John Hancock Strategic Income Fund

Interest rates may be at historic lows, but that doesn’t mean all bond

funds are worth side-stepping. Plus, with the right blend of bonds, even a

low interest rate environment can be rewarding.

The John Hancock Strategic Income Fund, (800-225-5291) has been around since

1986. Originally introduced as a high yield bond fund, in 1991, the fund's

investment strategy changed from holding only one type of fixed-income

security---high-yielding bonds--- to a multi-strategy one. That move has

worked well for fund investors on a couple of fronts---opportunity and total

return. According to Lipper, the fund was up 3.5 percent as of February

27---that's about 100 basis points higher than the average multi-sector fund.

As for opportunity, look inside its portfolio and you’ll find securities

from the various fixed-income sectors plus some foreign bonds. "One of the

real peaches of the fund is that you’ve got tremendous flexibility, " says

Fred Cavanaugh, portfolio manager on the fund since its inception.

At the end of January, 56 percent of the bonds in the John Hancock Strategic

Income Fund (JHFIX) portfolio were foreign bonds--37 percent of those

considered high quality and from countries like Canada, Germany, New Zealand;

22 percent were invested in US governments, mainly Treasuries; 19 percent in

high-yielding bonds; and the remainder in cash.

Here's more from Cavanaugh about how the fund is managed:

Q: Tell me more about the benefits of having a fund that allows you to invest

in the various bond sectors.

Cavanaugh: Let's look at the past seven years. When you do, you’ll see that

it's not the same sector every year that's doing well.

Over the past seven years, the US government sector has been the best

performing sector twice; high-yield has been the best performing sector

three times; and the foreign markets have been the best performing sector

twice. So there's not a great deal of correlation and the winners and losers

change from year-to-year which creates great opportunity.

If you can forecast which sector is going to be the best performing sector

and structure your portfolio accordingly by overweighting that sector in your

asset base and underweighting the sector that looks like it's going to be the

weaker performer, that type of flexibility is what makes a fund like this so

exciting.

Q: Many are telling investors to stay away from bonds because rates are so

low that they only have one way to go---up. What do you think?

Cavanaugh: The people who are saying stay away from bonds are probably basing

that on the low interest rate environment and feeling that there's probably

not much room for them to go any lower. There is a very strong consensus that

the economy is on the verge of a turnaround and in that environment, rates

are going to go up and bonds are not a good place to be.

However, we’ve got a lot of our bonds in foreign countries and denominated in

different currencies which causes them to be subjected to a completely

different interest rate environment than we have here.

Q: What about the Federal Reserve. Do you think they’ll raise rates any time

soon?

Cavanaugh: I think the Fed will be on hold for the rest of the year. And, if

there is a move, it's more likely to be down than up. Now, why won't it go

up? Given our economic forecast, there really isn't much of a need to raise

interest rates.

And even if our forecast is wrong and the economy does kick in sooner than

we expect and we start to get a level of economic growth that's far more

robust than we were expecting---and one that appears to be sustainable---I

think the Fed will be very slow to raise rates in that environment because

they will not want to run the risk of short-circuiting the recovery. The Fed

has had such a difficult time of getting it (the economy) going that I don't

think they will be very conservative in terms of raising rates.

The other reason is, they really can't afford that because there is not much

inflation.

Q: Who is this fund ideally suited for?

Cavanaugh: Someone who is either at or nearly retirement and wants to

generate some income. And for the more aggressive investor, it would be a

nice fit as a diversification play in a growth strategy.

Dian Vujovich is a nationally syndicated mutual fund columnist, author of a

number of books including Straight Talk About Mutual Funds (McGraw-Hill), and publisher of this web site.