Richard Pzena, co-manager of the John Hancock Classic Value Fund, has the second-worst returns among peers after buying Freddie Mac and...

Share story

Richard Pzena, co-manager of the John Hancock Classic Value Fund, has the second-worst returns among peers after buying Freddie Mac and Fannie Mae because they were “the most undervalued stocks in our universe.”

Pzena made the assessment after Freddie Mac and Fannie Mae, the two largest U.S. mortgage-finance companies, lost more than a third of their value in 2007. Then they each fell as much as 85 percent more this year.

Hancock Classic Value declined nearly 42 percent in the past year through July 15, compared with an 18 percent drop by the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. About 36 percent of the fund’s assets are in financial-services companies such as Citigroup that have been pummeled by losses tied to subprime-mortgage defaults.

“Investors are really feeling the pain as extraordinary events have derailed stocks,” Michael Herbst, an analyst with Morningstar in Chicago, said in an interview. “I don’t think Pzena could have reasonably anticipated some of the market events we’ve seen.”

Pzena’s losses matched the 12-month decline by Bill Miller’s $9.7 billion Legg Mason Value Trust, according to Morningstar. Legg Mason Partners All Cap Fund was the worst-performing U.S. diversified stock fund with more than $100 million of assets over the same period. The fund, managed by Jay Leopold, slumped 45 percent.

Hancock Classic Value has Morningstar’s second-lowest rating of two stars. It has a three-year Sharpe ratio of -0.65, compared with -0.05 for competing funds that invest in large- company stocks deemed cheap compared to financial yardsticks such as earnings. A higher Sharpe ratio means better risk-adjusted returns.

Pzena didn’t return calls seeking comment.

Hancock Classic Value Fund is owned by John Hancock Financial Services, a unit of Toronto-based Manulife Financial. The fund’s stake in Freddie Mac had dropped to 3.6 percent on June 30, while Fannie Mae dropped out of the list of its top 10 holdings. The fund hadn’t disclosed a complete list of current stocks it owns.

Citigroup accounted for 4.3 percent of assets and was the fund’s No. 2 holding on June 30. The biggest U.S. bank, Citigroup has reported three straight quarterly losses totaling $17.4 billion. Citigroup has taken $54.6 billion of credit losses and write-downs since the credit crisis began last year, more than any financial institution, Bloomberg data show.

Hancock Classic Value Fund’s nonfinancial picks include Alcatel-Lucent.

Pzena’s fund also owns shares of Amgen, the world’s biggest biotechnology company by sales.