UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811- 21287
John Hancock Preferred Income Fund III
(Exact
name of registrant as specified in charter)
200 Berkeley Street, Boston, Massachusetts 02116
(Address of principal executive offices) (Zip code)
Salvatore Schiavone
Treasurer
200 Berkeley Street
Boston, Massachusetts 02116
(Name and address of agent for service)
Registrant's telephone number, including area code: 617-663-4497
Date of fiscal year end: | July 31 |
| |
Date of reporting period: | July 31, 2020 |
ITEM 1. REPORTS TO STOCKHOLDERS.
John Hancock
Preferred Income Fund III
Ticker: HPS
Annual report
7/31/2020
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the fund's shareholder reports such as this one will no longer be sent by mail, unless you specifically request paper copies of the reports from the transfer agent or from your financial intermediary. Instead, the reports will be made available on our website, and you will be notified by mail each time a report is posted and be provided with a website link to access the report.
If you have already elected to receive shareholder reports electronically, you will not be affected by this change and you do not need to take any action. You may elect to receive shareholder reports and other communications electronically by calling the transfer agent, Computershare, at 800-852-0218, by going to "Communication Preferences" at computershare.com/investor, or by contacting your financial intermediary.
You may elect to receive all reports in paper, free of charge, at any time. You can inform the transfer agent or your financial intermediary that you wish to continue receiving paper copies of your shareholder reports by following the instructions listed above. Your election to receive reports in paper will apply to all funds held with John Hancock Investment Management or your financial intermediary.
A message to shareholders
Dear shareholder,
The financial markets delivered strong returns during first half of the 12-month period ended July 31, 2020; however, heightened fears over the coronavirus (COVID-19) sent markets tumbling during the latter half of February and early March. Yet by the end of the first quarter, equity markets began to rise—and this comeback gathered momentum during the final four months of the period; however, holdings of preferred shares in certain market segments did not participate fully in the rebound.
Of course, it would be a mistake to consider this market turnaround a trustworthy signal of assured or swift economic recovery. While there has been economic growth in most of the United States, the pace has slowed in many areas as spending remains far below pre-pandemic levels.
From an investment perspective, we continue to think that maintaining a focus on long-term objectives while pursuing a risk-aware strategy is a prudent way forward. Above all, we believe the counsel of a trusted financial professional continues to matter now more than ever. Periods of heightened uncertainty are precisely the time to review your financial goals and follow a plan that helps you make the most of what continues to be a challenging situation.
On behalf of everyone at John Hancock Investment Management, I'd like to take this opportunity to welcome new shareholders and thank existing shareholders for the continued trust you've placed in us.
Sincerely,
Andrew G. Arnott
President and CEO,
John Hancock Investment Management
Head of Wealth and Asset Management,
United States and Europe
This commentary reflects the CEO's views as of this report's period end and are subject to change at any time. Diversification does not guarantee investment returns and does not eliminate risk of loss. All investments entail risks, including the possible loss of principal. For more up-to-date information, you can visit our website at jhinvestments.com.
John Hancock
Preferred Income Fund III
Table of contents
2 | Your fund at a glance | |
6 | Manager's discussion of fund performance | |
8 | Fund's investments | |
16 | Financial statements | |
20 | Financial highlights | |
21 | Notes to financial statements | |
30 | Report of independent registered public accounting firm | |
31 | Tax information | |
32 | Additional information | |
35 | Shareholder meeting | |
36 | Continuation of investment advisory and subadvisory agreements | |
43 | Trustees and Officers | |
47 | More information |
INVESTMENT OBJECTIVE
The fund seeks to provide a high level of current income consistent with preservation of capital. The fund's secondary investment objective is to provide growth of capital to the extent consistent with its primary objective.
AVERAGE ANNUAL TOTAL RETURNS AS OF 7/31/2020 (%)
The ICE Bank of America Hybrid Preferred Securities Index is a subset of the ICE Bank of America Fixed Rate Preferred Securities Index, including all subordinated securities with a payment deferral feature. The ICE Bank of America Fixed Rate Preferred Securities Index tracks the performance of fixed-rate U.S. dollar-denominated preferred securities issued in the U.S. domestic market. Qualifying securities must have an investment-grade rating and the country of risk must also have an investment-grade rating.
It is not possible to invest directly in an index. Index figures do not reflect expenses and sales charges, which would result in lower returns.
The performance data contained within this material represents past performance, which does not guarantee future results.
Investment returns and principal value will fluctuate and a shareholder may sustain losses. Further, the fund's performance at net asset value (NAV) is different from the fund's performance at closing market price because the closing market price is subject to the dynamics of secondary market trading. Market risk may be increased when shares are purchased at a premium to NAV or sold at a discount to NAV. Current month-end performance may be higher or lower than the performance cited. The fund's most recent performance can be found at jhinvestments.com or by calling 800-852-0218.
PERFORMANCE HIGHLIGHTS OVER THE LAST TWELVE MONTHS
The spread of COVID-19 was the key driver of the preferred market's performance
After benefiting from a period of relative calm from August 2019 through January 2020, preferred securities came under severe pressure during the global markets sell-off in March 2020.
Energy holdings hurt performance
A decline in energy demand, an effect of the pandemic, hampered the fund's return.
Communication services holdings boosted relative performance
Investors' demand for companies benefiting from the work-from-home trend helped telecommunications holdings.
PORTFOLIO COMPOSITION AS OF 7/31/2020 (%)
SECTOR COMPOSITION AS OF
7/31/2020 (%)
QUALITY COMPOSITION AS OF
7/31/2020 (%)
A note about risks
As is the case with all exchange-listed closed-end funds, shares of this fund may trade at a discount or a premium to the fund's net asset value (NAV). An investment in the fund is subject to investment and market risks, including the possible loss of the entire principal invested. There is no guarantee prior distribution levels will be maintained, and distributions may include a substantial tax return of capital. A return of capital is the return of all or a portion of a shareholder's investment in the fund. For the fiscal year ended July 31, 2020, the fund's aggregate distributions included a return of capital of $0.08 per share, or 6.45% of aggregate distributions, which could impact the tax treatment of a subsequent sale of fund shares. Fixed-income investments are subject to interest-rate risk; their value will normally decline as interest rates rise or if a creditor, grantor, or counterparty is unable or unwilling to make principal, interest, or settlement payments. Preferred stock dividends are payable only if declared by the issuer's board. Preferred stock may be subject to redemption provisions. The market value of convertible securities tend to fall as interest rates rise and rise as interest rates fall. Convertible preferred stock's value can depend heavily on the underlying common stock's value. Investments in higher-yielding, lower-rated securities are subject to a higher risk of default. An issuer of securities held by the fund may default, have its credit rating downgraded, or otherwise perform poorly, which may affect fund performance. Liquidity—the extent to which a security may be sold or a derivative position closed without negatively affecting its market value—may be impaired by reduced trading volume, heightened volatility, rising interest rates, and other market conditions. Domestic and foreign equity markets have experienced increased volatility and turmoil which may adversely affect the fund and issuers worldwide. The fund's use of leverage creates additional risks, including greater volatility of the fund's NAV, market price, and returns. There is no assurance that the fund's leverage strategy will be successful. In addition, in volatile market environments, the fund could be required to sell securities in the portfolio in order to comply with regulatory or other debt compliance requirements, which could negatively impact the fund's performance. Focusing on a particular industry or sector may increase the fund's volatility and make it more susceptible to market, economic, and regulatory risks as well as other factors affecting those industries or sectors.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, and affect fund performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social, and economic risks. Any such impact could adversely affect the fund's performance, resulting in losses to your investment.
The fund normally will invest at least 25%, measured at the time of purchase, of its total assets in the industries composing the utilities sector, which includes telecommunications companies. When the fund's investments focus on one or more sectors of the economy, they are far less diversified than the broad securities markets. This means that the fund may be more volatile than other funds, and the values of its investments may go up and down more rapidly. Because utility companies are capital intensive, they can be hurt by higher interest rates, which would increase the companies' interest burden. They can also be affected by costs in connection with capital construction programs, costs associated with environmental and other regulations, and the effects of economic declines, surplus capacity, and increased competition. In addition, the fund may invest in financial services companies, which can be hurt by economic declines, changes in interest rates, and regulatory and market impacts. The fund's investments in securities of foreign issuers involve special risks, such as political, economic, and currency risks and differences in accounting standards and financial reporting. Cybersecurity incidents may allow an unauthorized party to gain access to fund assets, customer data, or proprietary information, or cause a fund or its service providers to suffer data corruption or lose operational functionality. Similar incidents affecting issuers of a fund's securities may negatively affect performance.
Preferred securities suffered significant losses for the period, hamstrung by poor performance during late February and throughout March when growing investor anxiety over the COVID-19 pandemic led to extreme global market volatility, with preferreds hit particularly hard. April marked the beginning of a robust rebound that persisted through period end, triggered largely by the U.S. Federal Reserve's (Fed's) moves to cut interest rates and restore liquidity to financial markets, as well as fiscal stimulus designed to shore up the U.S. economy. Even after this late period rally, many preferreds still hadn't fully recovered from their March lows by period end as they tend to be issued by energy, utilities, and financial services firms that saw their values hurt by the pandemic.
What elements of the fund's positioning affected results?
The fund's overweighting in the energy sector detracted from performance relative to its comparative index, the ICE Bank of America Hybrid Preferred Securities Index. The energy sector performed poorly as investors began to discount future energy demand in light of the forced pandemic-related shutdown of the economy. Even the midstream energy companies—firms that process, store, and transport oil and gas—were caught up in the sector's decline, even though they tend to be less sensitive to commodity prices.
TOP 10 ISSUERS AS OF 7/31/2020 (%)
DTE Energy Company | 5.2 |
CenterPoint Energy, Inc. | 3.8 |
Morgan Stanley | 3.7 |
Citigroup, Inc. | 3.7 |
Algonquin Power & Utilities Corp. | 3.3 |
Southern California Edison Company | 3.2 |
U.S. Cellular Corp. | 3.1 |
Telephone & Data Systems, Inc. | 3.0 |
PPL Capital Funding, Inc. | 2.9 |
Duke Energy Corp. | 2.8 |
TOTAL | 34.7 |
As a percentage of total investments. | |
Cash and cash equivalents are not included. |
Also detracting from performance were sales of Kinder Morgan, Inc. and Stanley Black & Decker, Inc. These sales permitted a reduction of the fund's leverage in March, a strategy we pursued to manage the portfolio's overall risk profile. Given the weak market environment at the time, the sale of these securities resulted in losses for the fund.
In contrast, the fund's overweighting in the communication services sector contributed, with holdings in U.S. Cellular Corp. and Telephone and Data Systems, Inc. adding value amid investors' search for companies that would benefit from the work-from-home trend. Elsewhere, the fund's overweighting in electric utility preferreds further boosted relative performance.
How was the fund positioned at the end of the period?
We believe preferred securities will continue to recover over the next 6 to 12 months. We think interest rates will remain low given the economic impact of the coronavirus and that it will be some time before the Fed decides to raise rates for fear of derailing a recovery. The yields on preferreds looked very attractive relative to the 10-year U.S. Treasury bond as of the end of July, at wide levels not seen since the 2008 financial crisis. As the economy slowly goes back to normal, we expect this spread to revert to the historical mean, which will likely provide significant upside to preferred securities. The credit quality of the average preferred issue is very good, in our view, at an average of investment grade. We believe that, over time, preferreds' credit quality and attractive valuations will be recognized by the market and result in price appreciation for the asset class.
MANAGED BY
Joseph H. Bozoyan, CFA, Manulife IM (US) |
Brad Lutz, CFA, Manulife IM (US) |
Shares | Value | ||||
Preferred securities (A) 117.2% (79.2% of Total investments) | $602,216,038 | ||||
(Cost $621,069,323) | |||||
Communication services 11.3% | 57,972,700 | ||||
Diversified telecommunication services 2.4% | |||||
Qwest Corp., 6.125% (B) | 20,000 | 477,200 | |||
Qwest Corp., 6.500% (B) | 141,033 | 3,455,309 | |||
Qwest Corp., 6.750% | 330,000 | 8,385,300 | |||
Wireless telecommunication services 8.9% | |||||
Telephone & Data Systems, Inc., 6.875% (B) | 473,000 | 11,962,170 | |||
Telephone & Data Systems, Inc., 7.000% (B)(C) | 415,000 | 10,491,200 | |||
U.S. Cellular Corp., 6.950% (B)(C) | 673,431 | 17,374,520 | |||
U.S. Cellular Corp., 7.250% (B)(C) | 227,085 | 5,827,001 | |||
Consumer discretionary 0.3% | 1,360,800 | ||||
Internet and direct marketing retail 0.3% | |||||
QVC, Inc., 6.250% (B) | 60,000 | 1,360,800 | |||
Consumer staples 2.1% | 11,070,000 | ||||
Food products 2.1% | |||||
Ocean Spray Cranberries, Inc., 6.250% (D) | 135,000 | 11,070,000 | |||
Energy 1.8% | 9,156,300 | ||||
Oil, gas and consumable fuels 1.8% | |||||
Enbridge, Inc. (6.375% to 4-15-23, then 3 month LIBOR + 3.593%) (B) | 210,000 | 5,229,000 | |||
NuStar Logistics LP (3 month LIBOR + 6.734%), 7.009% (B)(E) | 195,000 | 3,927,300 | |||
Financials 42.9% | 220,484,694 | ||||
Banks 20.4% | |||||
Bank of America Corp., 6.000% (B) | 142,625 | 3,892,236 | |||
Bank of America Corp. (6.450% to 12-15-66, then 3 month LIBOR + 1.327%) (B) | 140,000 | 3,719,800 | |||
Citigroup Capital XIII (3 month LIBOR + 6.370%), 6.638% (E) | 338,275 | 9,133,425 | |||
Citigroup, Inc. (7.125% to 9-30-23, then 3 month LIBOR + 4.040%) (B)(C) | 616,412 | 17,499,937 | |||
Fifth Third Bancorp, 6.000% (B) | 211,595 | 5,670,746 | |||
First Republic Bank, 4.700% (B)(C) | 171,950 | 4,467,261 | |||
GMAC Capital Trust I (3 month LIBOR + 5.785%), 6.177% (E) | 466,377 | 11,225,694 | |||
Pinnacle Financial Partners, Inc., 6.750% | 185,000 | 4,810,000 | |||
Synovus Financial Corp. (6.300% to 6-21-23, then 3 month LIBOR + 3.352%) (B) | 211,500 | 5,317,110 |
8 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
Shares | Value | ||||
Financials (continued) | |||||
Banks (continued) | |||||
The PNC Financial Services Group, Inc. (6.125% to 5-1-22, then 3 month LIBOR + 4.067%) (B) | 210,000 | $5,699,400 | |||
Truist Financial Corp., Series G, 5.200% (B) | 387,500 | 9,830,875 | |||
U.S. Bancorp (6.500% to 1-15-22, then 3 month LIBOR + 4.468%) (B) | 180,000 | 4,809,600 | |||
Wells Fargo & Company (6.625% to 3-15-24, then 3 month LIBOR + 3.690%) (B)(C) | 388,450 | 10,406,576 | |||
Wells Fargo & Company, 6.000% | 87,815 | 2,278,799 | |||
Wells Fargo & Company, 7.500% | 4,000 | 5,406,000 | |||
Western Alliance Bancorp, 6.250% (B) | 20,000 | 510,200 | |||
Capital markets 5.5% | |||||
Morgan Stanley (6.375% to 10-15-24, then 3 month LIBOR + 3.708%) (B)(C) | 170,000 | 4,800,800 | |||
Morgan Stanley (6.875% to 1-15-24, then 3 month LIBOR + 3.940%) (B) | 130,000 | 3,731,000 | |||
Morgan Stanley (7.125% to 10-15-23, then 3 month LIBOR + 4.320%) | 692,953 | 19,922,399 | |||
Consumer finance 1.3% | |||||
Navient Corp., 6.000% | 295,208 | 6,465,055 | |||
Insurance 15.6% | |||||
AEGON Funding Company LLC, 5.100% (B)(C) | 347,450 | 8,710,572 | |||
American Equity Investment Life Holding Company (6.625% to 9-1-25, then 5 Year CMT + 6.297%) | 183,925 | 4,585,250 | |||
American Financial Group, Inc., 5.125% (B)(C) | 162,725 | 4,312,213 | |||
American International Group, Inc., 5.850% (B) | 261,000 | 7,187,940 | |||
Athene Holding, Ltd., Series A (6.350% to 6-30-29, then 3 month LIBOR + 4.253%) (B)(C) | 325,000 | 8,469,500 | |||
Brighthouse Financial, Inc., 6.600% | 293,491 | 7,765,772 | |||
Prudential Financial, Inc., 5.750% (B) | 150,000 | 3,909,000 | |||
Prudential PLC, 6.500% (B)(C) | 85,943 | 2,389,215 | |||
The Hartford Financial Services Group, Inc. (7.875% to 4-15-22, then 3 month LIBOR + 5.596%) (B) | 61,882 | 1,769,206 | |||
The Phoenix Companies, Inc., 7.450% | 574,500 | 8,129,175 | |||
Unum Group, 6.250% (B) | 155,000 | 4,079,600 | |||
W.R. Berkley Corp., 5.625% (B) | 746,101 | 18,898,738 | |||
Thrifts and mortgage finance 0.1% | |||||
Federal National Mortgage Association, Series S, 8.250% (F) | 80,000 | 681,600 | |||
Information technology 2.1% | 10,838,645 | ||||
Semiconductors and semiconductor equipment 2.1% | |||||
Broadcom, Inc., 8.000% (B)(C) | 9,500 | 10,838,645 |
SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 9 |
Shares | Value | ||||
Real estate 4.4% | $22,868,463 | ||||
Equity real estate investment trusts 4.4% | |||||
American Homes 4 Rent, Series E, 6.350% (B) | 100,006 | 2,605,156 | |||
American Homes 4 Rent, Series F, 5.875% (B) | 175,450 | 4,623,108 | |||
Digital Realty Trust, Inc., 6.350% (B) | 921 | 23,366 | |||
Diversified Healthcare Trust, 5.625% | 862,332 | 15,616,833 | |||
Utilities 52.3% | 268,464,436 | ||||
Electric utilities 21.3% | |||||
Duke Energy Corp., 5.125% (B)(C) | 556,300 | 14,363,666 | |||
Duke Energy Corp., 5.750% (B) | 240,000 | 6,842,400 | |||
Entergy Louisiana LLC, 5.250% (B) | 153,587 | 4,047,017 | |||
Interstate Power & Light Company, 5.100% (B) | 157,514 | 4,011,882 | |||
NextEra Energy Capital Holdings, Inc., 5.125% (B) | 190,000 | 4,827,900 | |||
NextEra Energy, Inc., 5.279% (B)(C) | 240,000 | 11,625,600 | |||
PG&E Corp., 5.500% | 60,000 | 6,015,000 | |||
PPL Capital Funding, Inc., 5.900% (B) | 866,981 | 22,307,421 | |||
SCE Trust II, 5.100% (B)(C) | 557,307 | 13,464,537 | |||
SCE Trust III (5.750% to 3-15-24, then 3 month LIBOR + 2.990%) (B) | 120,000 | 2,709,600 | |||
The Southern Company, 6.250% (B) | 161,850 | 4,127,175 | |||
The Southern Company, 6.750% (B) | 320,000 | 14,758,400 | |||
Gas utilities 4.1% | |||||
South Jersey Industries, Inc., 5.625% (B) | 251,850 | 6,507,804 | |||
South Jersey Industries, Inc., 7.250% | 370,750 | 14,670,578 | |||
Multi-utilities 26.9% | |||||
Algonquin Power & Utilities Corp. (6.200% to 7-1-24, then 3 month LIBOR + 4.010%) | 375,000 | 10,147,500 | |||
Algonquin Power & Utilities Corp. (6.875% to 10-17-23, then 3 month LIBOR + 3.677%) | 558,675 | 15,279,761 | |||
CenterPoint Energy, Inc., 7.000% (B) | 800,000 | 28,920,000 | |||
CMS Energy Corp., 5.625% (B)(C) | 235,000 | 6,429,600 | |||
Dominion Energy, Inc., 7.250% (B) | 73,700 | 7,664,063 | |||
DTE Energy Company (Callable 9-1-20), 5.250% (B) | 267,000 | 6,856,560 | |||
DTE Energy Company (Callable 12-1-22), 5.250% (B) | 200,000 | 5,322,000 | |||
DTE Energy Company, 6.000% (B)(C) | 97,772 | 2,604,646 | |||
DTE Energy Company, 6.250% (B) | 544,000 | 24,528,960 | |||
Integrys Holding, Inc. (6.000% to 8-1-23, then 3 month LIBOR + 3.220%) (B) | 296,303 | 7,533,608 | |||
NiSource, Inc. (6.500% to 3-15-24, then 5 Year CMT + 3.632%) (B)(C) | 348,000 | 9,552,600 | |||
Sempra Energy, 5.750% (B) | 370,000 | 9,960,400 | |||
Sempra Energy, 6.750% (B) | 32,700 | 3,385,758 |
10 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
Shares | Value | ||||
Common stocks 3.4% (2.3% of Total investments) | $17,510,345 | ||||
(Cost $29,153,973) | |||||
Communication services 0.4% | 1,978,250 | ||||
Diversified telecommunication services 0.4% | |||||
CenturyLink, Inc. (B)(C) | 205,000 | 1,978,250 | |||
Energy 3.0% | 15,532,095 | ||||
Oil, gas and consumable fuels 3.0% | |||||
BP PLC, ADR (B)(C) | 183,000 | 4,033,320 | |||
Equitrans Midstream Corp. (B) | 468,013 | 4,516,325 | |||
The Williams Companies, Inc. (B)(C) | 365,000 | 6,982,450 | |||
Rate (%) | Maturity date | Par value^ | Value | ||
Corporate bonds 27.1% (18.3% of Total investments) | $139,049,953 | ||||
(Cost $147,472,863) | |||||
Communication services 1.5% | 7,669,598 | ||||
Wireless telecommunication services 1.5% | |||||
SoftBank Group Corp. (6.875% to 7-19-27, then 5 Year ICE Swap Rate + 4.854%) (B)(G) | 6.875 | 07-19-27 | 7,895,000 | 7,669,598 | |
Consumer discretionary 2.3% | 11,976,500 | ||||
Automobiles 2.3% | |||||
General Motors Financial Company, Inc. (6.500% to 9-30-28, then 3 month LIBOR + 3.436%) (G) | 6.500 | 09-30-28 | 12,682,000 | 11,976,500 | |
Consumer staples 0.2% | 862,400 | ||||
Food products 0.2% | |||||
Land O' Lakes, Inc. (B)(D)(G) | 8.000 | 07-16-25 | 880,000 | 862,400 | |
Energy 4.7% | 24,209,598 | ||||
Oil, gas and consumable fuels 4.7% | |||||
DCP Midstream LP (7.375% to 12-15-22, then 3 month LIBOR + 5.148%) (G) | 7.375 | 12-15-22 | 12,273,000 | 9,059,857 | |
Enbridge, Inc. (6.250% to 3-1-28, then 3 month LIBOR + 3.641%) (B) | 6.250 | 03-01-78 | 1,000,000 | 990,000 | |
Energy Transfer Operating LP (3 month LIBOR + 3.018%) (B)(E) | 3.704 | 11-01-66 | 9,000,000 | 4,500,000 | |
Energy Transfer Operating LP (6.625% to 2-15-28, then 3 month LIBOR + 4.155%) (B)(C)(G) | 6.625 | 02-15-28 | 8,550,000 | 6,156,000 | |
MPLX LP (6.875% to 2-15-23, then 3 month LIBOR + 4.652%) (B)(G) | 6.875 | 02-15-23 | 4,000,000 | 3,503,741 | |
Financials 13.6% | 69,711,049 | ||||
Banks 8.1% | |||||
Barclays PLC (7.750% to 9-15-23, then 5 Year U.S. Swap Rate + 4.842%) (B)(G) | 7.750 | 09-15-23 | 2,870,000 | 2,923,813 |
SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 11 |
Rate (%) | Maturity date | Par value^ | Value | ||
Financials (continued) | |||||
Banks (continued) | |||||
Barclays PLC (8.000% to 6-15-24, then 5 Year CMT + 5.672%) (G) | 8.000 | 06-15-24 | 4,839,000 | $5,123,291 | |
Citigroup, Inc. (6.125% to 11-15-20, then 3 month LIBOR + 4.478%) (G) | 6.125 | 11-15-20 | 1,800,000 | 1,795,500 | |
Citizens Financial Group, Inc. (6.375% to 4-6-24, then 3 month LIBOR + 3.157%) (B)(G) | 6.375 | 04-06-24 | 7,500,000 | 7,232,288 | |
Comerica, Inc. (5.625% to 7-1-25, then 5 Year CMT + 5.291%) (G) | 5.625 | 07-01-25 | 3,750,000 | 4,004,250 | |
Huntington Bancshares, Inc. (5.625% to 7-15-30, then 10 Year CMT + 4.945%) (G) | 5.625 | 07-15-30 | 2,000,000 | 2,207,460 | |
JPMorgan Chase & Co. (3 month LIBOR + 3.320%) (B)(C)(E)(G) | 3.616 | 10-01-20 | 5,550,000 | 5,193,585 | |
Lloyds Banking Group PLC (7.500% to 6-27-24, then 5 Year U.S. Swap Rate + 4.760%) (G) | 7.500 | 06-27-24 | 8,000,000 | 8,440,000 | |
Regions Financial Corp. (5.750% to 6-15-25, then 5 Year CMT + 5.430%) (G) | 5.750 | 06-15-25 | 2,400,000 | 2,556,000 | |
Wells Fargo & Company (5.900% to 6-15-24, then 3 month LIBOR + 3.110%) (B)(G) | 5.900 | 06-15-24 | 2,000,000 | 2,031,922 | |
Capital markets 1.5% | |||||
The Bank of New York Mellon Corp. (4.700% to 9-20-25, then 5 Year CMT + 4.358%) (G) | 4.700 | 09-20-25 | 3,000,000 | 3,248,340 | |
The Charles Schwab Corp. (5.375% to 6-1-25, then 5 Year CMT + 4.971%) (B)(G) | 5.375 | 06-01-25 | 4,100,000 | 4,489,500 | |
Consumer finance 0.9% | |||||
Discover Financial Services (6.125% to 6-23-25, then 5 Year CMT + 5.783%) (G) | 6.125 | 06-23-25 | 4,500,000 | 4,782,600 | |
Insurance 3.1% | |||||
Markel Corp. (6.000% to 6-1-25, then 5 Year CMT + 5.662%) (G) | 6.000 | 06-01-25 | 2,500,000 | 2,628,125 | |
MetLife, Inc. (5.875% to 3-15-28, then 3 month LIBOR + 2.959%) (B)(C)(G) | 5.875 | 03-15-28 | 5,000,000 | 5,475,000 | |
SBL Holdings, Inc. (7.000% to 5-13-25, then 5 Year CMT + 5.580%) (B)(C)(D)(G) | 7.000 | 05-13-25 | 9,050,000 | 7,579,375 | |
Materials 0.6% | 3,030,180 | ||||
Chemicals 0.6% | |||||
Braskem Netherlands Finance BV (8.500% to 10-24-25, then 5 Year CMT + 8.220%) (D) | 8.500 | 01-23-81 | 3,000,000 | 3,030,180 | |
Utilities 4.2% | 21,590,628 | ||||
Electric utilities 2.3% | |||||
Emera, Inc. (6.750% to 6-15-26, then 3 month LIBOR + 5.440%) (B)(C) | 6.750 | 06-15-76 | 3,370,000 | 3,745,755 | |
Southern California Edison Company (6.250% to 2-1-22, then 3 month LIBOR + 4.199%) (B)(C)(G) | 6.250 | 02-01-22 | 8,000,000 | 7,920,000 |
12 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
Rate (%) | Maturity date | Par value^ | Value | ||
Utilities (continued) | |||||
Multi-utilities 1.9% | |||||
CMS Energy Corp. (4.750% to 3-1-30, then 5 Year CMT + 4.116%) (B) | 4.750 | 06-01-50 | 4,500,000 | $4,804,853 | |
Dominion Energy, Inc. (5.750% to 10-1-24, then 3 month LIBOR + 3.057%) (B)(C) | 5.750 | 10-01-54 | 3,000,000 | 3,170,020 | |
NiSource, Inc. (5.650% to 6-15-23, then 5 Year CMT + 2.843%) (B)(G) | 5.650 | 06-15-23 | 2,000,000 | 1,950,000 | |
Capital preferred securities (H) 0.1% (0.1% of Total investments) | $626,793 | ||||
(Cost $635,707) | |||||
Financials 0.1% | 626,793 | ||||
Banks 0.1% | |||||
Wachovia Capital Trust III (Greater of 3 month LIBOR + 0.930% or 5.570%) (B)(E)(G) | 5.570 | 08-31-20 | 630,000 | 626,793 | |
Par value^ | Value | ||||
Short-term investments 0.1% (0.1% of Total investments) | $675,000 | ||||
(Cost $675,000) | |||||
Repurchase agreement 0.1% | 675,000 | ||||
Repurchase Agreement with State Street Corp. dated 7-31-20 at 0.000% to be repurchased at $675,000 on 8-3-20, collateralized by $688,700 U.S. Treasury Notes, 0.160% due 7-31-22 (valued at $688,577) | 675,000 | 675,000 | |||
Total investments (Cost $799,006,866) 147.9% | $760,078,129 | ||||
Other assets and liabilities, net (47.9%) | (246,328,923) | ||||
Total net assets 100.0% | $513,749,206 |
The percentage shown for each investment category is the total value of the category as a percentage of the net assets of the fund unless otherwise indicated. | |
^All par values are denominated in U.S. dollars unless otherwise indicated. | |
Security Abbreviations and Legend | |
ADR | American Depositary Receipt |
CMT | Constant Maturity Treasury |
ICE | Intercontinental Exchange |
LIBOR | London Interbank Offered Rate |
(A) | Includes preferred stocks and hybrid securities with characteristics of both equity and debt that pay dividends on a periodic basis. |
(B) | All of a portion of this security is pledged as collateral pursuant to the Credit Facility Agreement. Total collateral value at 7-31-20 was $524,047,842. A portion of the securities pledged as collateral were loaned pursuant to the Credit Facility Agreement. The value of securities on loan amounted to $211,918,452. |
(C) | All or a portion of this security is on loan as of 7-31-20, and is a component of the fund's leverage under the Credit Facility Agreement. |
(D) | These securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers, in transactions exempt from registration. |
(E) | Variable rate obligation. The coupon rate shown represents the rate at period end. |
(F) | Non-income producing security. |
SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 13 |
(G) | Perpetual bonds have no stated maturity date. Date shown as maturity date is next call date. |
(H) | Includes hybrid securities with characteristics of both equity and debt that trade with, and pay, interest income. |
14 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
Open contracts | Number
of contracts |
Position | Expiration
date |
Notional
basis^ |
Notional
value^ |
Unrealized
appreciation (depreciation) |
10-Year U.S. Treasury Note Futures | 680 | Short | Sep 2020 | $(94,438,862) | $(95,253,125) | $(814,263) |
$(814,263) |
Interest rate swaps | ||||||||||
Counterparty
(OTC)/ Centrally cleared |
Notional
amount |
Currency | Payments
made |
Payments
received |
Fixed
payment frequency |
Floating
payment frequency |
Maturity
date |
Unamortized
upfront payment paid (received) |
Unrealized
appreciation (depreciation) |
Value |
Centrally cleared | 77,000,000 | USD | Fixed 2.136% | USD 3 Month LIBOR BBA(a) | Semi-Annual | Quarterly | Oct 2022 | — | $(3,797,892) | $(3,797,892) |
— | $(3,797,892) | $(3,797,892) |
(a) | At 7-31-20, the 3 month LIBOR was 0.249%. |
Derivatives Currency Abbreviations | |
USD | U.S. Dollar |
Derivatives Abbreviations | |
BBA | The British Banker's Association |
LIBOR | London Interbank Offered Rate |
OTC | Over-the-counter |
SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 15 |
Assets | |
Unaffiliated investments, at value (Cost $799,006,866) | $760,078,129 |
Receivable for centrally cleared swaps | 816,154 |
Cash | 107,936 |
Collateral held at broker for futures contracts | 1,360,000 |
Dividends and interest receivable | 3,139,473 |
Receivable for investments sold | 563,627 |
Other assets | 56,375 |
Total assets | 766,121,694 |
Liabilities | |
Payable for futures variation margin | 42,534 |
Credit facility agreement payable | 252,000,000 |
Interest payable | 189,295 |
Payable to affiliates | |
Accounting and legal services fees | 23,344 |
Trustees' fees | 149 |
Other liabilities and accrued expenses | 117,166 |
Total liabilities | 252,372,488 |
Net assets | $513,749,206 |
Net assets consist of | |
Paid-in capital | $585,143,160 |
Total distributable earnings (loss) | (71,393,954) |
Net assets | $513,749,206 |
Net asset value per share | |
Based on 31,697,320 shares of beneficial interest outstanding - unlimited number of shares authorized with no par value | $16.21 |
16 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
Investment income | |
Dividends | $43,754,828 |
Interest | 8,747,846 |
Total investment income | 52,502,674 |
Expenses | |
Investment management fees | 6,280,611 |
Interest expense | 5,930,130 |
Accounting and legal services fees | 86,703 |
Transfer agent fees | 27,447 |
Trustees' fees | 40,833 |
Custodian fees | 78,403 |
Printing and postage | 147,726 |
Professional fees | 66,485 |
Stock exchange listing fees | 30,990 |
Other | 28,049 |
Total expenses | 12,717,377 |
Less expense reductions | (59,715) |
Net expenses | 12,657,662 |
Net investment income | 39,845,012 |
Realized and unrealized gain (loss) | |
Net realized gain (loss) on | |
Unaffiliated investments | (8,282,148) |
Futures contracts | (9,072,495) |
Swap contracts | (278,168) |
(17,632,811) | |
Change in net unrealized appreciation (depreciation) of | |
Unaffiliated investments | (58,199,135) |
Futures contracts | 690,642 |
Swap contracts | (2,654,064) |
(60,162,557) | |
Net realized and unrealized loss | (77,795,368) |
Decrease in net assets from operations | $(37,950,356) |
SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 17 |
Year
ended 7-31-20 |
Year
ended 7-31-19 | |
Increase (decrease) in net assets | ||
From operations | ||
Net investment income | $39,845,012 | $37,867,131 |
Net realized loss | (17,632,811) | (9,094,447) |
Change in net unrealized appreciation (depreciation) | (60,162,557) | 14,856,515 |
Increase (decrease) in net assets resulting from operations | (37,950,356) | 43,629,199 |
Distributions to shareholders | ||
From earnings | (39,820,447) | (39,440,405) |
From tax return of capital | (2,744,217) | (6,897,167) |
Total distributions | (42,564,664) | (46,337,572) |
Fund share transactions | ||
Issued pursuant to Dividend Reinvestment Plan | 1,084,737 | 1,030,759 |
Total decrease | (79,430,283) | (1,677,614) |
Net assets | ||
Beginning of year | 593,179,489 | 594,857,103 |
End of year | $513,749,206 | $593,179,489 |
Share activity | ||
Shares outstanding | ||
Beginning of year | 31,633,379 | 31,576,985 |
Issued pursuant to Dividend Reinvestment Plan | 63,941 | 56,394 |
End of year | 31,697,320 | 31,633,379 |
18 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
Cash flows from operating activities | |
Net decrease in net assets from operations | $(37,950,356) |
Adjustments to reconcile net decrease in net assets from operations to net cash provided by operating activities: | |
Long-term investments purchased | (279,230,990) |
Long-term investments sold | 351,174,546 |
Net purchases and sales in short-term investments | (633,838) |
Net amortization of premium (discount) | 344,730 |
(Increase) Decrease in assets: | |
Receivable for centrally cleared swaps | (100,187) |
Collateral held at broker for futures contracts | (571,000) |
Dividends and interest receivable | (8,699) |
Receivable for investments sold | 3,667,150 |
Other assets | 8,268 |
Increase (Decrease) in liabilities: | |
Payable for futures variation margin | (10,577) |
Payable for investments purchased | (4,206,042) |
Interest payable | (611,396) |
Payable to affiliates | (49,714) |
Other liabilities and accrued expenses | (23,494) |
Net change in unrealized (appreciation) depreciation on: | |
Investments | 58,199,135 |
Net realized (gain) loss on: | |
Investments | 8,282,148 |
Proceeds received as return of capital | 822,156 |
Net cash provided by operating activities | $99,101,840 |
Cash flows provided by (used in) financing activities | |
Distributions to shareholders | $(41,479,927) |
Decrease in due to custodian | (13,977) |
Borrowings (repayments) under the credit facility agreement | (57,500,000) |
Net cash used in financing activities | $(98,993,904) |
Net increase in cash | $107,936 |
Cash at beginning of year | — |
Cash at end of year | $107,936 |
Supplemental disclosure of cash flow information: | |
Cash paid for interest | $(6,541,526) |
Noncash financing activities not included herein consists of reinvestment distributions | $1,084,737 |
SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 19 |
Period ended | 7-31-20 | 7-31-19 | 7-31-18 | 7-31-17 | 7-31-16 |
Per share operating performance | |||||
Net asset value, beginning of period | $18.75 | $18.84 | $19.53 | $20.06 | $19.04 |
Net investment income1 | 1.26 | 1.20 | 1.33 | 1.43 | 1.41 |
Net realized and unrealized gain (loss) on investments | (2.46) | 0.18 | (0.55) | (0.49) | 1.08 |
Total from investment operations | (1.20) | 1.38 | 0.78 | 0.94 | 2.49 |
Less distributions | |||||
From net investment income | (1.26) | (1.25) | (1.47) | (1.45) | (1.35) |
From tax return of capital | (0.08) | (0.22) | — | (0.02) | (0.12) |
Total distributions | (1.34) | (1.47) | (1.47) | (1.47) | (1.47) |
Net asset value, end of period | $16.21 | $18.75 | $18.84 | $19.53 | $20.06 |
Per share market value, end of period | $16.59 | $19.53 | $18.43 | $19.22 | $20.17 |
Total return at net asset value (%)2,3 | (6.51) | 7.92 | 4.50 | 5.28 | 14.13 |
Total return at market value (%)2 | (8.14) | 14.91 | 3.88 | 3.04 | 28.07 |
Ratios and supplemental data | |||||
Net assets, end of period (in millions) | $514 | $593 | $595 | $617 | $633 |
Ratios (as a percentage of average net assets): | |||||
Expenses before reductions | 2.32 | 2.94 | 2.48 | 2.03 | 1.79 |
Expenses including reductions4 | 2.31 | 2.93 | 2.46 | 2.02 | 1.78 |
Net investment income | 7.26 | 6.62 | 7.11 | 7.45 | 7.35 |
Portfolio turnover (%) | 34 | 36 | 23 | 21 | 15 |
Senior securities | |||||
Total debt outstanding end of period (in millions) | $252 | $310 | $310 | $310 | $310 |
Asset coverage per $1,000 of debt5 | $3,039 | $2,917 | $2,922 | $2,993 | $3,046 |
1 | Based on average daily shares outstanding. |
2 | Total return based on net asset value reflects changes in the fund’s net asset value during each period. Total return based on market value reflects changes in market value. Each figure assumes that distributions from income, capital gains and tax return of capital, if any, were reinvested. |
3 | Total returns would have been lower had certain expenses not been reduced during the applicable periods. |
4 | Expenses including reductions excluding interest expense were 1.23%, 1.25%, 1.23%, 1.23% and 1.23% for the periods ended 7-31-20, 7-31-19, 7-31-18, 7-31-17 and 7-31-16, respectively. |
5 | Asset coverage equals the total net assets plus borrowings divided by the borrowings of the fund outstanding at period end (Note 7). As debt outstanding changes, the level of invested assets may change accordingly. Asset coverage ratio provides a measure of leverage. |
20 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 21 |
Total
value at 7-31-20 |
Level
1 quoted price |
Level
2 significant observable inputs |
Level
3 significant unobservable inputs | |
Investments in securities: | ||||
Assets | ||||
Preferred securities | ||||
Communication services | $57,972,700 | $57,972,700 | — | — |
Consumer discretionary | 1,360,800 | 1,360,800 | — | — |
Consumer staples | 11,070,000 | — | $11,070,000 | — |
Energy | 9,156,300 | 9,156,300 | — | — |
Financials | 220,484,694 | 212,355,519 | 8,129,175 | — |
Information technology | 10,838,645 | 10,838,645 | — | — |
Real estate | 22,868,463 | 22,868,463 | — | — |
Utilities | 268,464,436 | 260,930,828 | 7,533,608 | — |
Common stocks | 17,510,345 | 17,510,345 | — | — |
Corporate bonds | 139,049,953 | — | 139,049,953 | — |
Capital preferred securities | 626,793 | — | 626,793 | — |
Short-term investments | 675,000 | — | 675,000 | — |
Total investments in securities | $760,078,129 | $592,993,600 | $167,084,529 | — |
Derivatives: | ||||
Liabilities | ||||
Futures | $(814,263) | $(814,263) | — | — |
Swap contracts | (3,797,892) | — | $(3,797,892) | — |
22 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 23 |
July 31, 2020 | July 31, 2019 | |
Ordinary income | $39,820,447 | $39,440,405 |
Return of capital | 2,744,217 | 6,897,167 |
Total | $42,564,664 | $46,337,572 |
24 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 25 |
Risk | Statement
of assets and liabilities location |
Financial
instruments location |
Assets
derivatives fair value |
Liabilities
derivatives fair value |
Interest rate | Receivable/payable for futures variation margin | Futures 1 | — | $(814,263) |
Interest rate | Swap contracts, at value | Interest rate swaps2 | — | (3,797,892) |
— | $(4,612,155) |
1 | Reflects cumulative appreciation/depreciation on futures as disclosed in Fund's investments. Only the year end variation margin is separately disclosed on the Statement of assets and liabilities. |
2 | Reflects cumulative value of swap contracts. Receivable/payable for centrally cleared swaps, which includes value and margin, are shown separately on the Statement of assets and liabilities. |
Statement of operations location - Net realized gain (loss) on: | |||
Risk | Futures contracts | Swap contracts | Total |
Interest rate | $(9,072,495) | $(278,168) | $(9,350,663) |
Statement of operations location - Change in net unrealized appreciation (depreciation) of: | |||
Risk | Futures contracts | Swap contracts | Total |
Interest rate | $690,642 | $(2,654,064) | $(1,963,422) |
26 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT |
• | the likelihood of greater volatility of NAV and market price of shares; |
• | fluctuations in the interest rate paid for the use of the CFA; |
• | increased operating costs, which may reduce the fund’s total return; |
• | the potential for a decline in the value of an investment acquired through leverage, while the fund’s obligations under such leverage remains fixed; and |
• | the fund is more likely to have to sell securities in a volatile market in order to meet asset coverage or other debt compliance requirements. |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 27 |
28 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 29 |
30 | JOHN HANCOCK PREFERRED INCOME FUND III | ANNUAL REPORT |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND III | 31 |
Additional information (Unaudited)
Investment objective and principal investment strategies
The fund is a closed-end, diversified management investment company, common shares of which were initially offered to the public on June 19, 2003 and are publicly traded on the New York Stock Exchange (the NYSE). The fund's primary investment objective is to provide a high level of current income consistent with preservation of capital. The fund's secondary investment objective is to provide growth of capital to the extent consistent with its primary investment objective. The fund seeks to achieve its investment objectives by investing in securities that, in the opinion of the Advisor, may be undervalued relative to similar securities in the marketplace. The fund's principal investment strategies include, but are not limited to, the following: Under normal market conditions, the fund invests at least 80% of its assets (net assets plus borrowings for investment purposes) in preferred stocks and other preferred securities, including convertible preferred securities. The fund normally invests 25% or more of its total assets in the industries composing the utilities sector. The fund will invest at least 50% of its total assets in preferred securities and other fixed-income securities that are rated investment grade (i.e., at least "Baa" by Moody's Investors Service, Inc. ("Moody's") or "BBB" by Standard & Poor's Ratings Services ("S&P"), or in unrated securities determined by the Advisor to be of comparable credit quality. The fund can invest up to 50% of its total assets in preferred securities and other fixed income securities rated below investment grade by either S&P or Moody's or in comparable unrated securities. Below investment grade securities must be rated "Ca" or higher by Moody's or "CC" or higher by S&P (or determined to be of comparable quality). The fund may not invest more than 5% of its total assets in securities rated below "B" or in comparable rated securities. The investment policies are based on credit quality ratings at the time of acquisition.
Dividends and distributions
During the year ended July 31, 2020, distributions from net investment income totaling $1.2637 per share and tax return of capital totaling $0.0807 per share were paid to shareholders. The dates of payments and the amounts per share were as follows:
Payment Date | Distributions | ||||
August 30, 2019 | $0.1222 | ||||
September 30, 2019 | 0.1222 | ||||
October 31, 2019 | 0.1100 | ||||
November 29, 2019 | 0.1100 | ||||
December 31, 2019 | 0.1100 | ||||
January 31, 2020 | 0.1100 | ||||
February 28, 2020 | 0.1100 | ||||
March 31, 2020 | 0.1100 | ||||
April 30, 2020 | 0.1100 | ||||
May 29, 2020 | 0.1100 | ||||
June 30, 2020 | 0.1100 | ||||
July 31, 2020 | 0.1100 | ||||
Total | $1.3444 |
Dividend reinvestment plan
The fund's Dividend Reinvestment Plan (the Plan) provides that distributions of dividends and capital gains are automatically reinvested in common shares of the fund by Computershare Trust Company, N.A. (the Plan Agent). Every shareholder holding at least one full share of the fund is entitled to participate in the Plan. In addition, every shareholder who became a shareholder of the fund after June 30, 2011, and holds at least one full share of the fund
will be automatically enrolled in the Plan. Shareholders may withdraw from the Plan at any time and shareholders who do not participate in the Plan will receive all distributions in cash.
If the fund declares a dividend or distribution payable either in cash or in common shares of the fund and the market price of shares on the payment date for the distribution or dividend equals or exceeds the fund's net asset value per share (NAV), the fund will issue common shares to participants at a value equal to the higher of NAV or 95% of the market price. The number of additional shares to be credited to each participant's account will be determined by dividing the dollar amount of the distribution or dividend by the higher of NAV or 95% of the market price. If the market price is lower than NAV, or if dividends or distributions are payable only in cash, then participants will receive shares purchased by the Plan Agent on participants' behalf on the NYSE or otherwise on the open market. If the market price exceeds NAV before the Plan Agent has completed its purchases, the average per share purchase price may exceed NAV, resulting in fewer shares being acquired than if the fund had issued new shares.
There are no brokerage charges with respect to common shares issued directly by the fund. However, whenever shares are purchased or sold on the NYSE or otherwise on the open market, each participant will pay a pro rata portion of brokerage trading fees, currently $0.05 per share purchased or sold. Brokerage trading fees will be deducted from amounts to be invested.
The reinvestment of dividends and net capital gains distributions does not relieve participants of any income tax that may be payable on such dividends or distributions.
Shareholders participating in the Plan may buy additional shares of the fund through the Plan at any time in amounts of at least $50 per investment, up to a maximum of $10,000, with a total calendar year limit of $100,000. Shareholders will be charged a $5 transaction fee plus $0.05 per share brokerage trading fee for each order. Purchases of additional shares of the fund will be made on the open market. Shareholders who elect to utilize monthly electronic fund transfers to buy additional shares of the fund will be charged a $2 transaction fee plus $0.05 per share brokerage trading fee for each automatic purchase. Shareholders can also sell fund shares held in the Plan account at any time by contacting the Plan Agent by telephone, in writing or by visiting the Plan Agent's website at www.computershare.com/investor. The Plan Agent will mail a check (less applicable brokerage trading fees) on settlement date (two business days after the shares have been sold). If shareholders choose to sell shares through their stockbroker, they will need to request that the Plan Agent electronically transfer those shares to their stockbroker through the Direct Registration System.
Shareholders participating in the Plan may withdraw from the Plan at any time by contacting the Plan Agent by telephone, in writing or by visiting the Plan Agent's website at www.computershare.com/investor. Such termination will be effective immediately if the notice is received by the Plan Agent prior to any dividend or distribution record date; otherwise, such termination will be effective on the first trading day after the payment date for such dividend or distribution, with respect to any subsequent dividend or distribution. If shareholders withdraw from the Plan, their shares will be credited to their account; or, if they wish, the Plan Agent will sell their full and fractional shares and send the shareholders the proceeds, less a transaction fee of $5 and less brokerage trading fees of $0.05 per share. If a shareholder does not maintain at least one whole share of common stock in the Plan account, the Plan Agent may terminate such shareholder's participation in the Plan after written notice. Upon termination, shareholders will be sent a check for the cash value of any fractional share in the Plan account, less any applicable broker commissions and taxes.
Shareholders who hold at least one full share of the fund may join the Plan by notifying the Plan Agent by telephone, in writing or by visiting the Plan Agent's website at www.computershare.com/investor. If received in proper form by the Plan Agent before the record date of a dividend, the election will be effective with respect to all dividends paid after
such record date. If shareholders wish to participate in the Plan and their shares are held in the name of a brokerage firm, bank or other nominee, shareholders should contact their nominee to see if it will participate in the Plan. If shareholders wish to participate in the Plan, but their brokerage firm, bank or other nominee is unable to participate on their behalf, they will need to request that their shares be re-registered in their own name, or they will not be able to participate. The Plan Agent will administer the Plan on the basis of the number of shares certified from time to time by shareholders as representing the total amount registered in their name and held for their account by their nominee.
Experience under the Plan may indicate that changes are desirable. Accordingly, the fund and the Plan Agent reserve the right to amend or terminate the Plan. Participants generally will receive written notice at least 90 days before the effective date of any amendment. In the case of termination, participants will receive written notice at least 90 days before the record date for the payment of any dividend or distribution by the fund.
All correspondence or requests for additional information about the Plan should be directed to Computershare Trust Company, N.A., at the address stated below, or by calling 800-852-0218, 201-680-6578 (For International Telephone Inquiries) and 800-952-9245 (For the Hearing Impaired (TDD)).
Shareholder communication and assistance
If you have any questions concerning the fund, we will be pleased to assist you. If you hold shares in your own name and not with a brokerage firm, please address all notices, correspondence, questions or other communications regarding the fund to the transfer agent at:
Regular Mail:
Computershare
P.O. Box 505000
Louisville, KY 40233
Registered or Overnight Mail:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
If your shares are held with a brokerage firm, you should contact that firm, bank or other nominee for assistance.
The fund held its Annual Meeting of Shareholders on Monday, February 3, 2020. The following proposal was considered by the shareholders:
Proposal: To elect five (5) Trustees (James R. Boyle, William H. Cunningham, Grace K. Fey, Hassell H. McClellan and Gregory A. Russo) to serve for a three-year term ending at the 2023 Annual Meeting of Shareholders.
Total votes for the nominee |
Total votes withheld from the nominee |
|
Independent Trustees | ||
James R. Boyle | 24,816,668.765 | 549,882.000 |
William H. Cunningham | 24,755,088.765 | 611,462.000 |
Grace K. Fey | 24,651,753.765 | 714,797.000 |
Hassell H. McClellan | 24,636,411.765 | 730,139.000 |
Gregory A. Russo | 24,553,989.765 | 812,561.000 |
Trustees whose term of office continued after the Annual Meeting of Shareholders because they were not up for election are: Charles L. Bardelis, Peter S. Burgess, Marianne Harrison, Andrew G. Arnott, Deborah C. Jackson, James M. Oates and Steven R. Pruchansky.
CONTINUATION OF INVESTMENT ADVISORY AND SUBADVISORY AGREEMENTS
Evaluation of Advisory and Subadvisory Agreements by the Board of Trustees
This section describes the evaluation by the Board of Trustees (the Board) of John Hancock Preferred Income Fund III (the fund) of the Advisory Agreement (the Advisory Agreement) with John Hancock Investment Management LLC (the Advisor) and the Subadvisory Agreement (the Subadvisory Agreement) with Manulife Investment Management (US) LLC (the Subadvisor). The Advisory Agreement and Subadvisory Agreement are collectively referred to as the Agreements. Prior to the June 23-25, 2020 telephonic1 meeting at which the Agreements were approved, the Board also discussed and considered information regarding the proposed continuation of the Agreements at a telephonic meeting held on May 26-27, 2020.
Approval of Advisory and Subadvisory Agreements
At telephonic meetings held on June 23-25, 2020, the Board, including the Trustees who are not parties to any Agreement or considered to be interested persons of the fund under the Investment Company Act of 1940, as amended (the 1940 Act) (the Independent Trustees), reapproved for an annual period the continuation of the Advisory Agreement between the fund and the Advisor and the Subadvisory Agreement between the Advisor and the Subadvisor with respect to the fund.
In considering the Advisory Agreement and the Subadvisory Agreement, the Board received in advance of the meetings a variety of materials relating to the fund, the Advisor and the Subadvisor, including comparative performance, fee and expense information for a peer group of similar funds prepared by an independent third-party provider of fund data, performance information for an applicable benchmark index; and other pertinent information, such as the market premium and discount information, and, with respect to the Subadvisor, comparative performance information for comparably managed accounts, as applicable, and other information provided by the Advisor and the Subadvisor regarding the nature, extent and quality of services provided by the Advisor and the Subadvisor under their respective Agreements, as well as information regarding the Advisor's revenues and costs of providing services to the fund and any compensation paid to affiliates of the Advisor. At the meetings at which the renewal of the Advisory Agreement and Subadvisory Agreement are considered, particular focus is given to information concerning fund performance, comparability of fees and total expenses, and profitability. However, the Board notes that the evaluation process with respect to the Advisor and the Subadvisor is an ongoing one. In this regard, the Board also took into account discussions with management and information provided to the Board (including its various committees) at prior meetings with respect to the services provided by the Advisor and the Subadvisor to the fund, including quarterly performance reports prepared by management containing reviews of investment results and prior presentations from the Subadvisor with respect to the fund. The information received and considered by the Board in connection with the May and June meetings and throughout the year was both written and oral. The Board noted the affiliation of the
____________________
1 On
March 25, 2020, as a result of health and safety measures put in place to combat
the global COVID-19 pandemic, the Securities and Exchange Commission
issued an exemptive order (the "Order") pursuant to Sections 6(c) and
38(a) of the Investment Company Act of 1940, as amended (the "1940
Act"), that temporarily exempts registered investment management
companies from the in-person voting requirements under the 1940 Act,
subject to certain requirements, including that votes taken pursuant
to the Order are ratified at the next in-person meeting. The Board
determined that reliance on the Order was necessary or appropriate
due to the circumstances related to current or potential effects of
COVID-19 and therefore, the Board's May and June meetings were held
telephonically in reliance on the Order.
Subadvisor with the Advisor, noting any potential conflicts of interest. The Board also considered the nature, quality, and extent of non-advisory services, if any, to be provided to the fund by the Advisor's affiliates. The Board considered the Advisory Agreement and the Subadvisory Agreement separately in the course of its review. In doing so, the Board noted the respective roles of the Advisor and Subadvisor in providing services to the fund.
Throughout the process, the Board asked questions of and requested additional information from management. The Board is assisted by counsel for the fund and the Independent Trustees are also separately assisted by independent legal counsel throughout the process. The Independent Trustees also received a memorandum from their independent legal counsel discussing the legal standards for their consideration of the proposed continuation of the Agreements and discussed the proposed continuation of the Agreements in private sessions with their independent legal counsel at which no representatives of management were present.
Approval of Advisory Agreement
In approving the Advisory Agreement with respect to the fund, the Board, including the Independent Trustees, considered a variety of factors, including those discussed below. The Board also considered other factors (including conditions and trends prevailing generally in the economy, the securities markets, and the industry) and did not treat any single factor as determinative, and each Trustee may have attributed different weights to different factors. The Board's conclusions may be based in part on its consideration of the advisory and subadvisory arrangements in prior years and on the Board's ongoing regular review of fund performance and operations throughout the year.
Nature, extent, and quality of services. Among the information received by the Board from the Advisor relating to the nature, extent, and quality of services provided to the fund, the Board reviewed information provided by the Advisor relating to its operations and personnel, descriptions of its organizational and management structure, and information regarding the Advisor's compliance and regulatory history, including its Form ADV. The Board also noted that on a regular basis it receives and reviews information from the fund's Chief Compliance Officer (CCO) regarding the fund's compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act. The Board observed that the scope of services provided by the Advisor, and of the undertakings required of the Advisor in connection with those services, including maintaining and monitoring its own and the fund's compliance programs, risk management programs, liquidity management programs and cybersecurity programs, had expanded over time as a result of regulatory, market and other developments. The Board considered that the Advisor is responsible for the management of the day-to-day operations of the fund, including, but not limited to, general supervision of and coordination of the services provided by the Subadvisor, and is also responsible for monitoring and reviewing the activities of the Subadvisor and third-party service providers. The Board also considered the significant risks assumed by the Advisor in connection with the services provided to the fund including entrepreneurial risk in sponsoring new funds and ongoing risks including investment, operational, enterprise, litigation, regulatory and compliance risks with respect to all funds.
The Board also considered the differences between the Advisor's services to the fund and the services it provides to other clients that are not closed-end funds, including, for example, the differences in services related to the regulatory and legal obligations of closed-end funds.
In considering the nature, extent, and quality of the services provided by the Advisor, the Trustees also took into account their knowledge of the Advisor's management and the quality of the performance of the Advisor's duties, through Board meetings, discussions and reports during the preceding year and through each Trustee's experience as a Trustee of the fund and of the other funds in the John Hancock group of funds complex (the John Hancock Fund Complex).
In the course of their deliberations regarding the Advisory Agreement, the Board considered, among other things:
(a) | the skills and competency with which the Advisor has in the past managed the fund's affairs and its subadvisory relationship, the Advisor's oversight and monitoring of the Subadvisor's investment performance and compliance programs, such as the Subadvisor's compliance with fund policies and objectives, review of brokerage matters, including with respect to trade allocation and best execution and the Advisor's timeliness in responding to performance issues; | |
(b) | the background, qualifications and skills of the Advisor's personnel; | |
(c) | the Advisor's compliance policies and procedures and its responsiveness to regulatory changes and fund industry developments; | |
(d) | the Advisor's administrative capabilities, including its ability to supervise the other service providers for the fund, as well as the Advisor's oversight of any securities lending activity, its monitoring of class action litigation and collection of class action settlements on behalf of the fund, and bringing loss recovery actions on behalf of the fund; | |
(e) | the financial condition of the Advisor and whether it has the financial wherewithal to provide a high level and quality of services to the fund; | |
(f) | the Advisor's initiatives intended to improve various aspects of the fund's operations and investor experience with the fund; and | |
(g) | the Advisor's reputation and experience in serving as an investment advisor to the fund and the benefit to shareholders of investing in funds that are part of a family of funds offering a variety of investments. |
The Board concluded that the Advisor may reasonably be expected to continue to provide a high quality of services under the Advisory Agreement with respect to the fund.
Investment performance. In considering the fund's performance, the Board noted that it reviews at its regularly scheduled meetings information about the fund's performance results. In connection with the consideration of the Advisory Agreement, the Board:
(a) | reviewed information prepared by management regarding the fund's performance; | |
(b) | considered the comparative performance of an applicable benchmark index; | |
(c) | considered the performance of comparable funds, if any, as included in the report prepared by an independent third-party provider of fund data; | |
(d) | took into account the Advisor's analysis of the fund's performance; and | |
(e) | considered the fund's share performance and premium/discount information. |
The Board noted that while it found the data provided by the independent third party generally useful it recognized its limitations, including in particular that the data may vary depending on the end date selected and the results of the performance comparisons may vary depending on the selection of the peer group. The Board noted that, based on its net asset value, the fund outperformed its benchmark index for the one-, three-, five- and ten-year periods ended December 31, 2019. The Board also noted that, based on its net asset value, the fund outperformed its peer group median for the one-year period and underperformed its peer group median for the three-, five- and ten-year periods ended December 31, 2019. The Board took into account management's discussion of the fund's performance, including the favorable performance relative to the benchmark for the one-, three-, five- and ten-year periods and to
the peer group for the one-year period. The Board concluded that the fund's performance has generally been in line with or outperformed the historical performance of the fund's benchmark index.
Fees and expenses. The Board reviewed comparative information prepared by an independent third-party provider of fund data, including, among other data, the fund's contractual and net management fees (and subadvisory fees, to the extent available) and total expenses as compared to similarly situated investment companies deemed to be comparable to the fund in light of the nature, extent and quality of the management and advisory and subadvisory services provided by the Advisor and the Subadvisor. The Board considered the fund's ranking within a smaller group of peer funds chosen by the independent third-party provider, as well as the fund's ranking within a broader group of funds. In comparing the fund's contractual and net management fees to those of comparable funds, the Board noted that such fees include both advisory and administrative costs.
The Board also took into account the impact of leverage on fund expenses. The Board took into account the management fee structure, including that management fees for the fund were based on the fund's total managed assets, which are attributable to common stock and borrowings.
The Board noted that net management fees and net total expenses for the fund are each lower than the peer group median and that the contractual fee waiver and/or expense reimbursement reduces certain expenses of the fund.
The Board took into account management's discussion with respect to the overall management fee, the fees of the Subadvisor, including the amount of the advisory fee retained by the Advisor after payment of the subadvisory fee, in each case in light of the services rendered for those amounts and the risks undertaken by the Advisor. The Board also noted that the Advisor pays the subadvisory fee. In addition, the Board took into account that management had agreed to implement an overall fee waiver across the complex, including the fund, which is discussed further below. The Board reviewed information provided by the Advisor concerning the investment advisory fee charged by the Advisor or one of its advisory affiliates to other clients (including other funds in the John Hancock Fund Complex) having similar investment mandates, if any. The Board considered any differences between the Advisor's and Subadvisor's services to the fund and the services they provide to other comparable clients or funds. The Board concluded that the advisory fee paid with respect to the fund is reasonable in light of the nature, extent and quality of the services provided to the fund under the Advisory Agreement.
Profitability/Fall out benefits. In considering the costs of the services to be provided and the profits to be realized by the Advisor and its affiliates (including the Subadvisor) from the Advisor's relationship with the fund, the Board:
(a) | reviewed financial information of the Advisor; | |||||||
(b) | reviewed and considered information presented by the Advisor regarding the net profitability to the Advisor and its affiliates with respect to the fund; | |||||||
(c) | received and reviewed profitability information with respect to the John Hancock Fund Complex as a whole and with respect to the fund; | |||||||
(d) | received information with respect to the Advisor's allocation methodologies used in preparing the profitability data and considered that the Advisor hired an independent third party consultant to provide an analysis of the Advisor's allocation methodologies; | |||||||
(e) | considered that the Advisor also provides administrative services to the fund on a cost basis pursuant to an administrative services agreement; |
(f) (g) |
noted that the fund's Subadvisor is an affiliate of the Advisor; noted that the Advisor also derives reputational and other indirect
benefits from providing advisory services to the fund;
|
|||||||
(h) | noted that the subadvisory fees for the fund are paid by the Advisor; | |||||||
(i) | considered the Advisor's ongoing costs and expenditures necessary to improve services, meet new regulatory and compliance requirements, and adapt to other challenges impacting the fund industry; and | |||||||
(j) | considered that the Advisor should be entitled to earn a reasonable level of profits in exchange for the level of services it provides to the fund and the risks that it assumes as Advisor, including entrepreneurial, operational, reputational, litigation and regulatory risk. |
Based upon its review, the Board concluded that the level of profitability, if any, of the Advisor and its affiliates (including the Subadvisor) from their relationship with the fund was reasonable and not excessive.
Economies of scale. In considering the extent to which the fund may realize any economies of scale and whether fee levels reflect these economies of scale for the benefit of the fund shareholders, the Board noted that the fund has a limited ability to increase its assets as a closed-end fund. The Board took into account management's discussions of the current advisory fee structure, and, as noted above, the services the Advisor provides in performing its functions under the Advisory Agreement and in supervising the Subadvisor.
The Board also considered potential economies of scale that may be realized by the fund as part of the John Hancock Fund Complex. Among them, the Board noted that the Advisor has contractually agreed to waive a portion of its management fee and/or reimburse expenses for certain funds of the John Hancock Fund Complex, including the fund (the participating portfolios). This waiver is based on the aggregate net assets of all the participating portfolios. The amount of the reimbursement is calculated daily and allocated among all the participating portfolios in proportion to the daily net assets of each fund. The Board also considered the Advisor's overall operations and its ongoing investment in its business in order to expand the scale of, and improve the quality of, its operations that benefit the fund. The Board noted that although the fund does not have breakpoints in its contractual management fee, its net management fee and total expenses are each below the peer group median. The Board determined that the management fee structure for the fund was reasonable.
Approval of Subadvisory Agreement
In making its determination with respect to approval of the Subadvisory Agreement, the Board reviewed:
(1) | information relating to the Subadvisor's business, including current subadvisory services to the fund (and other funds in the John Hancock Fund Complex); | |
(2) | the historical and current performance of the fund and comparative performance information relating to an applicable benchmark index and comparable funds; and | |
(3) | the subadvisory fee for the fund and to the extent available, comparable fee information prepared by an independent third party provider of fund data. |
Nature, extent, and quality of services. With respect to the services provided by the Subadvisor, the Board received information provided to the Board by the Subadvisor, including the Subadvisor's Form ADV, as well as took into account information presented throughout the past year. The Board considered the Subadvisor's current level of staffing and its overall resources, as well as received information relating to the Subadvisor's compensation program.
The Board reviewed the Subadvisor's history and investment experience, as well as information regarding the qualifications, background, and responsibilities of the Subadvisor's investment and compliance personnel who provide services to the fund. The Board also considered, among other things, the Subadvisor's compliance program and any disciplinary history. The Board also considered the Subadvisor's risk assessment and monitoring process. The Board reviewed the Subadvisor's regulatory history, including whether it was involved in any regulatory actions or investigations as well as material litigation, and any settlements and amelioratory actions undertaken, as appropriate. The Board noted that the Advisor conducts regular, periodic reviews of the Subadvisor and its operations, including regarding investment processes and organizational and staffing matters. The Board also noted that the fund's CCO and his staff conduct regular, periodic compliance reviews with the Subadvisor and present reports to the Independent Trustees regarding the same, which includes evaluating the regulatory compliance systems of the Subadvisor and procedures reasonably designed to assure compliance with the federal securities laws. The Board also took into account the financial condition of the Subadvisor.
The Board considered the Subadvisor's investment process and philosophy. The Board took into account that the Subadvisor's responsibilities include the development and maintenance of an investment program for the fund that is consistent with the fund's investment objective, the selection of investment securities and the placement of orders for the purchase and sale of such securities, as well as the implementation of compliance controls related to performance of these services. The Board also received information with respect to the Subadvisor's brokerage policies and practices, including with respect to best execution and soft dollars.
Subadvisor compensation. In considering the cost of services to be provided by the Subadvisor and the profitability to the Subadvisor of its relationship with the fund, the Board noted that the fees under the Subadvisory Agreement are paid by the Advisor and not the fund. The Board also considered any potential conflicts of interest the Advisor might have in connection with the Subadvisory Agreement.
In addition, the Board considered other potential indirect benefits that the Subadvisor and its affiliates may receive from the Subadvisor's relationship with the fund, such as the opportunity to provide advisory services to additional funds in the John Hancock Fund Complex and reputational benefits.
Subadvisory fees. The Board considered that the fund pays an advisory fee to the Advisor and that, in turn, the Advisor pays subadvisory fees to the Subadvisor. As noted above, the Board also considered the fund's subadvisory fee as compared to similarly situated investment companies deemed to be comparable to the fund as included in the report prepared by the independent third party provider of fund data, to the extent available. The Board noted that the limited size of the Lipper peer group was not sufficient for comparative purposes. The Board also took into account the subadvisory fee paid by the Advisor to the Subadvisor with respect to the fund and compared them to fees charged by the Subadvisor to manage other subadvised portfolios and portfolios not subject to regulation under the 1940 Act, as applicable.
Subadvisor performance. As noted above, the Board considered the fund's performance as compared to the fund's peer group and the benchmark index and noted that the Board reviews information about the fund's performance results at its regularly scheduled meetings. The Board noted the Advisor's expertise and resources in monitoring the performance, investment style and risk-adjusted performance of the Subadvisor. The Board was mindful of the Advisor's focus on the Subadvisor's performance. The Board also noted the Subadvisor's long-term performance record for similar accounts, as applicable.
The Board's decision to approve the Subadvisory Agreement was based on a number of determinations, including the following:
(1) | the Subadvisor has extensive experience and demonstrated skills as a manager; | |
(2) | the fund's performance, based on net asset value, has generally been in line with or outperformed the historical performance of the fund's benchmark ; and | |
(3) | the subadvisory fees are reasonable in relation to the level and quality of services being provided under the Subadvisory Agreement. | |
* * * |
Based on the Board's evaluation of all factors that the Board deemed to be material, including those factors described above, the Board, including the Independent Trustees, concluded that renewal of the Advisory Agreement and the Subadvisory Agreement would be in the best interest of the fund and its shareholders. Accordingly, the Board, and the Independent Trustees voting separately, approved the Advisory Agreement and Subadvisory Agreement for an additional one-year period.
This chart provides information about the Trustees and Officers who oversee your John Hancock fund. Officers elected by the Trustees manage the day-to-day operations of the fund and execute policies formulated by the Trustees.
Independent Trustees
Name, year of birth Position(s) held with fund Principal occupation(s) and other directorships during past 5 years |
Trustee of the Trust since1 |
Number of John Hancock funds overseen by Trustee |
Hassell H. McClellan, Born: 1945 | 2012 | 195 |
Trustee and Chairperson of the Board Director/Trustee, Virtus Funds (since 2008); Director, The Barnes Group (since 2010); Associate Professor, The Wallace E. Carroll School of Management, Boston College (retired 2013). Trustee (since 2005) and Chairperson of the Board (since 2017) of various trusts within the John Hancock Fund Complex. |
Charles L. Bardelis,2 Born: 1941 | 2012 | 195 |
Trustee Director, Island Commuter Corp. (marine transport). Trustee of various trusts within the John Hancock Fund Complex (since 1988). |
James R. Boyle, Born: 1959 | 2015 | 195 |
Trustee Chief Executive Officer, Foresters Financial (since 2018); Chairman and Chief Executive Officer, Zillion Group, Inc. (formerly HealthFleet, Inc.) (healthcare) (2014-2018); Executive Vice President and Chief Executive Officer, U.S. Life Insurance Division of Genworth Financial, Inc. (insurance) (January 2014-July 2014); Senior Executive Vice President, Manulife Financial, President and Chief Executive Officer, John Hancock (1999-2012); Chairman and Director, John Hancock Investment Management LLC, John Hancock Investment Management Distributors LLC, and John Hancock Variable Trust Advisers LLC (2005-2010). Trustee of various trusts within the John Hancock Fund Complex (2005-2014 and since 2015). |
Peter S. Burgess,2 Born: 1942 | 2012 | 195 |
Trustee Consultant (financial, accounting, and auditing matters) (since 1999); Certified Public Accountant; Partner, Arthur Andersen (independent public accounting firm) (prior to 1999); Director, Lincoln Educational Services Corporation (since 2004); Director, Symetra Financial Corporation (2010-2016); Director, PMA Capital Corporation (2004-2010). Trustee of various trusts within the John Hancock Fund Complex (since 2005). |
William H. Cunningham, Born: 1944 | 2002 | 195 |
Trustee Professor, University of Texas, Austin, Texas (since 1971); former Chancellor, University of Texas System and former President of the University of Texas, Austin, Texas; Chairman (since 2009) and Director (since 2006), Lincoln National Corporation (insurance); Director, Southwest Airlines (since 2000); former Director, LIN Television (2009-2014). Trustee of various trusts within the John Hancock Fund Complex (since 1986). |
Grace K. Fey, Born: 1946 | 2012 | 195 |
Trustee Chief Executive Officer, Grace Fey Advisors (since 2007); Director and Executive Vice President, Frontier Capital Management Company (1988-2007); Director, Fiduciary Trust (since 2009). Trustee of various trusts within the John Hancock Fund Complex (since 2008). |
Independent Trustees (continued)
Name, year of birth Position(s) held with fund Principal occupation(s) and other directorships during past 5 years |
Trustee of the Trust since1 |
Number of John Hancock funds overseen by Trustee |
Deborah C. Jackson, Born: 1952 | 2008 | 195 |
Trustee President, Cambridge College, Cambridge, Massachusetts (since 2011); Board of Directors, Massachusetts Women's Forum (since 2018); Board of Directors, National Association of Corporate Directors/New England (since 2015); Board of Directors, Association of Independent Colleges and Universities of Massachusetts (2014-2017); Chief Executive Officer, American Red Cross of Massachusetts Bay (2002-2011); Board of Directors of Eastern Bank Corporation (since 2001); Board of Directors of Eastern Bank Charitable Foundation (since 2001); Board of Directors of American Student Assistance Corporation (1996-2009); Board of Directors of Boston Stock Exchange (2002-2008); Board of Directors of Harvard Pilgrim Healthcare (health benefits company) (2007-2011). Trustee of various trusts within the John Hancock Fund Complex (since 2008). |
James M. Oates,2 Born: 1946 | 2012 | 195 |
Trustee Managing Director, Wydown Group (financial consulting firm) (since 1994); Chairman and Director, Emerson Investment Management, Inc. (2000-2015); Independent Chairman, Hudson Castle Group, Inc. (formerly IBEX Capital Markets, Inc.) (financial services company) (1997-2011); Director, Stifel Financial (since 1996); Director, Investor Financial Services Corporation (1995-2007); Director, Connecticut River Bancorp (1998-2014); Director/Trustee, Virtus Funds (since 1988). Trustee (since 2004) and Chairperson of the Board (2005-2016) of various trusts within the John Hancock Fund Complex. |
Steven R. Pruchansky, Born: 1944 | 2002 | 195 |
Trustee and Vice Chairperson of the Board Managing Director, Pru Realty (since 2017); Chairman and Chief Executive Officer, Greenscapes of Southwest Florida, Inc. (2014-2020); Director and President, Greenscapes of Southwest Florida, Inc. (until 2000); Member, Board of Advisors, First American Bank (until 2010); Managing Director, Jon James, LLC (real estate) (since 2000); Partner, Right Funding, LLC (2014-2017); Director, First Signature Bank & Trust Company (until 1991); Director, Mast Realty Trust (until 1994); President, Maxwell Building Corp. (until 1991). Trustee (since 1992), Chairperson of the Board (2011-2012), and Vice Chairperson of the Board (since 2012) of various trusts within the John Hancock Fund Complex. |
Gregory A. Russo, Born: 1949 | 2008 | 195 |
Trustee Director and Audit Committee Chairman (2012-2020), and Member, Audit Committee and Finance Committee (2011-2020), NCH Healthcare System, Inc. (holding company for multi-entity healthcare system); Director and Member (2012-2018) and Finance Committee Chairman (2014-2018), The Moorings, Inc. (nonprofit continuing care community); Vice Chairman, Risk & Regulatory Matters, KPMG LLP (KPMG) (2002-2006); Vice Chairman, Industrial Markets, KPMG (1998-2002); Chairman and Treasurer, Westchester County, New York, Chamber of Commerce (1986-1992); Director, Treasurer, and Chairman of Audit and Finance Committees, Putnam Hospital Center (1989-1995); Director and Chairman of Fundraising Campaign, United Way of Westchester and Putnam Counties, New York (1990-1995). Trustee of various trusts within the John Hancock Fund Complex (since 2008). |
Non-Independent Trustees3
Name, year of birth Position(s) held with fund Principal occupation(s) and other directorships during past 5 years |
Trustee of the Trust since1 |
Number of John Hancock funds overseen by Trustee |
Andrew G. Arnott, Born: 1971 | 2017 | 195 |
President and Non-Independent Trustee Head of Wealth and Asset Management, United States and Europe, for John Hancock and Manulife (since 2018); Executive Vice President, John Hancock Financial Services (since 2009, including prior positions); Director and Executive Vice President, John Hancock Investment Management LLC (since 2005, including prior positions); Director and Executive Vice President, John Hancock Variable Trust Advisers LLC (since 2006, including prior positions); President, John Hancock Investment Management Distributors LLC (since 2004, including prior positions); President of various trusts within the John Hancock Fund Complex (since 2007, including prior positions). Trustee of various trusts within the John Hancock Fund Complex (since 2017). |
Marianne Harrison, Born: 1963 | 2018 | 195 |
Non-Independent Trustee President and CEO, John Hancock (since 2017); President and CEO, Manulife Canadian Division (2013-2017); Member, Board of Directors, CAE Inc. (since 2019); Member, Board of Directors, MA Competitive Partnership Board (since 2018); Member, Board of Directors, American Council of Life Insurers (ACLI) (since 2018); Member, Board of Directors, Communitech, an industry-led innovation center that fosters technology companies in Canada (2017-2019); Member, Board of Directors, Manulife Assurance Canada (2015-2017); Board Member, St. Mary's General Hospital Foundation (2014-2017); Member, Board of Directors, Manulife Bank of Canada (2013-2017); Member, Standing Committee of the Canadian Life & Health Assurance Association (2013-2017); Member, Board of Directors, John Hancock USA, John Hancock Life & Health, John Hancock New York (2012-2013). Trustee of various trusts within the John Hancock Fund Complex (since 2018). |
Principal officers who are not Trustees
Name, year of birth Position(s) held with fund Principal occupation(s) during past 5 years |
Officer of the Trust since |
Charles A. Rizzo, Born: 1957 | 2007 |
Chief Financial Officer Vice President, John Hancock Financial Services (since 2008); Senior Vice President, John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (since 2008); Chief Financial Officer of various trusts within the John Hancock Fund Complex (since 2007). |
Salvatore Schiavone, Born: 1965 | 2010 |
Treasurer Assistant Vice President, John Hancock Financial Services (since 2007); Vice President, John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (since 2007); Treasurer of various trusts within the John Hancock Fund Complex (since 2007, including prior positions). |
Christopher (Kit) Sechler, Born: 1973 | 2018 |
Chief Legal Officer and Secretary Vice President and Deputy Chief Counsel, John Hancock Investments (since 2015); Assistant Vice President and Senior Counsel (2009-2015), John Hancock Investment Management; Chief Legal Officer and Secretary of various trusts within the John Hancock Fund Complex (since 2018); Assistant Secretary of John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (since 2009). |
Principal officers who are not Trustees (continued)
Name, year of birth Position(s) held with fund Principal occupation(s) during past 5 years |
Officer of the Trust since |
Trevor Swanberg, Born: 1979 | 2020 |
Chief Compliance Officer Chief Compliance Officer, various trusts within the John Hancock Fund Complex, John Hancock Investment Management LLC, and John Hancock Variable Trust Advisers LLC (since 2020); Deputy Chief Compliance Officer, various trusts within the John Hancock Fund Complex (2018-2020); Deputy Chief Compliance Officer, John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (2019-2020); Assistant Chief Compliance Officer, various trusts within the John Hancock Fund Complex (2016-2018); Assistant Chief Compliance Officer, John Hancock Investment Management LLC and John Hancock Variable Trust Advisers LLC (2016-2019); Vice President, State Street Global Advisors (2015-2016). |
The business address for all Trustees and Officers is 200 Berkeley Street, Boston, Massachusetts 02116-5023.
1 | Mr. Bardelis, Mr. Burgess and Ms. Harrison serve as Trustees for a term expiring in 2021; Mr. Arnott, Ms. Jackson, Mr. Oates and Mr. Pruchansky serve as Trustees for a term expiring in 2022; Mr. Boyle, Mr. Cunningham, Ms. Fey, Mr. McClellan and Mr. Russo serve as Trustees for a term expiring in 2023; Mr. Boyle has served as Trustee at various times prior to date listed in the table. |
2 | Member of the Audit Committee. |
3 | The Trustee is a Non-Independent Trustee due to current or former positions with the Advisor and certain of its affiliates. |
Trustees Hassell H. McClellan, Chairperson Officers Andrew G. Arnott Charles A. Rizzo Salvatore Schiavone Christopher (Kit) Sechler Trevor Swanberg1 |
Investment advisor John Hancock Investment Management LLC Subadvisor Manulife Investment Management (US) LLC Portfolio Managers Joseph H. Bozoyan, CFA Custodian State Street Bank and Trust Company Transfer agent Computershare Shareowner Services, LLC Legal counsel K&L Gates LLP Independent registered public accounting firm PricewaterhouseCoopers LLP Stock symbol Listed New York Stock Exchange: HPS |
* Member of the Audit Committee
† Non-Independent Trustee
1 Effective
July 31, 2020
For shareholder assistance refer to page 7
You can also contact us: | |||
800-852-0218 jhinvestments.com |
Regular mail: Computershare |
Express mail: Computershare |
The fund's proxy voting policies and procedures, as well as the fund's proxy voting record for the most recent twelve-month period ended June 30, are available free of charge on the Securities and Exchange Commission (SEC) website at sec.gov or on our website.
All of the fund's holdings as of the end of the third month of every fiscal quarter are filed with the SEC on Form N-PORT within 60 days of the end of the fiscal quarter. The fund's Form N-PORT filings are available on our website and the SEC's website, sec.gov.
We make this information on your fund, as well as monthly portfolio holdings, and other fund details available on our website at jhinvestments.com or by calling 800-852-0218.
John Hancock family of funds
DOMESTIC EQUITY FUNDS Blue Chip Growth Classic Value Disciplined Value Disciplined Value Mid Cap Equity Income Financial Industries Fundamental All Cap Core Fundamental Large Cap Core New Opportunities Regional Bank Small Cap Core Small Cap Growth Small Cap Value U.S. Global Leaders Growth U.S. Quality Growth GLOBAL AND INTERNATIONAL EQUITY FUNDS Disciplined Value International Emerging Markets Emerging Markets Equity Fundamental Global Franchise Global Equity Global Shareholder Yield Global Thematic Opportunities International Dynamic Growth International Growth International Small Company |
INCOME FUNDS Bond California Tax-Free Income Emerging Markets Debt Floating Rate Income Government Income High Yield High Yield Municipal Bond Income Investment Grade Bond Money Market Short Duration Bond Short Duration Credit Opportunities Strategic Income Opportunities Tax-Free Bond ALTERNATIVE AND SPECIALTY FUNDS Absolute Return Currency Alternative Asset Allocation Alternative Risk Premia Diversified Macro Infrastructure Multi-Asset Absolute Return Seaport Long/Short |
The fund's investment objectives, risks, charges, and expenses are included in the prospectus and should be considered carefully before investing. For a prospectus, contact your financial professional, call John Hancock Investment Management at 800-852-0218, or visit the fund's website at jhinvestments.com. Please read the prospectus carefully before investing or sending money.
The John Hancock funds are distributed by John Hancock Investment Management Distributors LLC. Member FINRA SIPC.
ASSET ALLOCATION Balanced Multi-Asset High Income Multi-Index Lifetime Portfolios Multi-Index Preservation Portfolios Multimanager Lifestyle Portfolios Multimanager Lifetime Portfolios Retirement Income 2040 EXCHANGE-TRADED FUNDS John Hancock Multifactor Consumer Discretionary ETF John Hancock Multifactor Consumer Staples ETF John Hancock Multifactor Developed International ETF John Hancock Multifactor Emerging Markets ETF John Hancock Multifactor Energy ETF John Hancock Multifactor Financials ETF John Hancock Multifactor Healthcare ETF John Hancock Multifactor Industrials ETF John Hancock Multifactor Large Cap ETF John Hancock Multifactor Materials ETF John Hancock Multifactor Media and John Hancock Multifactor Mid Cap ETF John Hancock Multifactor Small Cap ETF John Hancock Multifactor Technology ETF John Hancock Multifactor Utilities ETF |
ENVIRONMENTAL, SOCIAL, AND ESG All Cap Core ESG Core Bond ESG International Equity ESG Large Cap Core CLOSED-END FUNDS Financial Opportunities Hedged Equity & Income Income Securities Trust Investors Trust Preferred Income Preferred Income II Preferred Income III Premium Dividend Tax-Advantaged Dividend Income Tax-Advantaged Global Shareholder Yield |
John Hancock Multifactor ETF shares are bought and sold at market
price (not NAV), and are not individually redeemed
from the fund. Brokerage commissions will reduce returns.
John Hancock ETFs are distributed by Foreside Fund Services, LLC, and
are subadvised by Dimensional Fund Advisors LP.
Foreside is not affiliated with John Hancock Investment Management
Distributors LLC or Dimensional Fund Advisors LP.
Dimensional Fund Advisors LP receives compensation from John Hancock
in connection with licensing rights to the
John Hancock Dimensional indexes. Dimensional Fund Advisors LP does
not sponsor, endorse, or sell, and makes no
representation as to the advisability of investing in, John Hancock
Multifactor ETFs.
John Hancock Investment Management
A trusted brand
John Hancock Investment Management is a premier asset manager
with a heritage of financial stewardship dating back to 1862. Helping
our shareholders pursue their financial goals is at the core of
everything we do. It's why we support the role of professional financial
advice and operate with the highest standards of conduct and integrity.
A better way to invest
We serve investors globally through a unique multimanager approach:
We search the world to find proven portfolio teams with specialized
expertise for every strategy we offer, then we apply robust investment
oversight to ensure they continue to meet our uncompromising
standards and serve the best interests of our shareholders.
Results for investors
Our unique approach to asset management enables us to provide
a diverse set of investments backed by some of the world's best
managers, along with strong risk-adjusted returns across asset classes.
John Hancock Investment Management LLC
200 Berkeley Street
n Boston, MA 02116-5010
n 800-225-5291
n jhinvestments.com
MF1291598 | P12A 7/20 9/2020 |
ITEM 2. CODE OF ETHICS.
As of the end of the period, July 31, 2020, the registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its Chief Executive Officer, Chief Financial Officer and Treasurer (respectively, the principal executive officer, the principal financial officer and the principal accounting officer, the “Senior Financial Officers”). A copy of the code of ethics is filed as an exhibit to this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Peter S. Burgess is the audit committee financial expert and is “independent”, pursuant to general instructions on Form N-CSR Item 3.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees
The aggregate fees billed for professional services rendered by the principal accountant(s) for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant(s) in connection with statutory and regulatory filings or engagements amounted to $50,115 for the fiscal year ended July 31, 2020 and $44,779 for the fiscal year ended July 31, 2019. These fees were billed to the registrant and were approved by the registrant’s audit committee.
(b) Audit-Related Services
Audit related fees billed to the registrant or to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant ("control affiliates") amounted to $5 for the fiscal year ended July 31, 2020 and $5 for the fiscal year ended July 31, 2019.
(c) Tax Fees
The aggregate fees billed for professional services rendered by the principal accountant(s) for the tax compliance, tax advice and tax planning (“tax fees”) amounted to $3,837 for the fiscal year ended July 31, 2020 and $3,837 for the fiscal year ended July 31, 2019. The nature of the services comprising the tax fees was the review of the registrant’s tax returns and tax distribution requirements. These fees were billed to the registrant and were approved by the registrant’s audit committee.
(d) All Other Fees
The all other fees billed to the registrant for products and services provided by the principal accountant were $89 for the fiscal year ended July 31, 2020 and $84 for the fiscal year ended July 31, 2019. The nature of the services comprising the all other fees was mainly tax consulting work. These fees were approved by the registrant’s audit committee.
(e)(1) Audit Committee Pre-Approval Policies and Procedures:
The trust’s Audit Committee must pre-approve all audit and non-audit services provided by the independent registered public accounting firm (the “Auditor”) relating to the operations or financial reporting of the funds. Prior to the commencement of any audit or non-audit services to a fund, the Audit Committee reviews the services to determine whether they are appropriate and permissible under applicable law.
The trust’s Audit Committee has adopted policies and procedures to, among other purposes, provide a framework for the Committee’s consideration of audit-related and non-audit services by the Auditor. The policies and procedures require that any audit-related and non-audit service provided by the Auditor and any non-audit service provided by the Auditor to a fund service provider that relates directly to the operations and financial reporting of a fund are subject to approval by the Audit Committee before such service is provided. Audit-related services provided by the Auditor that are expected to exceed $25,000 per instance/per fund are subject to specific pre-approval by the Audit Committee. Tax services provided by the Auditor that are expected to exceed $30,000 per instance/per fund are subject to specific pre-approval by the Audit Committee.
All audit services, as well as the audit-related and non-audit services that are expected to exceed the amounts stated above, must be approved in advance of provision of the service by formal resolution of the Audit Committee. At the regularly scheduled Audit Committee meetings, the Committee reviews a report summarizing the services, including fees, provided by the Auditor.
(e)(2) Services approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X:
Audit-Related Fees, Tax Fees and All Other Fees:
There were no amounts that were approved by the Audit Committee pursuant to the de minimis exception under Rule 2-01 of Regulation S-X.
(f) According to the registrant’s principal accountant, for the fiscal year ended July 31, 2020, the percentage of hours spent on the audit of the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons who were not full-time, permanent employees of principal accountant was less than 50%.
(g) The aggregate non-audit fees billed by the registrant's accountant(s) for services rendered to the registrant and rendered to the registrant's control affiliates for each of the last two fiscal years of the registrant were $1,510,492 for the fiscal year ended July 31, 2020 and $998,470 for the fiscal year ended July 31, 2019.
(h) The audit committee of the registrant has considered the non-audit services provided by the registrant’s principal accountant(s) to the control affiliates and has determined that the services that were not pre-approved are compatible with maintaining the principal accountant(s)' independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately-designated standing audit committee comprised of independent trustees. The members of the audit committee are as follows:
Peter S. Burgess – Chairman
Charles L. Bardelis
James M. Oates
ITEM 6. SCHEDULE OF INVESTMENTS.
(a) Not applicable.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
See attached exhibit “Proxy Voting Policies and Procedures”.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Information about the portfolio managers
Management Biographies
Below is a list of the Manulife Investment Management (US) LLC (“Manulife IM (US)”) portfolio managers who share joint responsibility for the day-to-day investment management of the Fund. It provides a brief summary of their business careers over the past five years. Information is provided as of July 31, 2020.
Bradley L. Lutz, CFA
Portfolio Manager, Manulife Investment Management (US) LLC since 2017
Managing Director and Senior Investment Analyst, Manulife Investment Management (US) LLC (2002-2017)
Began business career in 1993
Managed the fund since 2017
Other Accounts the Portfolio Managers are Managing
The table below indicates for each portfolio manager information about the accounts over which the portfolio manager has day-to-day investment responsibility. All information on the number of accounts and total assets in the table is as of July 31, 2020. For purposes of the table, “Other Pooled Investment Vehicles” may include investment partnerships and group trusts, and “Other Accounts” may include separate accounts for institutions or individuals, insurance company general or separate accounts, pension funds and other similar institutional accounts.
Portfolio Manager Name | Other Accounts Managed by the Portfolio Manager |
Joseph H. Bozoyan, CFA | Other Registered Investment Companies: Approximately $3.48 billion |
Other Pooled Investment Vehicles: Approximately $501.47 million | |
Other Accounts: $0 | |
Bradley L. Lutz, CFA | Other Registered Investment Companies: Approximately $3.48 billion |
Other Pooled Investment Vehicles: $454.95 million | |
Other Accounts: Approximately $296.90 million |
Number and value of accounts within the total accounts that are subject to a performance-based advisory fee: None.
Conflicts of Interest. When a portfolio manager is responsible for the management of more than one account, the potential arises for the portfolio manager to favor one account over another. The principal types of potential conflicts of interest that may arise are discussed below. For the reasons outlined below, the Fund does not believe that any material conflicts are likely to arise out of a portfolio manager’s responsibility for the management of the Fund as well as one or more other accounts. The Advisor and Subadvisor have adopted procedures that are intended to monitor compliance with the policies referred to in the following paragraphs. Generally, the risks of such conflicts of interests are increased to the extent that a portfolio manager has a financial incentive to favor one account over another. The Advisor and Subadvisor have structured their compensation arrangements in a manner that is intended to limit such potential for conflicts of interests. See “Compensation of Portfolio Managers” below.
● | A portfolio manager could favor one account over another in allocating new investment opportunities that have limited supply, such as initial public offerings and private placements. If, for example, an initial public offering that was expected to appreciate in value significantly shortly after the offering was allocated to a single account, that account may be expected to have better investment performance than other accounts that did not receive an allocation on the initial public offering. The Subadvisor has policies that require a portfolio manager to allocate such investment opportunities in an equitable manner and generally to allocate such investments proportionately among all accounts with similar investment objectives. |
● | A portfolio manager could favor one account over another in the order in which trades for the accounts are placed. If a portfolio manager determines to purchase a security for more than one account in an aggregate amount that may influence the market price of the security, accounts that purchased or sold the security first may receive a more favorable price than accounts that made subsequent transactions. The less liquid the market for the security or the greater the percentage that the proposed aggregate purchases or sales represent of average daily trading volume, the greater the potential for accounts that make subsequent purchases or sales to receive a less favorable price. When a portfolio manager intends to trade the same security for more than one account, the policies of the Subadvisor generally require that such trades be “bunched,” which means that the trades for the individual accounts are aggregated and each account receives the same price. There are some types of accounts as to which bunching may not be possible for contractual reasons (such as directed brokerage arrangements). Circumstances may also arise where the trader believes that bunching the orders may not result in the best possible price. Where those accounts or circumstances are involved, the Subadvisor will place the order in a manner intended to result in as favorable a price as possible for such client. |
● | A portfolio manager could favor an account if the portfolio manager’s compensation is tied to the performance of that account rather than all accounts managed by the portfolio manager. If, for example, the portfolio manager receives a bonus based upon the performance of certain accounts relative to a benchmark while other accounts are disregarded for this purpose, the portfolio manager will have a financial incentive to seek to have the accounts that determine the portfolio manager’s bonus achieve the best possible performance to the possible detriment of other accounts. Similarly, if the Subadvisor receives a performance-based advisory fee, the portfolio manager may favor that account, whether or not the performance of that account directly determines the portfolio manager’s compensation. The investment performance on specific accounts is not a factor in determining the portfolio manager’s compensation. See “Compensation of Portfolio Managers” below. Neither the Advisor nor the Subadvisor receives a performance-based fee with respect to any of the accounts managed by the portfolio managers. |
● | A portfolio manager could favor an account if the portfolio manager has a beneficial interest in the account, in order to benefit a large client or to compensate a client that had poor returns. For example, if the portfolio manager held an interest in an investment partnership that was one of the accounts managed by the portfolio manager, the portfolio manager would have an economic incentive to favor the account in which the portfolio manager held an interest. The Subadvisor imposes certain trading restrictions and reporting requirements for accounts in which a portfolio manager or certain family members have a personal interest in order to confirm that such accounts are not favored over other accounts. |
● | If the different accounts have materially and potentially conflicting investment objectives or strategies, a conflict of interest may arise. For example, if a portfolio manager purchases a security for one account and sells the same security short for another account, such trading pattern could disadvantage either the account that is long or short. In making portfolio manager assignments, the Subadvisor seeks to avoid such potentially conflicting situations. However, where a portfolio manager is responsible for accounts with differing investment objectives and policies, it is possible that the portfolio manager will conclude that it is in the best interest of one account to sell a portfolio security while another account continues to hold or increase the holding in such security. |
Compensation of Portfolio Managers. The Subadvisor has adopted a system of compensation for portfolio managers and others involved in the investment process that is applied systematically among investment professionals. At the Subadvisor, the structure of compensation of investment professionals is currently composed of the following basic components: base salary and an annual investment bonus plan as well as customary benefits that are offered generally to all full-time employees of the Subadvisor. The following describes each component of the compensation package for the individuals identified as a portfolio manager for the Funds.
● | Base salary. Base compensation is fixed and normally reevaluated on an annual basis. The Subadvisor seeks to set compensation at market rates, taking into account the experience and responsibilities of the investment professional. |
● | Investment Bonus Plan. Only investment professionals are eligible to participate in the Investment Bonus Plan. Under the plan, investment professionals are eligible for an annual bonus. The plan is intended to provide a competitive level of annual bonus compensation that is tied to the investment professional achieving superior investment performance and aligns the financial incentives of the Subadvisor and the investment professional. Any bonus under the plan is completely discretionary, with a maximum annual bonus that may be well in excess of base salary. Payout of a portion of this bonus may be deferred for up to five years. While the amount of any bonus is discretionary, the following factors are generally used in determining bonuses under the plan: |
● | Investment Performance: The investment performance of all accounts managed by the investment professional over one- and three-and five-year periods are considered, and no specific benchmark is used to measure performance. With respect to fixed income accounts, relative yields are also used to measure performance. |
● | The Profitability of the Subadvisor: The profitability of the Subadvisor and its parent company are also considered in determining bonus awards. |
● | Non-Investment Performance: To a lesser extent, intangible contributions, including the investment professional’s support of client service and sales activities, new fund/strategy idea generation, professional growth and development, and management, where applicable, are also evaluated when determining bonus awards. |
● | In addition to the above, compensation may also include a revenue component for an investment team derived from a number of factors including, but not limited to, client assets under management, investment performance, and firm metrics. |
● | Options and Stock Grants. A limited number of senior investment professionals may receive options to purchase shares of Manulife Financial stock. Generally, such option would permit the investment professional to purchase a set amount of stock at the market price on the date of grant. The option can be exercised for a set period (normally a number of years or until termination of employment) and the investment professional would exercise the option if the market value of Manulife Financial stock increases. Some investment professionals may receive restricted stock grants, where the investment professional is entitled to receive the stock at no or nominal cost, provided that the stock is forgone if the investment professional’s employment is terminated prior to a vesting date. |
● | Deferred Incentives. Investment professionals may receive deferred incentives which are fully invested in strategies managed by the team/individuals as well as other Manulife Asset Management strategies. |
The Subadvisor also permits investment professionals to participate on a voluntary basis in a deferred compensation plan, under which the investment professional may elect on an annual basis to defer receipt of a portion of their compensation until retirement. Participation in the plan is voluntary.
Share Ownership by Portfolio Managers. For purposes of these tables, “similarly managed accounts” include all accounts that are managed (i) by the same portfolio managers that are jointly and primarily responsible for the day-to-day management of the Fund; and (ii) with an investment style, objective, policies and strategies substantially similar to those that are used to manage the Fund.
Range of Beneficial | ||
Range of Beneficial | Ownership in Similarly | |
Portfolio Manager | Ownership in the Fund | Managed Accounts |
Joseph H. Bozoyan, | ||
CFA | $10,001-$50,000 | $10,001-$50,000 |
Bradley L. Lutz, CFA | $10,001-$50,000 | $10,001-$50,000 |
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
None.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The registrant has adopted procedures by which shareholders may recommend nominees to the registrant's Board of Trustees. A copy of the procedures is filed as an exhibit to this Form N-CSR. See attached "John Hancock Funds – Nominating and Governance Committee Charter".
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's principal executive officer and principal financial officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.
ITEM 12. DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
The Fund did not participate directly in securities lending activities. See Note 7 to financial statements in Item 1.
ITEM 13. EXHIBITS.
(a)(1) Code of Ethics for Senior Financial Officers is attached.
(a)(2) Separate certifications for the registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
(c)(1) Proxy Voting Policies and Procedures are attached.
(c)(2) Submission of Matters to a Vote of Security Holders is attached. See attached "John Hancock Funds - Governance Committee Charter".
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
John Hancock Preferred Income Fund III
By: | /s/ Andrew Arnott |
Andrew Arnott | |
President | |
Date: | September 16, 2020 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/ Andrew Arnott |
Andrew Arnott | |
President | |
Date: | September 16, 2020 |
By: | /s/ Charles A. Rizzo |
Charles A. Rizzo | |
Chief Financial Officer | |
Date: | September 16, 2020 |