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John

Hello and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting and education savings at Manulife John Hancock Investments. Today is September 12th, 2025, and as always, the goal of this podcast is to help investment professionals deliver better outcomes for their clients and their practice. Now September is back to school month for many people, and because of that, we always try to record a podcast related to planning or saving for education.

Today's episode dives into one of the most significant shifts in higher education policy that we've seen in recent years. It's all around the One Big Beautiful Bill Act or OBBBA. Signed into law this summer, OBBBA is reshaping federal financial aid, student loans, and college accountability in ways that will affect millions of students and families. To help us unpack what this all means, we're joined by one of the nation's foremost experts on financial aid for students, Mark Kantrowitz.

Mark is a nationally recognized authority on scholarships, student loans, college savings plans, and education tax benefits. He's testified before Congress, written for major publications like The New York Times, Wall Street Journal, and Forbes, and authored five bestselling books on paying for college. Mark, welcome to the Portfolio Intelligence podcast.

Mark

Thank you for having me.

John

You got it. Hey, listen, can you give our audience a quick overview of what the One Big Beautiful Bill Act is and why it matters to families planning for college?

Mark

The One Big Beautiful Bill Act is a massive piece of legislation, approximately 870 pages long. It extended the Tax Cuts and Jobs Act of 2017, many provisions of which were set to expire at the end of 2025. And it also added a bunch of new tax cuts. And in the process, it cut federal student aid programs by more than $300 billion, perhaps partly to offset the increased costs of the legislation.

So, it made significant changes to federal student loan programs and loan limits, student loan deferments and forbearances, student loan forgiveness and discharge, federal education grant programs like the Pell Grant, federal education tax credits, college endowment, excise taxes, college savings plans, and the FAFSA.

John

Wow. So a lot of different changes across the board when it comes to college and paying for college. Let's start with and hit, the student loan programs—what was taken away and what was added?

Mark

Right. So, OBBBA made several changes to federal student loan programs, some pretty dramatic changes. It repealed the Grad PLUS loan program, but it retained the Parent PLUS loan program. However, previously, the Parent PLUS loan was effectively unlimited with annual limits equal to the cost of attendance at the college, minus other rates, and no aggregate limit. While the OBBBA legislation added annual and aggregate loan limits for the Parent PLUS loans, it also set new loan limits for graduate and professional school students, partly compensating for the elimination of the Grad PLUS loan.

The new loan limits are lower than what some students were borrowing from the Grad PLUS loan program previously, before it was eliminated.

Now, it also made changes to student loan repayment plans. Instead of a dozen student loan repayment plans, there will now be just two—a standard repayment plan and an income-based repayment assistance plan, or RAP.

The standard repayment plan is more similar to previous extended repayment plans, where the repayment term is based on the amount of debt. The RAP plan has loan payments based on a percentage of adjusted gross income that ranges from 1% to 10%, it increases as AGI (Adjusted Gross Income) increases.

Now, comparing RAP to the previous Income-Driven Repayment plans, which are being phased out—it's more expensive than the SAVE plan. Loan payments under RAP are less than under IBR, i.e. income-based repayment, for low and moderate income—powers up to about $75,000 in income. But the repayment term is 30 years instead of the 20 or 25 years under IBR. So, that yields higher total payments

OBBBA also repeals the economic hardship and unemployment deferments, and switches the general forbearances from a maximum three years in one year increments, to nine months out of every 24 month period with no aggregate limit to the number of forbearances you can have. But they're, strictly speaking, going to be short term suspensions of the obligation to repay the debt.

John

Okay. So that, is some detail on the impact on the student loan programs. What about how this impacts grants?

Mark

So OBBBA made a few changes to the Pell Grant program. First of all, the Pell Grant program had a funding shortfall of about $10.5 billion. OBBBA eliminated that funding shortfall by appropriating sufficient funds. Now…it blocks Pell Grants for applicants whose student aid index is double or more the maximum Pell Grant. These are the so-called Pell billionaires who have low income but high assets. Foreign earned income is going to be added to adjusted gross income when determining eligibility for the Pell Grant.

Previously, someone whose income was mostly from a foreign country could nevertheless qualify for a Pell Grant because that was excluded from adjusted gross income. Now it's going to be added back in.

Also, students whose non-federal grants, such as scholarships and state grants, exceed the total cost of attendance will lose eligibility for the Pell Grant. And finally, it creates the workforce Pell Grants to pay for short term programs, typically eight to 15 weeks.

Oh, and it also creates a new tax credit for contributions to elementary and secondary school voucher programs.

John

Okay, so big impact on student loans. Big impact on grants. The other thing a lot of people want to understand is how does this impact college savings program.

Mark

So, it makes several significant changes to 529 college savings plan, and it also creates a new savings plan. The qualified expenses in a 529 plan previously included tuition and fees for a K-12 education. Now it will also include books, standardized tests like the SAT, ACT and AP tests, tutoring, dual enrollment fees, and educational therapies for disabled students.

It also doubles the limit from $10,000 a year to $20,000 a year. Now, the changes in qualified expenses were immediate upon passage, but the increase from $10,000 to $20,000 starts in the 2026 tax year.

It also makes workforce education programs and postsecondary credentialing expenses eligible as qualified expenses. It allows rollovers from 529 plans to ABLE accounts for the disabled. Previously, those were set to expire and now it's made permanent and there are increased slightly…the limit. The lifetime estate and gift tax exclusion has been permanently increased. It was set to expire and revert back to about $7 million a year. Now it's been permanently extended, and it's been increased to $15 million and then subsequently indexed for inflation. It creates new Trump Accounts which have, a variety of benefits. I mean, children born from 2025 to 2028 will get a $1,000 birthday gift…from the…paid for by the federal government to seed the money in the account. Employers can contribute up to $2,500 a year, and parents can contribute maximum of $5,000.

I recommend that you maximize the free money. So, take that thousand-dollar birthday gift. Take the money from the employer…those…and it's hard to turn away free money…the others…and the accounts are similar to IRAs.

John

So, there's a lot of changes there that impact college savings across a number of dynamics, whether it be for younger families or high net worth individuals. Do you see 529 plans or other saving vehicles becoming more important under this new landscape?

Mark

Well, if we look at where the money is coming from to pay for college, it comes from savings, income, loans and financial aid. Every dollar you save is a dollar less you'll have to borrow. College savings also expands your college choice, so that you aren't as limited in what kind of colleges you can choose.

Now, with the cutbacks on federal student loans in the legislation it becomes more important for families to save, especially if they want to enroll at a higher cost college or in graduate and professional school. Otherwise, they will have to shift their enrollment to lower cost colleges such as an in-state public college.

Now, some of the low-income families may not be able to afford a college education because they may be forced to shift their borrowing to private student loans which are credit underwritten and then low-income students tend to be less likely to qualify for those loans. So, if they can't afford to pay the bill, they may not be able to enroll in college.

John

Okay, so if you had one piece of advice for families that are trying to navigate the college planning process in this post-OBBBA world, what would it be?

Mark

Well, one would be to save early and often. Shop around when choosing a college. Consider the net price of each college that you've been admitted to. And also, and it's cheaper to save than to borrow. So, save as much as possible before college to reduce the amount you'll need to borrow during college.

John

Makes sense. Get ahead of it. Try to avoid those long-term loans if you can save in advance for college and shop for the right college. We've heard those messages from a number of different speakers who we've had on in the past. Hey Mark, I want to thank you for joining the podcast. It's really helpful and insightful. We appreciate your time.

Mark

Thank you.

John

All right, folks, if you want to hear more, this is certainly a complicated topic. We have an upcoming webinar for financial advisors on October 28th. So, reach out to your local business consultant or keep an eye on your email to get more information on that. As always, if you want to subscribe to the Portfolio Intelligence podcast, you can find us on iTunes or our website. You can learn about a number of things in addition to college savings. You can get great business building ideas, all types of viewpoints around investing and investing for the long term. Folks, as always, we want to thank you for listening to today's show. Take care.

John

This podcast is being brought to you by John Hancock Investment Management Distributors, LLC member, FINRA, SIPC. The views and opinions expressed in this podcast are those of the speaker are subject to change as market and other conditions warrant and do not constitute investment advice or a recommendation regarding any specific product or security, there's no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks including the potential loss of principal.

Manulife John Hancock Investments and Mark Kantrowitz are not affiliated. Manulife John Hancock Investments takes no responsibility for the accuracy of the content, and the views may not necessarily reflect those of Manulife John Hancock Investments nor does Manulife John Hancock Investments endorse the use of any of the applications referenced. Before using any of the programs and or applications referenced please ensure that you have permissions from your firm to use them. Likewise, consult with your tax or financial professional before making any investment decisions.

John

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host John Bryson, head of investment consulting and education savings at Manulife John Hancock Investments. Today is August 25th, 2025, and as the summer winds down, I thought it would be a great time to reconnect with Matt Miskin and Emily Roland, our co-chief investment strategists here at Manulife John Hancock Investments.

Matt, Emily, welcome to the show. Tell us what's going on with economies and markets around the world.

Matt

I'll, I'll kick it off here. You know, it's been a long week, in the last couple weeks. There's just been so much data coming out. So, we're still in earnings season. We're getting a lot of timely global economic data. We got PMI. So, these are Purchasing Manager Indices. They're great timely business surveys all over the world and really, they accelerated in August. Personally, I think there was some back-to-school shopping that showed up in the U.S. economic data. I know we're doing our part here in the Miskin household supporting the economy, but what we saw was basically in August a re-acceleration of global growth. And then to close off the week, we had the Jackson Hole Fed meeting where Powell had a very short speech. The markets ran with it though. Basically, he said, hey, we may be able to cut rates to the not-so-distant future. That wasn’t any new information really, but he did say, look, the jobs market is slowing. The prior jobs report did get revised down, that's something that's material to the mandate. He said inflation could be rising because of tariffs, but then it comes back down. So overall, the market took it as extremely dovish.

In our view, it's not that dovish, and we can get into that more as we discuss the Fed policy from here. But lots to unpack from the backpack. But overall, things have been holding up pretty well John.

John

Nice. You got a good back-to-school theme going. I love it.

Hey, Emily, Matt had mentioned Powell's Jackson Hole speech, and you know, it marked a rally on Friday. Do you think the market is correctly pricing in future Fed moves into all parts of the market, and especially the bond market? Do they agree?

Emily

You know, not necessarily, John, because we did see so many significant moves across assets, and really not much changed. We heard like a hint of a commitment from Powell that they're going to begin cutting rates in September, but the bond market was already pricing that in. We look really closely at the two-year Treasury yield—which is a good proxy of what the Fed is going to do next—and last week, it ended at 3.69%. That's down just two basis points since the start of the quarter and actually in the range it's been since 2023. We also heard from the Fed in the last summary of economic projections that they were anticipating two to three cuts by the end of the year. So, it wasn't really a new development, but risk assets loved it. So, we think that's pretty notable.

And what it does is it basically makes riskier parts of the market more expensive as they priced in those better outcomes. And then the bond market really didn't budge much, and we still see the valuations there as really attractive. We like the elevated income that's available in bonds. We don't think bonds have really picked up on the disinflation that we expect to see coming through the pipeline and we're starting to see as it relates to the housing market. Shelter is by far the biggest component of inflation. So, while we may see some tariff-related increase in goods inflation, we think the services side, most notably the shelter side, should help to bring inflation down. Bonds just aren't pricing that in right now.

So, while equity markets are sort of reflecting a lot of positive sentiment right now, we do think bonds are mispriced, and they offer a lot of value at these levels. It's something to think about taking advantage of as we head into the last few months of the year.

John

That's great. It's a great comment on bonds. I'm going to come back to that. But before I do, Matt, Emily had mentioned risk-on assets performing well. Looking at last week, small-cap value and mid-caps were part of that. What contributed to their outperformance, and do you see that trend continuing?

Matt

So, if you go down to market capitalization, financials are the biggest part of that market, and regional banks in particular are a big part of small caps and small-cap value. And this thought of the Fed cutting is helping smaller companies in general in terms of sentiment around them and regional banks. If they can cut on the short end and the longer end stays elevated, it steepens the yield curve, and that, in theory, makes banks more profitable. Now, that is all good news, and we do see a lot of value in small caps, especially on the bank side. The thing is, still with small caps, 40% of the indices don't make money. So, they're not even profitable. They're not even embedded in the valuation because if you don't make money, you can't even value the business on a P/E basis. So, you have to exclude 40% of the index, and then you could say, well, the rest that make money, they're kind of cheap. But at the end of the day, again, it was a lower-quality rally in small caps. What we've seen is that the higher-quality companies have struggled this year, and the lower-quality, kind of more speculative parts of the markets, have done better. So, we want to be careful with that.

Mid-cap is more legitimate to us. So, it's a much more profitable segment of the market. It's cheaper than large-cap, and what you saw recently too is some of the high-flying momentum names. Momentum investing is when you're looking at stocks that are up the most over the last six to 12 months, and markets have been piling into these high-flying momentum names. That's peeled back. Some of them got really expensive with like a 500x P/E on them. And so, as those peeled back and started to see selling pressure, you saw this rotation in mid and small. In our view, the mid-cap spot is a better place to be—more profitability than small, cheaper valuations than large, still getting exposure to the United States, which is again showing some of the best growth globally, even though global growth is picking up a little bit in August. So that's what we like to see. And mid-caps last week hit a new all-time high on a price basis, and so that was a nice development as well.

John

Ok, thanks, Matt. And Emily, Matt has started to talk about global growth, and he was taking a lot of credit for driving global economies with his back-to-school theme there. Can you talk to us about how you interpret the recent bounce in global PMI, specifically the U.S. manufacturing and maybe U.S. services.

Emily

Yeah, sure. By the way, I've been trying to come up with some snappy back-to-school analogies in the few minutes that we've been on this call. Matt did not give me a heads-up on our theme for today, so I'm going to see what I can do here on the fly.

So, PMIs are a really timely indicator of the health of underlying economies that we look at regularly. We get a couple of reads on it, and we got some preliminary data for August last week, and it did show a re-acceleration in global growth after dipping a little bit here in July. So, the U.S. manufacturing PMI was really the highlight—53.3—that's the highest reading of the year. I guess back-to-school related, like I think about my son, he's going into his sophomore year, he's on the football team. I would say the highlight of his schedule—they just were released today—is a gym class. So, we expected an A out of him in gym class, and that's what the U.S. manufacturing PMI was. The Eurozone also did tick up; it's a little bit over 50. Japan at 49.9. The U.K., which we watch closely, fell to 47.3, so ok.

Some mixed results on the services side, the U.S. was awesome—55.4—but the Eurozone is still just above 50, and Japan slowed a bit. So, what's notable to us here is if you sort of put it all together, the U.S. composite PMI—so services and manufacturing—is doing quite well at 55.4. The Eurozone's at 51.1. So, there's actually a pretty big gap that's opened up, suggesting that U.S. growth is doing better on a relative basis. And that basically growth in Europe is not as bad as everyone had feared, but a lot is being priced into the market. So, Europe is just on an absolute tear this year. We're seeing just exceptional results out of areas like European financials, up over 50% this year.

So, there's just sort of this narrative that's building and really being reflected in the price action that we're not really seeing in the data. So, for us, that creates a little bit of a conundrum. We still want to look at where the best relative economic growth and where the best relative earnings growth is in order to make the decision between U.S. and non-U.S. equities in terms of emphasizing them in portfolios. And it's still, you know, leading us to find better opportunities within the U.S., even though that's just not what we're seeing from a performance perspective so far this year.

John

Ok, so sticking on that opportunity with the U.S., Matt, I want to ask you about U.S. earnings. The S&P 500 earnings estimates are coming in strong. Valuations are definitely peaky. How do you feel we are? Where do you feel we are in the earnings-driven phase of the market cycle? Are you happy? Do you see more growth, or are you worried about a bubble?

Matt

Yeah. I mean, it's everything. Earnings growth is going to have to be the key driver of equity returns from here because the dividend yield on the S&P 500 is basically the lowest in history, just over 1%. The PE ratio on a forward basis is 22. We've only had 22 in 2021 and in 1999. So really, you know, the upside on multiples is basically 24, which would get you to a 2000 multiple, so the tech bubble. Earnings growth, though—you can get that. That's the healthiest way to grow the market and have the market go up, and that has been one of the best things that's been driving markets this year. They're up 11% in Q2. I think the estimate coming in was more like 6% or 7%, so beating by several percentage points.

The beat rate is like 80% this quarter. I mean, that is an awesome beat rate. Revenue growth was solid. So, you know, you had to come up with great earnings given the multiple, and the market did it. It showed up to class ready to go, sharpened pencils, and it just crushed the test.

Now here's the thing, though. There are more tests coming. So, the third quarter, we're gonna have earnings, the fourth quarter, and the comps are higher. So, it's like, you know, kind of grading on—I don't know if it's grading on a scale, but it's gonna get harder as the quarters come on. It's like the first test where they're like, 'All right, let me get you, you know, starting to get back to class.' And so that's something we're watching, though. And then broadly speaking, on a global basis, even though the U.S. has these tests coming up, so does the rest of the world. Earnings have not been that strong in Europe. Not strong in the emerging markets. So, they've got to pick it up because they priced in a lot of earnings recovery. But at the end of the day, we think, well, that's the best thing this market's got going for it—is how strong their earnings have been.

John

All right, strong earnings. You know, Matt, when you started answering that question, I thought you were going to miss the back-to-school opportunity, but you nailed it and then you overdid it. Well done.

Hey, Emily, I said I'd go back and talk about bonds. I want you to go a little bit deeper for me on bonds and then other opportunities that you and Matt are looking at that we haven't talked about in today's podcast.

Emily

Yeah, sure. So, you know, I will say just back-to-school-wise, like Matt keeps talking about tests and getting pencils ready. I never really cared that much about the school supplies. To me, it was all about the first day of school outfit. So, we're looking for a high-quality, you know, new shoes, new outfit for the first day of school, new backpack. And it's the same thing that we're doing in markets right now. You know, it's a great time, we think, to take some profits in riskier corners of markets like, yes, the momentum factor, which is basically chasing winners, which has been like the best-performing factor by far this year. It took a little bit of a breather last year, but it's up almost 20%.

Momentum is trading at elevated valuations versus the broad market right now. We're seeing kind of these unprofitable companies, you know, crypto-related assets, that's, you know, even meme stocks sort of back in the headlines here. We think it is a good time to sort of redeploy assets into high-quality stocks. We want to look to areas of the market that can really fight off margin pressure. We want to think about protecting against valuation risk. We want to own sectors and stocks that are trading at a reasonable price.

So, it's really about looking for companies with high quality, so good return on equity. And also, we've been looking a lot at the PEG ratio. This is getting back to the textbooks for those that have studied this. So, it's the PE ratio divided by earnings growth, which is basically a way to think about, you know, not overpaying for earnings growth. And that can really help manage valuation risk. So, from a sector perspective, that's leading us to overweights in areas like technology, communication services, as well as industrials.

Bonds, we continue to emphasize…it’s high-quality bonds here. Investment-grade corporates, mortgage-backed securities, municipal bonds. These are areas that are sporting elevated yields relative to their long-term history. And we think that the total return potential there is really attractive not only because of those elevated yields but also because we think duration could play a bigger role in portfolios here as global growth slows. Matt mentioned earlier Powell recognizing that there's challenges to the labor market. The U.S. jobs market has been the engine keeping the economy going here. We are starting to see some cracks there. The last jobs report had significant revisions to the prior couple of months. We're seeing things like continuing claims elevated.

So, we do think those cracks probably grow a little bit more here, which suggests that the economy does slowly slow from here. Which means bond yields are probably too high. There has been a very myopic focus on things like, you know, worries around the deficit and sort of worries about, you know, investing in U.S. assets in the wake of some political volatility. That's what's showing up too in the price, and the math has not really been considered here. We think the math is a good story in terms of combining that potential duration tailwind with the income going into the remainder of this year and on into 2026.

John

Emily, Matt, my summer wrap-up session has turned into a full gear analysis and master's class. So, I want to thank you both. Folks, if you want to learn more to keep on that theme, as always, please subscribe to the Portfolio Intelligence podcast. You can find it on iTunes or wherever you subscribe to your podcast, or you can find it on our website.

There you can also find viewpoints on all things investing, some great business-building ideas, and much, much more. As always, thanks for listening to the show.

John

This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA, SIPC. The views and opinions expressed in this podcast are those of the speaker, are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.

Duration measures the sensitivity of the price of bonds to a change in interest rates. Price-to-earnings (P/E) is a valuation measure comparing the ratio of a stock's price with its earnings per share.

John

Hello and welcome to the Portfolio Intelligence podcast. I'm your host John Bryson, head of investment consulting and education savings at Manulife John Hancock Investments. Today is July 28, 2025. As always, the goal of this podcast is to help investment professionals deliver better outcomes for their clients and their practice. Sometimes that means taking a look behind the curtain to understand asset managers better.

With that in mind, I've asked Matt Hammer, our head of product management at Manulife John Hancock Investments, to talk about what he and the team does and how it impacts investors. So Matt, welcome to the Portfolio Intelligence podcast.

Matt

Great. John, thanks so much for having me.

John

You got it. So hey, tell us, what does a product management team do and why is that important to our clients?

Matt

Yeah, thanks, John. So, product management is critical in the asset management space, and we have a team globally with various teams across the globe and all the various regions. And really what we're trying to do is ensure that our platform of investment options is suited for clients where they want to be met. So whether that be vehicle types or different types of investments in different asset classes, we're not only looking at what is on our current platform and ensuring that those are the best areas for clients, but also taking a look at, from a product development standpoint, where we can anticipate those needs may be in the future and hopefully provide the right investment types for clients moving forward.

You know, John, we also work very closely with our distribution team as well. And one of our main roles is to speak with financial advisors across the country here in the U.S. to help them not only with individual investment decisions and helping serve their clients, but also from an asset allocation standpoint, understanding the various investment options and the various managers as well.

John

Okay. And knowing that we have a multi-manager model, we've talked about that in the podcast before. When you're looking to hire different managers around the world, what are some of the things you're looking for?

Matt

Yes. So, we're looking for everything when it comes to a manager to be selected for the platform, John. But to boil it down, we're not only looking at just performance and things like that. We're looking for what I like to call the performance blueprint. And what that means is, you know, various managers will perform in different ways given a certain macro regime or given an interest rate policy or based on geopolitical events and things like that. So, what we're trying to do is understand a manager, understand their philosophy, their process, everything about that specific manager, and try to look at how that manager may complement other investment options on our platform, but also understand exactly how they're going to perform given a given market regime.

And a simple example of that I always like to use is in the U.S. large value space. It's a very common space for people to invest. Well, there's deep value, there's core value, there's dividend or yield-focused value managers, and as you'd understand, those managers are going to perform differently based on different market regimes. So, what we really want to understand is not looking at them as a large value manager, but what their actual mandate is and how it can complement other mandates and other opportunities on our platform.

And we're also looking at partnering with managers that can be vehicle agnostic, so to speak. So, we understand that mutual funds, ETFs, active ETFs, SMAs, CITs, private assets—both illiquid and semi-liquid—these are areas that clients and advisors want to invest in based on their client needs. And so we're trying to work with managers that can also help complement us not only from a strategy perspective but also from a vehicle perspective.

John

Okay, really interesting. So as this kind of go-between between all the portfolio managers on our platform, in our business consultant and financial professionals, you must be pulled into a lot of different conversations that can go in a lot of different directions. What are the critical conversations looking like today?

Matt

Yeah, you know, John, I try to look at every conversation, as you might imagine, as critical to that client or that advisor. But if I were to boil down what the vast majority of my discussions are right now, it is, by leaps and bounds, fixed income as number one and people understanding that. The other would be private assets in the private credit space. And what I find advisors…so they're both kind of in that fixed income area, so it's public and private…and what I find is that advisors are really looking to not only broaden their knowledge in the space, really do some deep dives on the managers they may be using or may be building out and trying to use in the future. But John, it's quite fascinating, you know, advisors oftentimes don't really understand exactly what they own in all of these areas. And so, this is an area where we've been able to help guide advisors so that they can better serve their clients, again, based on those needs.

John

Okay, so it's an interesting comment. People don't always know what they own. We know there's a broad landscape out there, a lot of different investment options. You're talking a lot about fixed income, the public space fixed income, the private asset space. I want to talk about the public space first. As we look at portfolios, two of the largest parts of people's portfolios are in the core and core plus space…we call it core and core plus space. How does that apply here?

Matt

Well, it's a great question. And yeah, you know, obviously there are various types of advisors. So, I don't mean to say that people don't know exactly what they own. Here's what I mean by that comment, John: people often don't always open up under the hood and understand exactly what's in there. So, you bring up core and core plus. Many advisors, when they use core and core plus, they're looking at this as exactly what they are—that kind of core building block of a fixed income portfolio. But there is a ton of variability in the core and core plus space.

So, when you say core and core plus, that's a Morningstar peer group moniker, if you will. In 2019, Morningstar broke out the intermediate bond category into core and core plus. That's why we know it today as core and core plus. But what I found is that these are two huge areas, as you mentioned, of client portfolios. When I think about what advisors focus on, if I were to boil it down into that space, it comes down to really three areas.

Number one is, I look at: is this a top-down or bottom-up manager? When I talk about this with advisors, they are often puzzled by that question. Here's what I mean by that. When you look at top-down, this is trying to anticipate macro events, trying to anticipate where we are in the business cycle, anticipate interest rate movement and regime, and trying to make an asset allocation decision in that way.

When I think about bottom-up fixed income managers, I think about something that's so basic within fixed income: is this a good issuer as we underwrite it? Are they going to pay us our principal back, and are they going to pay us our interest along the way? It's about building a portfolio building block by building block.

John, I'm not here to tell you that top-down or bottom-up is good or bad. I'm just here to say that they're very different. So that's one of the first things we talk through with advisors: is their manager top-down or bottom-up? I believe—and we often believe—that it's easier to predict things like the shape of the yield curve or is this a good company than it is and what the Fed or the 10-year is going to do or what macro events are going to happen. As we sit in the middle to end of the second half of 2025 here, I think the first half was pretty indicative of that being hard to predict. So that's the first part: top-down or bottom-up.

The second part is around the client experience. This is something that I always talk with advisors about: what is the client experience that you are going to have with these managers? It's so hard to predict, we obviously don't know what's going to happen in the future. So, we look at things through two different lenses here in the client experience. We look at rolling returns, so average rolling returns, and we look at average rolling risk-adjusted returns.

If I could get on my soapbox for just a moment, I think the investment community has, if I could be so bold as to say, gotten a little bit lazy when it comes to how we look at performance. We look at annual performance; we look at 1-, 3-, 5-, and 10-year performance in a static manner. I just again…I just think that's a little bit lazy. It's not that it's an unimportant data point, but it shouldn't tell you the whole picture. If I look back five years or three years ago as of the end of June, or if I look at clients that invest on January 1 and take out their money on December 31, it just isn't a realistic scenario. Clients invest non-systematically. They invest every two weeks when they get a paycheck, if they get a bonus, if they get an inheritance, if they sell a home or a business. You get my point. They're not investing on April 1 or they’re not investing on January 1.

So, these dates that we've kind of gotten used to, again, I think are a little bit lazy. Back to the second thing that I always look at: the client experience. Rolling returns and average rolling returns—not only how often you beat your benchmark or how often you beat your peer group, but also by how much on an average rolling basis—can give you a much better snapshot into what the potential client experience will be. But importantly, it shows what the client experience has been for these managers on an absolute and risk-adjusted basis. So always looking at things from a rolling perspective.

So, number one, top-down or bottom-up. Number two, what is the client experience? And then one of the biggest eye-openers that we see is on this kind of portfolio composition concept that we run with—when it comes to core and core plus, this is extremely prevalent. We look at three areas in there, John. We look at sector composition, we look at credit quality composition, and we look at geographic composition. We do this over time, and we look at this through what I'll call a sand chart. You can see what a manager does over time in sector, geographic, and credit quality, and you start to understand if the performance blueprint and client experience is something that may be repeatable over time.

So, John,  in the core and core plus space, just because they're in the same category, we often see drastic variations where you have some managers that are, just to use some simple examples, a lot into credit or high yield. A lot of managers go heavy into international fixed income. A lot of managers go heavy into treasuries and agency mortgages. I'm not saying that one allocation is good or bad. It's just a simple matter of understanding what you own and what your client goals are. And if you match those three things up to say, I know that my manager is either top-down or bottom-up, so I can understand what their view is. I understand what the client experience on a rolling basis has been, and also what this manager looks like over time from a portfolio construction standpoint. That is extremely eye-opening to clients within the core and core plus space, and frankly, almost all the public fixed income spaces.

John

That's really helpful. I mean, you didn't say it, but it kind of came through in the conversation that the first glance of 'Is this a one-star or five-star rated fund by Morningstar, and how has the performance been over one, three, five, and 10 years?' is just a starting point. You've given some great insights as to go deeper: is it top-down or bottom-up? Are they making big interest rate bets? Are they building it security by security? What's their blueprint? What should you expect in certain markets? And don't just look at last year's return—look at how it's done historically. Great insights for our investors.

Matt, I'd ask the same question. You, you handle the public fixed income space really well. Do you apply the same approach to the private fixed income space like private credit?

Matt

Yeah, we do. And obviously, there's a little less transparency there. So, I stick with that same concept, John, of knowing what you own. What I find is there's two types of advisors, and I'll more focus on the semi-liquid space—so interval, tender offer, BDC type of private credit here. You know, there's advisors that have been using these types of portfolios for a number of years, and they've been quite happy with them. And then there's another subset of advisors that are really starting to build this part of their portfolio out. And for both of those types of advisors, I have the same insight, which is, again, know what you own and understand what risks you're getting into.

And here's what I mean by that: I found that advisors often are overexposed to corporate credit risk, even in the private space. So, they'll own, you know, a BDC or an interval fund or whatnot, and they'll own it through a structure of these middle market or direct lending strategies. And I think middle market and direct lending strategies just, you know, are really good places to have invested, and these have been great for clients. But you have to understand that just because you have some manager diversification there, if you're using three or four managers and they're all middle market direct lending strategies, you know, your economic sensitivity, your cash flow, where you're getting your yield from, etcetera, where you're getting your total return from—well, it may be obviously with different companies—it’s all kind of correlated to each other in the sense that this is corporate credit risk. This is, is this company, it's cash flow risk, it's EBITDA risk, etcetera.

And so, what we found in the private credit space is that there's huge untapped areas of the market, and one that we've been really highlighting is the asset-based finance area. So, asset-based lending—and it's called various things by different companies—but this is a huge part of the market that can truly diversify a client's portfolio away from just corporate credit risk towards asset-based finance and asset-based risk and can give their clients a better total risk-reward portfolio. And if I use that large value example earlier, I'll just briefly use a large growth example just to mix it up a little bit. If you have three or four large growth managers, they all have a different philosophy. They all buy, you know, potentially slightly different variations of stocks, etcetera. But if the large growth category, you know, gets hit, right, like all four of them are going to go down, you know, to the same extent…to some extent, right? When you look at private credit, if you have all direct lending risk and all middle market corporate risk, then that's kind of the similar concept. So, diversifying that with things like asset-based finance is something that we found can be really additive to client portfolios.

John

Okay. And that's one of those ones it's important to not only know what you own and control, what you can control, and you can get diversification, is what you're saying in that space by doing some research and digging into it. That's great.

Matt

That's exactly right.

John

We covered a lot and this is great. If people do want to get to know their fixed income better, whether it's public or private, what ideas do you have for them to do that?

Matt

Yeah, it's a great, it's a great point. So this is something that we've actually empowered our business consultants at Manulife John Hancock with is what I call a fixed income audit. When I look at a manager, one of the first things I do is run what, again, I call a fixed income audit. This is a report that's going to give you all sorts of various modern portfolio theory returns, etcetera, that you'd find in any area. But it's also going to give you exposures over time, which ties into that part of the discussion I had earlier on portfolio composition. So, it's going to give you what this manager has looked like over time, and it's really, really insightful. So, I'd urge people to utilize that tool and do a fixed income audit on their managers.

And I'd also just say that we can run rolling returns for fixed income portfolios as well—both rolling returns as well as risk-adjusted returns—through your Manulife John Hancock Investments business consultant. So those would be two areas that I would look at, John. And then, since I'm talking to you, I'll pass it back to you because I know that your team in the Investment Consulting Group can do a true deep dive on the entirety of a fixed income portfolio. So, fixed income audit and rolling returns for a specific strategy or a few strategies, and looking at how those may compare, is a great first step. But leveraging you and your team here in the U.S. and the Investment Consulting Group would be another avenue that I would strongly urge people to look at for the totality of their fixed income portfolio.

John

Yeah, I appreciate that, Matt. I've shared with our audience quite a bit that our business consultants, our website, and our investment consultant team are all resources that are here to help them grow their business. So I'm glad—thank you for saying that. I appreciate it.

Well, Matt, I want to thank you for being on the podcast. This was really insightful. It's great to get a glimpse behind the scenes on how things work and hear about the conversations that you're having with financial advisors. So thank you.

Matt

Thank you, John, appreciate the opportunity.

John

You got it. Folks, as always, if you want to hear more, please subscribe to the Portfolio Intelligence podcast, wherever you find your favorite podcast. And to hear more, visit our website. You can get up to speed info on what's going on in the market, some great business building ideas. And much, much more. Thanks for listening to the show.

John

This podcast is being brought to you by John Hancock Investment Management Distributors LLC, member, FINRA, SIPC. The views and opinions expressed in this podcast are those of the speaker, are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There's no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.

John P. Bryson

Hello, and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. Today is September 6, 2024. And in the Northeast, September is back-to-school month as we are in an educational mode. We are going to focus today's podcast on financial literacy, specifically as it pertains to college.

To help me with this topic, I've invited Lael Oldmixon of the University of Alaska. Lael serves as the executive director of the Education Trust of Alaska. She has worked in admissions, recruitment, and finance roles for the university, and since 2013, she has been the director of the University of Alaska Scholars and Presidents Scholarships programs. Lael, welcome to the podcast.

Lael Oldmixon

Hi, John. Thank you so much for having me.

John P. Bryson

You got it. Hey, listen, I know over your career you've talked to thousands of incoming students and parents about college. And let's be honest, college is expensive. When you talk to those folks, how do you talk to them about paying for it without falling into massive debt?

Lael Oldmixon

John, thanks for that question. I will say that I have worked at public schools and I've worked at private schools big and small, and this is the most common question that I hear from families―especially families who are debt averse. And the first thing that I just want to clarify for most people is that the ticket price that you see sometimes or often is not exactly the number that you're going to see at the end in your student account.

So, recognize that. You might want to ask some questions of the school, like what is the average aid package and what kind of support do you provide for your student? So outside of that, what I would say is … make sure that before you consider your scope of college, if you create a budget, you think about what … what your family has available to you and then also think about what you are willing to borrow. And that will help with making decisions about the types of schools that you want to look at. But again, don't let the ticket price turn you off. Make sure that you're asking those very difficult questions about what the average scholarship amounts are, or what the average aid package looks like at that school. You do want to find a college that fits your budget, or that will help to meet your college cost, help to keep your college costs low. So this is an absolutely critical piece of your questions that you are going to be asking the admissions office or the financial aid office. You also want to make sure that you are borrowing the right amount. So I mentioned that before you're going to be offered a financial aid package. You do not have to accept everything that is offered, particularly the loan.

You want to be really smart about how much you are willing to take out because every dollar that you take out, you'll be paying interest on later as you pay it back. You also want to be thinking about your credit. You want to be thinking about the loans that you might be eligible for based on your credit, or if you are not able to cover all of your costs for college with loans and with your other aid or your 529 accounts. You may have to pay for some things with credit cards and that can be a little bit scary in terms of folks maybe not taking out or charging everything to their card and not considering the … the pay back later on that as well. Because, again, every dollar that you put toward credit, you're going to have to pay back and potentially pay back with interest. I'll also talk a little bit later about how you can think strategically about keeping your, your loan cost low, and some of the guidance that I've given in the past to families on that.

John P. Bryson

That's really helpful. And some of these kinds of basic blocking and tackling components are really important and easily overlooked. So, for example, to create a budget if I were to, say, to my senior in high school, “Hey, listen, you need to create a budget.” So, she would look at me with this blank look, and I think that's pretty common with a lot of adults too. So if you're talking to a college student or a parent of a college student, what should they consider when creating a budget? Let's get into the details.

Lael Oldmixon

Thanks, John. Here is the meat and potatoes of it. You need to understand what your resources are, where your income is, and then you need to understand what your bottom line is, what your expenses are. So when you're thinking about your resources, you want to think about the job that you have, that you might be earning money to put toward college that you've built up in your savings account, or your 529 account.

You want to think about your parental or maybe grandparent assistance that will be available to you and count those dollars or estimate those dollars that you will have. Again, the 529 account. If somebody has been saving for you, you want to count those dollars in as well. And then, what financial aid and scholarships do you think you'll be eligible for? Then you want to look at your expenses. So how much are you going to have to pay in tuition, in housing and food, in textbooks? All of the fundamentals of paying for college. And then also the fun things like, you know, maybe your entertainment while you're in college, or maybe the travel that you're going to have while you're in college.

So then you're going to compare those lists together. And if they're, you know, overspending, if you don't have enough money from what you're anticipating your income is going to be, then you're going to need to adjust your expenses, and maybe decrease some of the areas of unnecessary spending. So, for example, like less pizza or fewer nights out with your friends. There are some areas that you're not going to be able to adjust. For example, the cost of tuition is probably not going to go down. The expenses of books or your housing or maybe your meal plan, you could adjust because they do have different food options at school, but you're still going to need to eat. You can also consider increasing your resources. So maybe you want to get a job while you're on campus.

Personally, I recommend getting an on-campus work, study job, or another student job and working to try to balance that with your academics. I would suggest not more than 15 hours per week because, really, what you should be thinking about when you're enrolled in college is that this is your 40-hour-a- week job, and that the student job or the work study is added on top of that. So you want to be able to attend class, do your homework, and then add on the additional work time that you can make.

John P. Bryson

That makes a ton of sense. When I think of the, just the process of a parent going through this, walking through it with their child or financial advisor, walking through it with the parent and the child together, it's a great discipline to have for going to college, getting ready for college, and really for the rest of your life. Like not knowing how to budget for what you want to save or knowing how to manage your  spending―critical, critical things, you know―that everybody needs to know, and it's a great life lesson. So let's pivot a little bit and talk about debt. We are trying to avoid debt, but sometimes that's impossible. We might have to get a loan one way or the other. What's the difference between some good debt and bad debt that you talk to folks about.

Lael Oldmixon

Okay, so you may … you definitely may have to take out a loan. And that's just sort of the fact of, of how, steps or how financing college works if you haven't saved the full amount for maybe … for four years of, of college. So when you're offered financial aid, which you would be offered, federal financial aid, you could be offered institutional aid or you could be offered private loans, or you could apply for private loans. And what I will say, in order of priority is that you want to complete the Free Application for Federal Student Aid so that you can see what federal aid you might be qualified for. So that includes grants, it includes loans. And with the loans that they offer, they have subsidized loans, and they have unsubsidized loans. So those are the best loans you could possibly ask for, because they typically have the best interest rates and are also capped.

So with the subsidized loans, that loan is probably the best loan that you could get because your interest will be delayed. It doesn't start accruing until after you have graduated from college. The unsubsidized loan, you will start paying … or the interest will start accruing while you are in college. And it's important to know the difference there because, again, that interest could be up to 8% accruing while you're in college.

You might be offered a whole bunch of unsubsidized loans, and you might be offered a whole bunch of subsidized. What I would recommend, and what I do recommend to families, is that you try to accept. If you have to take out a loan, you try to accept more of the subsidized loan and less of the unsubsidized, and also do not take out more than you need in loans. Now, if you go, again, go into the private loans, or go into having to put items on a credit card. The last resort would be credit card. I would absolutely stay away from that if you have the ability to do that. Again, it's debt that you just do not want to start with that by. You know, when you graduate, you just do not want to start with any additional debt than you have to.

John P. Bryson

Yeah. And the upfront work to do the research on the loans dramatically outweighs the … the higher interest rate costs of just going with your credit card. There's no doubt about that. That … that's great advice. So, when I think about planning for college, you want to find the right school for you, and you want to figure out how to pay for it. And there's a tradeoff, though, like you're looking for a job after graduation. If that job is going to pay more, you're willing to pay more for college, right? There's some value there. If you think in that way, how can you get more comfortable with what your, your, after graduation payments might be? And then you can think about, does that match up with the job? Any advice for folks there?

Lael Oldmixon

Absolutely. There are so many calculators available to families and to students who are interested in understanding what … what payments might look like, but also then, what a career might pay. So, I know in our higher education authority for the state of Alaska, we have a whole jobs suite that talks about what you might get paid after graduation if you pursue a credential in that area. And then you can go to the financial aid calculator like studentaid-dot-org-slash calculators, or mapping-your-future-dot-org or student-loan-gov and see what your potential payback might be. If you're looking at a career that might not have a … a salary that you can pay back, that's equivalent to what you would be paying back or more than what you'd be paying back, then you might want to consider a school that is a little less expensive for that career, and that would get you to the job either way. So there's some. It's a little bit tricky because some schools sound great. And I'm going to just use the degree in social work as an example. A degree in social work is not necessarily going to come with a big salary at the end. And so it may make sense to look for a school that has a good reputation and also cost less than maybe a school that has, a higher bill.

John P. Bryson

Higher bill for a premier, the premier reputation. Okay. That makes a lot of sense. What, what other factors should people be considering when comparing college costs? The whole picture?

Lael Oldmixon

Well, the whole picture … things that I see often are not considering what it will cost for fees, or what the what the books might cost, or computer expenses, or the … the day-to-day costs that you might have. Additionally, I think folks forget that they have to travel often to where they're going. And so, if it's going to cost a flight, for example, folks that come from, the lower 48 to Alaska, have to account for their flight time, or have to figure out how they're going to travel in and out of Alaska without a plane.

John P. Bryson

That's an interesting one I never really thought of. I guess the corollary is kind of like being house poor, right? You bought this amazing house, but you can't go do anything because you're spending it. You might find a college that's a perfect fit on paper, but think about the other costs: Cost of living in that area, costs of commuting back and forth to that area, etc. So that's really good insight. I never thought of that. Let's talk about credit history. You know, young adults probably don't understand so much about credit history. What should they know about it?

Lael Oldmixon

So having credit history is actually not a terrible thing. You know, it helps you eventually be able to maybe get a loan for a car or house for your mortgage. It's a positive thing to have credit history. So, for folks who are not familiar, often your credit score, FICO score, is used to measure what lenders are willing to lend you or how much credit they're willing to extend to you. So if you do apply for a credit card or, apply for any credit anywhere, you want to make sure that you're not applying needlessly. And I'm going to just tell a personal story about a pair of gold lamé pants that I had to have from Express in the early 2000s. And so I opened up a store credit card so that I could get a discount on these pants. And boy, did they look good, but I paid. That took me so long to pay off that credit card and it was an unnecessary credit card for me to have. So later in my life, when the FICO score was looking at how many lines of credit did I have open, my score was lower because I had some store credit cards.

I got rid of those and my FICO score eventually did go up. The other thing to know about credit is that … like, if you put things on credit, you have to pay the bills on time. Because then if you don't, it accrues interest. And before you know it, the $89 that you spent on that pair of pants goes up and you're paying $150 for those so you haven't actually saved any money. So you want to account for that as you build your budget. If you're going to have a credit card, you need to be able to pay it off every single month.

John P. Bryson

It's amazing if you think about the ripple effect, right? Small decisions early on in life. If you have a bad credit score, your loan, amount payment … amounts going to be much higher. It's going to have this compound effect, compound effect that you didn't really think through. So that's really great advice.

Lael Oldmixon

So it really is.

John P. Bryson

Yeah. It's sad but true. Right. You don't realize the pain of it until you look back over time. So … so you shared with me some great advice. Create a budget. Find a college that fits your budget. Borrow the right amount. Just because you get a loan offer doesn't mean you need to use it. Know your credit. Keep it. Keep the score strong and keep loan costs low. Any other ways that you are coaching incoming freshmen or parents to keep costs low or make sure that you're financially sound?

Lael Oldmixon

There are so many ways that you can keep costs low. One of the things that we see a lot of students taking advantage of right now are the placement classes that they can take in high school or doing dual enrollment with a university. So they're coming into college with a little bit of a head start and some credits that help them have a lighter load maybe later or, complete in a really timely manner.

Lael Oldmixon

Applying for grants or scholarships. So grants are funds that you don't have to pay back later. It's free. Free money for you. And scholarships are the same thing. And there are so many scholarships that people don't take advantage of that. It's … if folks just apply for them. They would probably get them, making sure that you have a diverse resume from high school. So, for example, if you are a volunteer or an athlete or you participate in student activities in high school, there are a number of scholarship programs that look for well-rounded, active contributors to the community. Other things that you can do … One of my favorite things that we offer here in Alaska that's a national program, is a national student exchange.

So between the our university here at the University of Alaska and other universities, a student can come here and pay an in-state rate and then go and visit Massachusetts and attend a school there at Alaska's in-state rate. So there are ways that you can get out and see the world without having to pay excessive amounts. Again, I just want to repeat here, complete the FAFSA, the Free Application for Federal Student Aid, even if you think you do not qualify. A lot of states have fellowship programs that require a FAFSA to be completed. For example, in Alaska, we have a scholarship program where individuals can get who are Alaska resident … can get up to, $7,000 a year if they just complete the FAFSA and complete the academic performance they are supposed to do in high school. That's huge, but you have to complete the FAFSA. I know other states have very similar programs and I would highly recommend that folks look into those options.

Another way that folks can keep college costs low is to think about a major in advance, declare the major, and complete the coursework. I know that sounds really simple, but the longer you delay and the longer it takes you to graduate, the more you end up having to pay and the potential that you have for, taking on unnecessary debt.

John P. Bryson

What's that? That's really good insight. So, so help me with that one a little bit more. So if you know your major, you're saying take as many in high school or early in college? Just refine that for me.

Lael Oldmixon

Early in college. What I would say is the earlier you decide what you're going to do, and I'll use myself again as an example. I was undeclared for the first two years of college. They called it exploratory where I went to school. What I did right in that situation was I completed all of my general education requirements that I would have to complete for any major, and then I declared my major. And once I declared the major, I worked hard to complete the requirements for the major within, the four years that I was aiming for. The national average for graduation, I think, is six years. And, so if you imagine the difference between paying for four years of college and six years of college, there's a real financial benefit to getting in, making a decision about your major and … and, graduating on time.

John P. Bryson

Okay. That's really interesting because I'm in your boat. When … when I went, it was kind of, “Check a couple things out, see what you like, and then gravitate toward the major.” If one doesn't jump out at you right away, your advice is focus a little bit earlier. You're going to avoid the fact that you might need to pick up a couple extra credits, therefore, pay money. Pay more money … you're going beyond four years. That's really interesting advice. I'm glad. I'm glad I asked you to clarify that. I think that's something that you don't hear a lot, but talking to an expert like yourself, that's great insight. Well Lael, this is fascinating. I do appreciate your time. It's always interesting to find, insight like this from an expert. So. Thank you. So much for joining our podcast today.

Lael Oldmixon

You're welcome. It was great to be here.

John P. Bryson

All right. Hey, folks, as always, if you want to hear more, please subscribe to the Portfolio Intelligence Podcast. You can find us on iTunes, Spotify, or wherever you find your favorite podcast. You can also find us on your website. You can catch up on all of our viewpoints around investing, business building ideas, education, savings, and much, much more. As always, thanks for listening to the show.

Important disclosures:

This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA, SIPC. The views and opinions expressed in this podcast are those of the speakers, are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.

John Hancock is not affiliated with Lael Oldmixon or the Education Trust of Alaska. 

John P. Bryson:

Hello everyone, and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. Today is July 17, 2024. And I have invited Matt Miskin, our co-chief investment strategist here at John Hancock Investment Management, to the podcast to talk about what's going on in the market and economies around the world. Welcome, Matt.

Matthew D. Miskin:

Thanks for having me, John.

John P. Bryson:

Hey, listen, first off, your co-chief is not here. Emily Roland is not here. What's going on? Is she on vacation?

Matthew D. Miskin:

She is? Yes, yeah. So, she is up, off the coast of Maine right now and enjoying some nice, cool water, in the ocean. We've been lucky to take a little bit of time here, but it is a difficult time, frankly, John, to take a little time off because these markets are moving fast. And you can take your eyes off for a second, and there's been some huge moves in this last week.

John P. Bryson:

Well, I, I hear you we're going to talk about that. I just want to make sure you're okay that she didn't invite you on vacation because you two together so much. But as long as you're okay, I'm okay.

Matthew D. Miskin:

I'm okay.

John P. Bryson:

All right. Perfect. Well, hey, listen, you mentioned it. There's been a lot of action going on. First, you know, in the first half of July. Walk us through it. There's a lot to cover.

Matthew D. Miskin:

Yeah. So we've come off the most concentrated market in the history of the United States. So the S&P 500 top 10 stock weighting was over 30%. So it's never been that concentrated. Meaning the weighting of the top 10 stocks have never been that big relative to the other parts of the index. That was going on and then we got a CPI report, inflation report last week that actually saw a deceleration of inflation.

Pretty meaningful, frankly. And that caused this massive core rotation that has been fast moving. So, the larger cap tech stocks have seen some modest selling pressure. Well, there's been a huge boost to small-cap stocks measured by the Russell 2000 Index, which is just a broad small-cap index. And that was last week. This week it actually gained further momentum.

Now, over the last five days, we have seen the largest outperformance of the Russell 2000 versus the S&P 500 ever. It's about a 10% gap between the two. That is the biggest weekly divergence we've ever seen. And then the Russell 2000 is the most overbought we've ever seen. So historic moves on the Russell 2000 coming out of historically concentrated market.

So it was basically a market in our view that was set for broadening. We've been talking about mid caps a lot over the years and just talking about how concentrated the market is. Now it's gone down into more, I would say, speculative parts of the market. We've seen this huge rotation, but it is something to take note because if this rotation continues, you really got to think about your equity positioning as the year goes on.

John P. Bryson:

Okay. So, playing that out. So, CPI is softening a little bit ... so that portends a cut in rates going forward. We've been talking about cutting rates, multiple rate cuts all of last year, most of this year―are we finally there or is that still going to be pushed out like it's been in the past?

Matthew D. Miskin:

Are we there yet? Are we there yet? You remember what I mean … it feels like, you know, the kids in the back of the car when you're on a road trip? Yeah, we're getting pretty close. John. So, the bond market is now pricing in 100% probability of a cut in September. It can change, right? You know, I mean, we could see a July CPI report that actually comes in hotter or even potentially, August. But August … there isn't a Fed meeting. They're unlikely to cut in July here just because it's so close. So, September is setting up to be the first cut. Usually, the Fed listens to the bond market when it's pricing in 100% probability of something. But look, things can always change. The bond market is also pricing in three cuts now.

September, November, December. 25 basis points a pop. And so, it is likely to happen. The bond market funny enough hasn't rallied that much on this. We still think there is gains to be had in bonds. They're kind of asleep here, not repricing much on a potentially, Fed cutting cycle. But what we've seen actually as of late is this potential Trump trade.

So, the election obviously coming up, you're getting these crosscurrents across the market, and one of them is that maybe under the Trump administration, you get deregulation, you get tax cuts would increase the deficit, that would increase Treasury issuance, it would also make the economy a bit stronger. And so that's causing a bit of the steepening of the yield curve, meaning the 10-year is going up a bit more than the 2-year yield and that's also playing out in the background. So, it is a convoluted, backdrop for rates right now. But at the end of the day, the most important thing is inflation coming down. And that is likely happening. The Fed is likely cutting in the back half. That's going to be good news for bonds no matter how you slice it.

John P. Bryson:

Okay, so rates coming down, inflation coming down. Good news for smaller-cap stocks. Good news for bonds. Still some volatility in the market. We can … we can expect we're at all-time highs. So these … these periods can be rocky. Is that a fair summary/

Matthew D. Miskin:

Yes, exactly. And yeah, so what we're seeing too, is just a huge rotation within the market. So it's … it's all of the above.

John P. Bryson:

All of the above. All right. So I want to broaden it a little bit further. One of the other things I think you're probably paying attention to is the U.S. dollar. It's actually weakening lately. Talk to us about why and what impact that's having on your views―the U.S. market versus international markets.

Matthew D. Miskin:

Yeah. So, the dollar has been in a trading range really since the beginning of 2023, bouncing around and … And really, it's been not that volatile. It's been kind of nice to see currency markets cool off and just see lower volatility. But as of late, what's happening is the Federal Reserve was really, holding tighter policy much than the rest of the world in terms of central banks.

So you had the ECB cut. Bank of Canada cut. You had a lot I mean … China has … has lower yields on their government bonds. And the Fed had kept rates where they are. So the dollar had been relatively, I would say firm, during this period but as inflation's coming down and now we're pricing in Fed cuts, the dollar's starting to weaken. That interest rate differential is potentially narrowing. And a weaker dollar really helps non-U.S. equities that are unhedged because you're … you're taking and getting exposure to these other currencies whether it's the euro, the pound, the yen and so on and so forth. And that can be another tailwind for U.S. investors beyond just the equity market. So, if you're buying Japanese stocks in yen, you could get the equities to rally and you could get the currency to rally. So it's almost a double benefit for you as an investor.

Now of course that can go the other way, but what we're seeing is a weaker dollar really helps non-U.S. equities rally. You've seen some of the French political risk that had really come about in the second quarter start to dissipate. I'm not saying it's gone, but it's just not as big of a market distraction as it was just even a couple of weeks ago.

That's strengthening the euro. So we do have non-U.S. equities in the … in our views. It is something that, you know, we're looking at as opportunities. You just got to be thoughtful there. The earnings aren't as strong as the United States. And frankly, where we're seeing the best earnings growth is on the value side, not the growth side, which is counterintuitive.

But on the non-U.S. equity front, we do look at opportunities for the currencies and also the equities. We're just tilting a bit more value in that exposure.

John P. Bryson:

That’s very good. So things may be shaping up for a rotation in U.S. equities. It's also shaping up a little bit that the international opportunity may be opening up with the rates in the U.S. falling, and then the dollar weakening. So some … some shifting sands if you will. So we've covered a lot. What are your other final thoughts around how you can position portfolios for the second half of the year.

Matthew D. Miskin:

Yeah. So I mean really the market has been one sided and it's been really a tech, U.S. large cap, tech, and everything else. And it's the everything else that looks to be gaining some traction here. It's very cheap you know. So even if you think about mid-cap stocks in the U.S. or small cap, they're trading really cheap versus large cap.

They're relatively cheap versus their own history. non-U.S. equities are … have been cheap for a long time. We want to find good earnings there, but … also that is really relatively inexpensive. And then even the bond market’s relatively cheap. You know I mean we're looking at some of the best yields we still have had in the last 20 years on high-quality bonds.

So, there's a lot of opportunities across the asset-allocation landscape beyond just large cap tech. And we are talking about trillions and trillions of dollars that are in the valuation of those large-cap tech companies. And even if you get a modest rotation where I'm talking, let's say one of those companies lose a third of their value, which would be significant, but some of these are up over 100% year-to-date. So even if they dropped a third, you'd still be up a good amount year-to-date. But a third would be almost $1 trillion of money that would be flowing into these other parts of the market. To put it in perspective, the S&P 600, which is a small-cap index as well, we just have the market value data. That market capitalization of all those two 600 stocks is about 1.3 trillion. So one stock in the S&P 500 is worth 3X what the 600 stocks are in the small cap-space. And if you got even a modest rotation, there is massive capital that can move these parts of the market. So, to us, you know, it's thinking about those opportunities.

We still like high-quality U.S. large cap stocks. We're not, you know, trying to say that that's something to totally avoid. We have earnings here, we're going to have to see how they do. But there … there's a lot in the price. There's a lot of good news in the price and incremental dollars. We prefer mid-cap, some bonds, and finding opportunities across global equities for the time being.

John P. Bryson:

So, you mentioned earlier the question, “Are we there yet? Are we there yet? Are we there yet?” You and Emily have been talking about the opportunity in bonds. You've been talking about the opportunity in mid-caps, and you've been talking about the opportunities in high-quality earnings, whether it's in the U.S. large-cap space or the value space or the international space. So, it might be time to kind of double down on that and think through, your portfolio. So, folks, keep it in mind, you know, looking for the opportunities out there. They exist. Now might be a great time to reassess.

What I'd encourage you to do after, I thank Matt for joining us today, is to keep an eye on what Matt and Emily are up to. They are posting weekly on LinkedIn so they can keep you up to date with what's going on.

As always, you can check out our website for the latest thoughts and viewpoints on all things investing, and if you're interested, you can go and subscribe to the Portfolio Intelligence Insights there, or on iTunes or wherever you download your most popular, favorite podcast.

As always, thanks so much for listening to the show. We'll talk to you again soon.

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This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA, SIPC. The views and opinions expressed in this podcast are those of the speakers, are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.

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