By Elizabeth Stanton
Aug. 21 (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.
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. Elliott Wave International’s Robert Prechter and Ralph Acampora of Altaira Wealth Management SA, who use charts, warned investors to avoid equities in 2007 as strategists at the biggest Wall Street firms forecast gains.
“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.”
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, Bloomberg data show.
The Standard & Poor’s 500 Index fell 38 percent in 2008, its worst year since 1937, and the average U.S. stock fund that invests in more than one industry lost almost 39 percent, according to data compiled by Chicago-based Morningstar Inc. Investors responded by shifting money into other strategies, making bond managers eight of the ten best-selling funds this year, according to Financial Research Corp. in Boston.
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.
“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.
“Under scientific scrutiny chart reading must share a pedestal with alchemy,” Malkiel wrote in his investment book. In an e-mail today, he said he still holds that view, “except that there is some momentum at various times.”
John Hancock’s fund may use technical indicators including “price, volume, momentum, relative strength, sector/group strength and moving averages,” according to its prospectus.
Bollinger bands are designed to alert investors when a security rises too high or falls too low by comparing its price to the average level. Moving Average Convergence/Divergence is a momentum indicator that also uses the average price of a security. The Relative Strength Index identifies possible turning points by measuring the degree that gains and losses outpace each other.
The bear market has made investors more receptive to chart- based strategies, said John Roque, managing director and chief technical strategist at WJB Capital Group Inc. in New York.
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.
Technical analysis “becomes more popular the more difficult the market is,” Roque said. “When stuff is undecipherable with regard to fundamentals, people tend to look to it for some sort of insight.” 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.
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.
Wellington began managing money using technical analysis four years before Teixeira joined the company in 1997 from Merrill Lynch & Co. At Merrill, Teixeira worked under Robert Farrell and Richard McCabe, analysts who have since retired.
Wellington’s technical analysis strategy for institutional clients returned 16.9 percent a year from 1999 through June 2009, according to the John Hancock fund’s prospectus. That compares with a loss of 0.1 percent annually for the MSCI All Country World Index. 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.
“Most shops that have a technical analyst group, that group acts in support of the fundamental research group,” Hartstein said. “They don’t actually manage money themselves. Wellington is unique in that aspect.”
To contact the reporter on this story: Elizabeth Stanton in New York at firstname.lastname@example.org.
Last Updated: August 21, 2009 16:20 EDT