John Hancock Closed-End Funds Deliver Mixed Results in Q1 2025: BTO Shines, HEQ Faces Challenges

The latest earnings data from John Hancock Closed-End Funds reveals a stark contrast in performance between its two flagship offerings: the Financial Opportunities Fund (BTO) and the Hedged Equity & Income Fund (HEQ). While BTO posted robust gains across key metrics, HEQ struggled to maintain its asset value, underscoring the divergent paths these funds are taking in the current market environment.

BTO: A Strong Quarter Driven by Leverage and Growth

The Financial Opportunities Fund (BTO) delivered an impressive performance in Q1 2025, fueled by strategic borrowing and a focus on financial sector opportunities. Key highlights include:
- Net Asset Value (NAV): Rose to $32.48, a 10.7% increase from $29.34 in Q1 2024. This growth reflects strong underlying asset performance, likely tied to gains in the financial services sector.
- Net Investment Income: Increased to $0.112 per share, a 5.7% rise year-over-year, driven by higher interest and dividend income.
- Managed Assets: Surged to $771.9 million, up 9.8% from 2024, though this figure includes borrowings under a Liquidity Agreement.

The use of leverage via the Liquidity Agreement has amplified BTO’s managed assets, but investors should note that borrowing increases risk exposure during market downturns. The fund’s NAV growth, however, suggests that this strategy has paid off in the near term.

HEQ: Income Growth Masks Asset Challenges

The Hedged Equity & Income Fund (HEQ) showed weaker performance compared to its counterpart, despite modest income gains:
- Net Investment Income: Rose to $0.134 per share, a 7.3% increase over Q1 2024.
- NAV: Dropped to $11.71, a 1.2% decline from $11.85 in the prior year.
- Managed Assets: Fell 1.7% to $141.6 million, signaling reduced investor confidence or portfolio adjustments.

HEQ’s hedged equity strategy—designed to mitigate market volatility—may explain its subdued NAV decline, but the contraction in managed assets raises questions about its appeal to investors. The fund’s focus on income generation appears to have come at the cost of capital appreciation.

Key Risks and Considerations

1. Leverage in BTO: While borrowing boosted BTO’s asset base, it also amplifies downside risk. A would help assess its leverage profile.
2. Distribution Volatility: Both funds emphasize that distributions may vary from reported earnings. Investors should monitor future announcements for clarity on payout sustainability.
3. Market Conditions: BTO’s financial sector focus may face headwinds if interest rates rise further, while HEQ’s hedged strategy could underperform in a strongly bullish equity market.

Conclusion: A Tale of Two Strategies

John Hancock’s Q1 2025 results paint a clear picture of strategic divergence:
- BTO emerges as the star performer, leveraging debt to fuel growth and capitalize on financial sector opportunities. Its 10.7% NAV increase and 9.8% managed asset growth signal strong execution of its mandate. However, its reliance on borrowed funds demands vigilance in volatile markets.
- HEQ, while maintaining income growth, struggles with declining NAV and managed assets. Its hedged approach may offer stability but leaves room for competitors in a rising market.

Investors should weigh BTO’s growth potential against its leverage risks and HEQ’s income profile against its lackluster capital appreciation. With BTO’s NAV now at $32.48 versus HEQ’s $11.71, the choice hinges on whether to bet on aggressive growth or defensive income—two very different paths forward.

As always, past performance is no guarantee of future results. Monitor distributions closely and consider the funds’ risk profiles before committing capital.