnott has learned to be patient with rolling out new managers under the Hancock brand, he has also learned not to be overly patient.

“If we haven’t seen [a big jump in DFA ETF assets] in a year, I’d be very concerned.”