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 number811-21202
John Hancock Preferred Income Fund II
(Exact name of registrant as specified in charter)
200 Berkeley Street, Boston, Massachusetts 02116
(Address of principal executive offices) (Zip code)
Salvatore Schiavone
Treasurer
197 Clarendon 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, 2019 |
ITEM 1. REPORTS TO STOCKHOLDERS.
John Hancock
Preferred Income Fund II
Ticker: HPF
Annual report 7/31/19
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,
It was a rather volatile time for bond markets in the United States during the 12 months ended July 31, 2019, with investor uncertainty surrounding trade with China and the broader health of the global economy leading to some dramatic swings in performance. The trend in longer-term yields was decidedly downward, with the 10-year U.S. Treasury finishing the period at just above 2%, triggering an inverted yield curve shortly after period end. In July, the U.S. Federal Reserve stepped in with a reduction in short-term interest rates in an attempt to offer a measure of stimulus to jittery markets, and investors greeted the news favorably.
While the economic fundamentals in the United States appear fairly solid, with a strong labor market and a confident consumer base, there are sure to be patches of market turbulence as the year goes on, particularly as the threat of a recession looms. As always, your best resource in unpredictable markets is your financial advisor, who can help position your portfolio so that it's sufficiently diversified to meet your long-term objectives and to withstand the inevitable bouts of market volatility along the way.
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 II
Table of contents
| | | |
| 2 | | Your fund at a glance |
| 6 | | 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 |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 1
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 7/31/19 (%)
The ICE Bank of America Merrill Lynch Hybrid Preferred Securities Index is a subset of the ICE Bank of America Merrill Lynch Fixed Rate Preferred Securities Index, including all subordinated securities with a payment deferral feature. The ICE Bank of America Merrill Lynch 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 or 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.
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 2
PERFORMANCE HIGHLIGHTS OVER THE LAST TWELVE MONTHS
Preferred securities delivered strong returns for the period
Preferreds' year-to-date 2019 strength, driven largely by expectations of falling interest rates, helped offset a late-2018 sell-off.
Security selection helped boost the fund's performance
Many of the fund's largest holdings across a number of industry sectors helped drive returns.
Disappointments were limited
Varied factors, including worse-than-expected financial results, weighed on a handful of holdings.
PORTFOLIO COMPOSITION AS OF 7/31/19 (%)
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 3
SECTOR COMPOSITION AS OF 7/31/19 (%)
QUALITY COMPOSITION AS OF 7/31/19 (%)
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 4
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. 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. 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. 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. 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.
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.
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 5
Discussion of fund performance
How would you describe the investment backdrop during the 12 months ended July 31, 2019?
Preferred securities generally posted gains during the period. Although preferreds started the period on a relatively stable note, they suffered steep fourth-quarter 2018 losses driven by fears of rising interest rates, escalating trade tensions with China, and slowing global economic data. Late-year tax-loss selling and outflows from preferred securities exchange-traded funds also weighed on the asset class. But so far in 2019, preferreds have bounced back strongly and more than offset those fourth-quarter losses. They've benefited from a dovish shift in tone from global monetary policy makers that many investors hoped would lead the U.S. Federal Reserve to make cuts in interest rates during the second half of this year. Increased demand from value-seeking investors, who found bargains among high-quality preferreds, also helped buoy the group.
What elements of the fund's positioning helped and hurt results?
Security selection was a key driver of the fund's performance, with some of the fund's largest holdings across a number of sectors performing particularly well. Among holdings in the financials sector, insurer W.R. Berkley Corp. and bank BB&T Corp. performed particularly well. These preferreds had lower-than-average coupons and, as such, suffered outsized losses in late 2018 and subsequently snapped back more strongly during the market's 2019 rally. Among utility holdings,
TOP 10 ISSUERS AS OF 7/31/19 (%)
| | |
| Dominion Energy, Inc. | 4.8 |
| JPMorgan Chase & Co. | 4.0 |
| CenterPoint Energy, Inc. | 3.6 |
| Morgan Stanley | 3.2 |
| PPL Capital Funding, Inc. | 3.2 |
| United States Cellular Corp. | 3.2 |
| Duke Energy Corp. | 3.1 |
| BB&T Corp. | 3.0 |
| Algonquin Power & Utilities Corp. | 2.8 |
| W.R. Berkley Corp. | 2.7 |
| TOTAL | 33.6 |
| As a percentage of total investments. |
| Cash and cash equivalents are not included. |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 6
convertible security Dominion Energy, Inc. was a standout amid strong financial results from the company. In the real estate sector, convertible security cellular tower company Crown Castle International Corp. posted notable gains, helped by strong growth in wireless communications. In the energy sector, holdings in the common stock of Kinder Morgan, Inc. performed quite well, largely due to investors' enthusiasm over the company's moves to reduce debt and sustain and increase its dividends annually.
In contrast, the fund's common stock holdings in telecommunications company CenturyLink, Inc. failed to keep pace with preferreds overall, hurt by weaker-than-expected earnings results. Healthcare facility operator Senior Housing Properties Trust also lagged, when one of its lessors suffered a credit rating downgrade.
What were some key aspects of your portfolio activity?
Given our view that interest rates would stay low for an extended period, we increasingly favored fixed-rate securities over fixed-to-floating rate securities. Fixed-rate securities generally increase in value when interest rates decline, while floating-rate securities tend to fall in value as their interest payments adjust lower.
Our desire to lock in profits for the fund and our outlook for continued weakness in energy prices prompted us to sell Royal Dutch Shell PLC and ONEOK, Inc., as well as reduce the fund's exposure to BP PLC. We purchased water company Aqua America, Inc. and Canadian electric provider Algonquin Power & Utilities Corp.
MANAGED BY
| | |
 | Joseph H. Bozoyan, CFA
On the fund since 2015
Investing since 1993 |
 | Brad Lutz, CFA
On the fund since 2017
Investing since 1992 |
The views expressed in this report are exclusively those of Joseph H. Bozoyan, CFA, Manulife Investment Management, and are subject to change. They are not meant as investment advice. Please note that the holdings discussed in this report may not have been held by the fund for the entire period. Portfolio composition is subject to review in accordance with the fund's investment strategy and may vary in the future. Current and future portfolio holdings are subject to risk.
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 7
AS OF 7-31-19
| | | | | Shares | Value |
| Preferred securities (A) 121.4% (79.7% of Total investments) | | | $546,162,436 |
| (Cost $529,488,070) | | | | | |
| Communication services 10.9% | | | | 48,791,137 |
| Diversified telecommunication services 2.8% | | | | |
| Qwest Corp., 6.125% | | | | 30,000 | 717,300 |
| Qwest Corp., 6.500% | | | | 110,790 | 2,729,866 |
| Qwest Corp., 6.750% | | | | 220,000 | 5,601,200 |
| Qwest Corp., 6.875% | | | | 138,346 | 3,541,658 |
| Wireless telecommunication services 8.1% | | | | |
| Telephone & Data Systems, Inc., 6.625% (B) | | | | 168,297 | 4,426,211 |
| Telephone & Data Systems, Inc., 6.875% (B) | | | | 115,519 | 2,934,183 |
| Telephone & Data Systems, Inc., 7.000% (B)(C) | | | | 283,000 | 7,224,990 |
| United States Cellular Corp., 6.950% (B)(C) | | | | 673,600 | 17,163,328 |
| United States Cellular Corp., 7.250% | | | | 165,825 | 4,452,401 |
| Consumer staples 3.1% | | | | 14,080,000 |
| Food and staples retailing 3.1% | | | | |
| Ocean Spray Cranberries, Inc., 6.250% (D) | | | | 160,000 | 14,080,000 |
| Energy 1.3% | | | | 5,625,900 |
| Oil, gas and consumable fuels 1.3% | | | | |
| Enbridge, Inc., Series B (6.375% to 4-15-23, then 3 month LIBOR + 3.593%) (B) | | | | 210,000 | 5,625,900 |
| Financials 48.0% | | | | 216,008,600 |
| Banks 24.5% | | | | |
| Bank of America Corp., 6.500% (B) | | | | 180,000 | 4,671,000 |
| Bank of America Corp. (6.450% to 12-15-66, then 3 month LIBOR + 1.327%), 6.450% | | | | 60,000 | 1,578,600 |
| BB&T Corp. (Callable 9-3-19), 5.200% (B) | | | | 326,250 | 8,247,600 |
| BB&T Corp., 5.625% (B) | | | | 474,675 | 12,061,492 |
| Citigroup Capital XIII (3 month LIBOR + 6.370%), 8.636% (B)(E) | | | | 265,000 | 7,208,000 |
| Citigroup, Inc. (7.125% to 9-30-23, then 3 month LIBOR + 4.040%) (B) | | | | 300,564 | 8,539,023 |
| GMAC Capital Trust I (3 month LIBOR + 5.785%), 8.303% (B)(E) | | | | 361,904 | 9,539,789 |
| JPMorgan Chase & Co., 5.450% (B) | | | | 60,000 | 1,567,800 |
| JPMorgan Chase & Co., 6.000% (B) | | | | 169,000 | 4,699,890 |
| JPMorgan Chase & Co., 6.100% (B) | | | | 276,500 | 7,310,660 |
| JPMorgan Chase & Co., 6.125% (B) | | | | 501,419 | 13,066,979 |
| JPMorgan Chase & Co., 6.300% (B) | | | | 30,000 | 763,800 |
| MB Financial, Inc., 6.000% (B) | | | | 150,000 | 3,955,500 |
| Synovus Financial Corp. (6.300% to 6-21-23, then 3 month LIBOR + 3.352%) | | | | 164,500 | 4,378,990 |
| 8 | JOHN HANCOCK PREFERRED INCOME FUND II | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
| | | | | Shares | Value |
| Financials (continued) | | | | |
| Banks (continued) | | | | |
| The PNC Financial Services Group, Inc., 5.375% (B) | | | | 70,000 | $1,786,400 |
| The PNC Financial Services Group, Inc. (6.125% to 5-1-22, then 3 month LIBOR + 4.067%) (B) | | | | 145,000 | 3,903,400 |
| U.S. Bancorp (6.500% to 1-15-22, then 3 month LIBOR + 4.468%) (B) | | | | 130,000 | 3,512,600 |
| Wells Fargo & Company, 6.000% (B) | | | | 200,000 | 5,122,000 |
| Wells Fargo & Company (6.625% to 3-15-24, then 3 month LIBOR + 3.690%) (B)(C) | | | | 269,225 | 7,705,220 |
| Western Alliance Bancorp, 6.250% | | | | 20,000 | 537,000 |
| Capital markets 7.8% | | | | |
| Ares Management Corp., 7.000% (B) | | | | 2,525 | 67,418 |
| Morgan Stanley, 6.625% (B) | | | | 175,000 | 4,476,500 |
| Morgan Stanley (6.375% to 10-15-24, then 3 month LIBOR + 3.708%) | | | | 125,000 | 3,482,500 |
| Morgan Stanley (6.875% to 1-15-24, then 3 month LIBOR + 3.940%) | | | | 86,000 | 2,405,420 |
| Morgan Stanley (7.125% to 10-15-23, then 3 month LIBOR + 4.320%) | | | | 405,472 | 11,551,897 |
| State Street Corp., 5.250% (B) | | | | 45,000 | 1,138,050 |
| State Street Corp., 6.000% (B)(C) | | | | 445,000 | 11,356,400 |
| The Carlyle Group LP, 5.875% | | | | 19,151 | 479,733 |
| Consumer finance 1.9% | | | | |
| Capital One Financial Corp., 6.200% (B) | | | | 75,395 | 1,963,286 |
| Capital One Financial Corp., 6.700% | | | | 52,925 | 1,353,822 |
| Navient Corp., 6.000% (B)(C) | | | | 244,271 | 5,293,353 |
| Insurance 13.6% | | | | |
| Aegon NV, 6.375% (B)(C) | | | | 392,498 | 10,224,573 |
| American International Group, Inc., 5.850% (B) | | | | 170,000 | 4,625,700 |
| Assurant, Inc., 6.500% | | | | 15,000 | 1,752,300 |
| Athene Holding, Ltd. (6.350% to 6-30-29, then 3 month LIBOR + 4.253%) (B) | | | | 250,000 | 6,830,000 |
| Brighthouse Financial, Inc., 6.600% | | | | 180,200 | 4,908,648 |
| Prudential Financial, Inc., 5.750% (B) | | | | 120,000 | 3,092,400 |
| Prudential PLC, 6.500% (B) | | | | 103,000 | 2,783,060 |
| The Hartford Financial Services Group, Inc. (7.875% to 4-15-22, then 3 month LIBOR + 5.596%) (B) | | | | 46,750 | 1,338,453 |
| The Phoenix Companies, Inc., 7.450% (B) | | | | 216,500 | 3,593,900 |
| Unum Group, 6.250% | | | | 127,500 | 3,460,350 |
| W.R. Berkley Corp., 5.625% (B)(C) | | | | 733,545 | 18,808,094 |
| Thrifts and mortgage finance 0.2% | | | | |
| Federal National Mortgage Association, Series S, 8.250% (F) | | | | 75,000 | 867,000 |
| SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II | 9 |
| | | | | Shares | Value |
| Industrials 2.2% | | | | $9,984,554 |
| Machinery 2.2% | | | | |
| Stanley Black & Decker, Inc., 5.750% (B)(C) | | | | 385,504 | 9,984,554 |
| Real estate 10.1% | | | | 45,545,782 |
| Equity real estate investment trusts 10.1% | | | | |
| American Homes 4 Rent, Series D, 6.500% | | | | 71,825 | 1,978,779 |
| American Homes 4 Rent, Series E, 6.350% | | | | 35,000 | 961,100 |
| American Homes 4 Rent, Series F, 5.875% | | | | 146,511 | 3,958,727 |
| American Homes 4 Rent, Series G, 5.875% | | | | 117,500 | 3,178,375 |
| Crown Castle International Corp., 6.875% (B) | | | | 5,000 | 6,021,000 |
| Digital Realty Trust, Inc., 6.350% | | | | 922 | 23,972 |
| Digital Realty Trust, Inc., 6.625% | | | | 10,925 | 290,824 |
| Federal Realty Investment Trust, Series C, 5.000% (B) | | | | 80,000 | 2,028,000 |
| Kimco Realty Corp., 6.000% (B)(C) | | | | 315,396 | 8,042,598 |
| Public Storage, 5.200% (B) | | | | 130,375 | 3,278,931 |
| Public Storage, 5.375% (B) | | | | 21,275 | 538,470 |
| Senior Housing Properties Trust, 5.625% (B) | | | | 683,020 | 15,245,006 |
| Utilities 45.8% | | | | 206,126,463 |
| Electric utilities 16.9% | | | | |
| American Electric Power Company, Inc., 6.125% (B)(C) | | | | 130,000 | 7,082,400 |
| Duke Energy Corp., 5.125% (B) | | | | 656,624 | 16,645,418 |
| Duke Energy Corp., 5.750% (B) | | | | 160,000 | 4,424,000 |
| Entergy Louisiana LLC, 5.250% (B) | | | | 120,000 | 3,126,000 |
| Interstate Power & Light Company, 5.100% (B) | | | | 108,837 | 2,811,260 |
| NextEra Energy Capital Holdings, Inc., 5.125% (B) | | | | 80,000 | 2,033,600 |
| NSTAR Electric Company, 4.780% (B) | | | | 15,143 | 1,544,586 |
| PPL Capital Funding, Inc., 5.900% (B) | | | | 855,000 | 21,802,500 |
| SCE Trust II, 5.100% (B)(C) | | | | 507,795 | 11,912,871 |
| SCE Trust III (5.750% to 3-15-24, then 3 month LIBOR + 2.990%) (B) | | | | 20,000 | 495,800 |
| The Southern Company, 6.250% (B) | | | | 155,000 | 4,073,400 |
| Gas utilities 4.0% | | | | |
| South Jersey Industries, Inc., 7.250% | | | | 283,600 | 15,198,124 |
| Spire, Inc., 5.900% | | | | 111,750 | 3,086,535 |
| Multi-utilities 24.0% | | | | |
| Algonquin Power & Utilities Corp. (6.200% to 7-1-24, then 3 month LIBOR + 4.010%) | | | | 290,000 | 7,772,000 |
| Algonquin Power & Utilities Corp. (6.875% to 10-17-23, then 3 month LIBOR + 3.677%) (B)(C) | | | | 402,050 | 11,120,703 |
| CenterPoint Energy, Inc., 7.000% | | | | 334,000 | 17,070,740 |
| CMS Energy Corp., 5.625% (B) | | | | 187,515 | 5,040,403 |
| 10 | JOHN HANCOCK PREFERRED INCOME FUND II | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
| | | | | Shares | Value |
| Utilities (continued) | | | | |
| Multi-utilities (continued) | | | | |
| Dominion Energy, Inc., 7.250% (B)(C) | | | | 265,900 | $26,720,290 |
| DTE Energy Company, 6.000% (B)(C) | | | | 76,475 | 2,159,654 |
| DTE Energy Company, 6.500% (B) | | | | 13,850 | 772,830 |
| DTE Energy Company (Callable 12-1-22), 5.250% (B) | | | | 160,000 | 4,275,200 |
| DTE Energy Company (Callable 9-3-19), 5.250% (B) | | | | 268,402 | 6,833,515 |
| Integrys Holding, Inc. (6.000% to 8-1-23, then 3 month LIBOR + 3.220%) (B)(C) | | | | 237,872 | 6,256,034 |
| NiSource, Inc. (6.500% to 3-15-24, then 5 Year CMT + 3.632%) | | | | 288,000 | 7,908,480 |
| Sempra Energy, 5.750% (B) | | | | 270,000 | 7,098,300 |
| Sempra Energy, 6.750% | | | | 43,600 | 4,859,220 |
| Water utilities 0.9% | | | | |
|
| Aqua America, Inc., 6.000% | | | | 70,000 | 4,002,600 |
| Common stocks 3.8% (2.5% of Total investments) | | | $16,862,859 |
| (Cost $21,385,689) | | | | | |
| Communication services 0.4% | | | | 1,813,500 |
| Diversified telecommunication services 0.4% | | | | |
| CenturyLink, Inc. (B) | | | | 150,000 | 1,813,500 |
| Energy 3.4% | | | | 15,049,359 |
| Oil, gas and consumable fuels 3.4% | | | | |
| Equitrans Midstream Corp. (B) | | | | 358,446 | 5,946,619 |
| Kinder Morgan, Inc. (B) | | | | 441,452 | 9,102,740 |
|
| | Rate (%) | Maturity date | | Par value^ | Value |
| Corporate bonds 25.7% (16.9% of Total investments) | | | $115,490,397 |
| (Cost $113,030,307) | | | | | |
| Communication services 1.5% | | | | 6,860,804 |
| Wireless telecommunication services 1.5% | | | | |
| Vodafone Group PLC (7.000% to 1-4-29, then 5 Year U.S. Swap Rate + 4.873%) | 7.000 | 04-04-79 | | 6,262,000 | 6,860,804 |
| Consumer discretionary 2.1% | | | | 9,495,135 |
| Automobiles 2.1% | | | | |
| General Motors Financial Company, Inc. (6.500% to 9-30-28, then 3 month LIBOR + 3.436%) (B)(C)(G) | 6.500 | 09-30-28 | | 9,739,000 | 9,495,135 |
| Energy 5.4% | | | | 24,445,525 |
| Oil, gas and consumable fuels 5.4% | | | | |
| DCP Midstream LP (7.375% to 12-15-22, then 3 month LIBOR + 5.148%) (B)(G) | 7.375 | 12-15-22 | | 9,297,000 | 9,152,525 |
| SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II | 11 |
| | Rate (%) | Maturity date | | Par value^ | Value |
| Energy (continued) | | | | |
| Oil, gas and consumable fuels (continued) | | | | |
| Energy Transfer Operating LP (3 month LIBOR + 3.018%) (B)(E) | 5.597 | 11-01-66 | | 8,050,000 | $6,118,000 |
| Energy Transfer Operating LP (6.625% to 2-15-28, then 3 month LIBOR + 4.155%) (B)(G) | 6.625 | 02-15-28 | | 6,500,000 | 6,175,000 |
| MPLX LP (6.875% to 2-15-23, then 3 month LIBOR + 4.652%) (G) | 6.875 | 02-15-23 | | 3,000,000 | 3,000,000 |
| Financials 12.8% | | | | 57,427,935 |
| Banks 10.2% | | | | |
| Bank of America Corp. (5.875% to 3-15-28, then 3 month LIBOR + 2.931%) (B)(C)(G) | 5.875 | 03-15-28 | | 4,500,000 | 4,790,025 |
| Barclays PLC (7.750% to 9-15-23, then 5 Year U.S. Swap Rate + 4.842%) (G) | 7.750 | 09-15-23 | | 3,000,000 | 3,056,250 |
| BNP Paribas SA (7.375% to 8-19-25, then 5 Year U.S. Swap Rate + 5.150%) (G) | 7.375 | 08-19-25 | | 6,800,000 | 7,530,996 |
| Citizens Financial Group, Inc. (6.000% to 7-6-23, then 3 month LIBOR + 3.003%) (G) | 6.000 | 07-06-23 | | 3,750,000 | 3,806,250 |
| Citizens Financial Group, Inc. (6.375% to 4-6-24, then 3 month LIBOR + 3.157%) (B)(G) | 6.375 | 04-06-24 | | 6,000,000 | 6,218,760 |
| HSBC Holdings PLC (6.500% to 3-23-28, then 5 Year U.S. ISDAFIX + 3.606%) (B)(C)(G) | 6.500 | 03-23-28 | | 6,500,000 | 6,776,250 |
| Huntington Bancshares, Inc. (5.700% to 4-15-23, then 3 month LIBOR + 2.880%) (G) | 5.700 | 04-15-23 | | 2,000,000 | 2,017,500 |
| Lloyds Banking Group PLC (7.500% to 6-27-24, then 5 Year U.S. Swap Rate + 4.760%) (B)(G) | 7.500 | 06-27-24 | | 6,000,000 | 6,288,900 |
| The Royal Bank of Scotland Group PLC (8.000% to 8-10-25, then 5 Year U.S. Swap Rate + 5.720%) (G) | 8.000 | 08-10-25 | | 3,175,000 | 3,401,219 |
| 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 | 2,122,500 |
| Capital markets 1.4% | | | | |
| Credit Suisse Group AG (7.250% to 9-12-25, then 5 Year U.S. Swap Rate + 4.332%) (D)(G) | 7.250 | 09-12-25 | | 2,400,000 | 2,568,000 |
| Credit Suisse Group AG (7.500% to 7-17-23, then 5 Year U.S. Swap Rate + 4.600%) (D)(G) | 7.500 | 07-17-23 | | 3,290,000 | 3,495,625 |
| Insurance 1.2% | | | | |
| MetLife, Inc. (5.875% to 3-15-28, then 3 month LIBOR + 2.959%) (B)(G) | 5.875 | 03-15-28 | | 4,000,000 | 4,270,000 |
| Prudential Financial, Inc. (5.700% to 9-15-28, then 3 month LIBOR + 2.665%) (B) | 5.700 | 09-15-48 | | 1,000,000 | 1,085,660 |
| Utilities 3.9% | | | | 17,260,998 |
| Electric utilities 1.9% | | | | |
| Emera, Inc. (6.750% to 6-15-26, then 3 month LIBOR + 5.440%) | 6.750 | 06-15-76 | | 3,750,000 | 4,078,125 |
| 12 | JOHN HANCOCK PREFERRED INCOME FUND II | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
| | Rate (%) | Maturity date | | Par value^ | Value |
| Utilities (continued) | | | | |
| Electric utilities (continued) | | | | |
| Southern California Edison Company (6.250% to 2-1-22, then 3 month LIBOR + 4.199%) (B)(C)(G) | 6.250 | 02-01-22 | | 4,000,000 | $4,105,000 |
| Multi-utilities 2.0% | | | | |
| CenterPoint Energy, Inc. (6.125% to 9-1-23, then 3 month LIBOR + 3.270%) (B)(C)(G) | 6.125 | 09-01-23 | | 7,275,000 | 7,585,643 |
|
| NiSource, Inc. (5.650% to 6-15-23, then 5 Year CMT + 2.843%) (B)(G) | 5.650 | 06-15-23 | | 1,500,000 | 1,492,230 |
| Capital preferred securities (H) 1.3% (0.9% of Total investments) | | | $6,006,096 |
| (Cost $5,574,000) | | | | | |
| Utilities 1.3% | | | | 6,006,096 |
| Multi-utilities 1.3% | | | | |
| Dominion Resources Capital Trust III (B) | 8.400 | 01-15-31 | | 5,000,000 | 6,006,096 |
|
| | | | | Par value^ | Value |
| Short-term investments 0.0% (0.0% of Total investments) | | | $224,000 |
| (Cost $224,000) | | | | | |
| Repurchase agreement 0.0% | | | | | 224,000 |
| Repurchase Agreement with State Street Corp. dated 7-31-19 at 1.300% to be repurchased at $224,008 on 8-1-19, collateralized by $230,000 U.S. Treasury Notes, 2.500% due 12-31-20 (valued at $232,253, including interest) | | | | 224,000 | 224,000 |
|
| Total investments (Cost $669,702,066) 152.2% | | | | $684,745,788 |
| Other assets and liabilities, net (52.2%) | | | | (234,950,793) |
| Total net assets 100.0% | | | | | $449,794,995 |
| 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 |
| CMT | Constant Maturity Treasury |
| ISDAFIX | International Swaps and Derivatives Association Fixed Interest Rate Swap Rate |
| 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 7-31-19 was $460,109,567. A portion of the securities pledged as collateral were loaned pursuant to the Credit Facility Agreement. The value of securities on loan amounted to $178,661,262. |
| (C) | All or a portion of this security is on loan as of 7-31-19, 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. |
| SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II | 13 |
| (F) | Non-income producing security. |
| (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 II | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
DERIVATIVES
FUTURES
| Open contracts | Number of
contracts | Position | Expiration
date | Notional
basis^ | Notional
value^ | Unrealized
appreciation
(depreciation) |
| 10-Year U.S. Treasury Note Futures | 520 | Short | Sep 2019 | $(65,108,566) | $(66,259,375) | $(1,150,809) |
| | | | | | | $(1,150,809) |
^ Notional basis refers to the contractual amount agreed upon at inception of open contracts; notional value represents the current value of the open contract.
SWAPS
| 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 | 60,000,000 | USD | Fixed 2.136% | USD 3 Month LIBOR BBA(a) | Semi-Annual | Quarterly | Oct 2022 | — | $(891,294) | $(891,294) |
| | | | | | | | | — | $(891,294) | $(891,294) |
| (a) | At 7-31-19, the 3 month LIBOR was 2.266% |
| Derivatives Currency Abbreviations |
| USD | U.S. Dollar |
| Derivatives Abbreviations |
| BBA | The British Banker's Association |
| LIBOR | London Interbank Offered Rate |
| OTC | Over-the-counter |
At 7-31-19, the aggregate cost of investments for federal income tax purposes was $668,448,033. Net unrealized appreciation aggregated to $14,255,652, of which $26,504,180 related to gross unrealized appreciation and $12,248,528 related to gross unrealized depreciation.
See Notes to financial statements regarding investment transactions and other derivatives information.
| SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II | 15 |
STATEMENT OF ASSETS AND LIABILITIES 7-31-19
| Assets | |
| Unaffiliated investments, at value (Cost $669,702,066) | $684,745,788 |
| Receivable for centrally cleared swaps | 557,897 |
| Cash | 90,988 |
| Collateral held at broker for futures contracts | 621,000 |
| Dividends and interest receivable | 2,553,460 |
| Receivable for investments sold | 3,173,558 |
| Other assets | 36,835 |
| Total assets | 691,779,526 |
| Liabilities | |
| Payable for futures variation margin | 40,615 |
| Credit facility agreement payable | 238,000,000 |
| Payable for investments purchased | 3,154,531 |
| Interest payable | 615,716 |
| Payable to affiliates | |
| Accounting and legal services fees | 55,035 |
| Trustees' fees | 443 |
| Other liabilities and accrued expenses | 118,191 |
| Total liabilities | 241,984,531 |
| Net assets | $449,794,995 |
| Net assets consist of | |
| Paid-in capital | $445,237,087 |
| Total distributable earnings (loss) | 4,557,908 |
| Net assets | $449,794,995 |
| |
| Net asset value per share | |
| Based on 21,325,264 shares of beneficial interest outstanding - unlimited number of shares authorized with no par value | $21.09 |
| 16 | JOHN HANCOCK PREFERRED INCOME FUND II | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
STATEMENT OF OPERATIONSFor the year ended 7-31-19
| Investment income | |
| Dividends | $34,928,677 |
| Interest | 6,548,748 |
| Less foreign taxes withheld | (48,780) |
| Total investment income | 41,428,645 |
| Expenses | |
| Investment management fees | 5,033,032 |
| Interest expense | 7,404,953 |
| Accounting and legal services fees | 93,982 |
| Transfer agent fees | 26,998 |
| Trustees' fees | 44,580 |
| Custodian fees | 54,904 |
| Printing and postage | 157,795 |
| Professional fees | 61,010 |
| Stock exchange listing fees | 23,823 |
| Other | 16,211 |
| Total expenses | 12,917,288 |
| Less expense reductions | (51,011) |
| Net expenses | 12,866,277 |
| Net investment income | 28,562,368 |
| Realized and unrealized gain (loss) | |
| Net realized gain (loss) on | |
| Unaffiliated investments and foreign currency transactions | (4,680,023) |
| Futures contracts | (2,946,530) |
| Swap contracts | 272,087 |
| | (7,354,466) |
| Change in net unrealized appreciation (depreciation) of | |
| Unaffiliated investments | 17,497,901 |
| Futures contracts | (1,024,741) |
| Swap contracts | (2,588,757) |
| | 13,884,403 |
| Net realized and unrealized gain | 6,529,937 |
| Increase in net assets from operations | $35,092,305 |
| | |
| SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II | 17 |
STATEMENTS OF CHANGES IN NET ASSETS
| | Year ended
7-31-19 | Year ended
7-31-18 |
| Increase (decrease) in net assets | | |
| From operations | | |
| Net investment income | $28,562,368 | $31,823,772 |
| Net realized gain (loss) | (7,354,466) | 9,472,097 |
| Change in net unrealized appreciation (depreciation) | 13,884,403 | (21,892,123) |
| Increase in net assets resulting from operations | 35,092,305 | 19,403,746 |
| Distributions to shareholders | | |
| From net investment income and net realized gain | (29,832,159) | — |
| From net investment income | — | (35,744,533) |
| From tax return of capital | (5,952,981) | — |
| Total distributions | (35,785,140) | (35,744,533) |
| Fund share transactions | | |
| Issued pursuant to Dividend Reinvestment Plan | 856,535 | 349,573 |
| Total increase (decrease) | 163,700 | (15,991,214) |
| Net assets | | |
| Beginning of year | 449,631,295 | 465,622,509 |
| End of year1 | $449,794,995 | $449,631,295 |
| Share activity | | |
| Shares outstanding | | |
| Beginning of year | 21,284,064 | 21,267,596 |
| Issued pursuant to Dividend Reinvestment Plan | 41,200 | 16,468 |
| End of year | 21,325,264 | 21,284,064 |
| 1 | Net assets - End of year includes undistributed net investment income of $(89,681) at July 31, 2018. The SEC eliminated the requirement to disclose undistributed net investment income in the current reporting period. |
| 18 | JOHN HANCOCK PREFERRED INCOME FUND II | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
STATEMENT OF CASH FLOWSFor the year ended 7-31-19
| | |
| Cash flows from operating activities | |
| Net increase in net assets from operations | $35,092,305 |
| Adjustments to reconcile net increase in net assets from operations to net cash provided by operating activities: | |
| Long-term investments purchased | (235,520,386) |
| Long-term investments sold | 243,460,064 |
| Net purchases and sales in short-term investments | 3,020,000 |
| Net amortization of premium (discount) | 29,736 |
| (Increase) Decrease in assets: | |
| Receivable for centrally cleared swaps | 117,009 |
| Collateral held at broker for futures contracts | (74,987) |
| Dividends and interest receivable | (895,440) |
| Receivable for investments sold | 496,509 |
| Other assets | 9,841 |
| Increase (Decrease) in liabilities: | |
| Payable for futures variation margin | 16,237 |
| Payable for investments purchased | 862,274 |
| Interest payable | 578,939 |
| Payable to affiliates | 20,653 |
| Other liabilities and accrued expenses | (46,985) |
| Net change in unrealized (appreciation) depreciation on: | |
| Investments | (17,497,901) |
| Net realized (gain) loss on: | |
| Investments | 4,679,835 |
| Proceeds received as return of capital | 619,938 |
| Net cash provided by operating activities | $34,967,641 |
| Cash flows provided by (used in) financing activities | |
| Distributions to shareholders | $(34,928,605) |
| Net cash used in financing activities | $(34,928,605) |
| Net increase in cash | $39,036 |
| Cash at beginning of year | $51,952 |
| Cash at end of year | $90,988 |
| Supplemental disclosure of cash flow information: | |
| Cash paid for interest | $6,826,014 |
| Noncash financing activities not included herein consists of reinvestment distributions: | $856,535 |
| SEE NOTES TO FINANCIAL STATEMENTS | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II | 19 |
| Period ended | 7-31-19 | 7-31-18 | 7-31-17 | 7-31-16 | 7-31-15 |
| Per share operating performance | | | | | |
| Net asset value, beginning of period | $21.13 | $21.89 | $22.58 | $21.59 | $21.28 |
| Net investment income1 | 1.34 | 1.50 | 1.60 | 1.59 | 1.64 |
| Net realized and unrealized gain (loss) on investments | 0.30 | (0.58) | (0.61) | 1.08 | 0.35 |
| Total from investment operations | 1.64 | 0.92 | 0.99 | 2.67 | 1.99 |
| Less distributions | | | | | |
| From net investment income | (1.40) | (1.68) | (1.68) | (1.53) | (1.62) |
| From tax return of capital | (0.28) | — | — | (0.15) | (0.06) |
| Total distributions | (1.68) | (1.68) | (1.68) | (1.68) | (1.68) |
| Net asset value, end of period | $21.09 | $21.13 | $21.89 | $22.58 | $21.59 |
| Per share market value, end of period | $23.67 | $21.27 | $22.39 | $22.68 | $19.51 |
| Total return at net asset value (%)2,3 | 8.26 | 4.63 | 4.87 | 13.47 | 10.08 |
| Total return at market value (%)2 | 20.70 | 2.97 | 6.79 | 26.12 | 5.06 |
| Ratios and supplemental data | | | | | |
| Net assets, end of period (in millions) | $450 | $450 | $466 | $480 | $459 |
| Ratios (as a percentage of average net assets): | | | | | |
| Expenses before reductions | 2.98 | 2.52 | 2.06 | 1.81 | 1.70 |
| Expenses including reductions4 | 2.97 | 2.50 | 2.05 | 1.80 | 1.69 |
| Net investment income | 6.60 | 7.13 | 7.42 | 7.37 | 7.56 |
| Portfolio turnover (%) | 35 | 24 | 21 | 14 | 13 |
| Senior securities | | | | | |
| Total debt outstanding end of period (in millions) | $238 | $238 | $238 | $238 | $238 |
| Asset coverage per $1,000 of debt5 | $2,890 | $2,889 | $2,956 | $3,016 | $2,927 |
| 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 1.26%, 1.25%, 1.25%, 1.24% and 1.23% for the periods ended 7-31-19, 7-31-18, 7-31-17, 7-31-16 and 7-31-15, 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 II | ANNUAL REPORT | SEE NOTES TO FINANCIAL STATEMENTS |
| Notes to financial statements | |
Note 1—Organization
John Hancock Preferred Income Fund II (the fund) is a closed-end management investment company organized as a Massachusetts business trust and registered under the Investment Company Act of 1940, as amended (the 1940 Act).
Note 2—Significant accounting policies
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP), which require management to make certain estimates and assumptions as of the date of the financial statements. Actual results could differ from those estimates and those differences could be significant. The fund qualifies as an investment company under Topic 946 of Accounting Standards Codification of US GAAP.
Events or transactions occurring after the end of the fiscal period through the date that the financial statements were issued have been evaluated in the preparation of the financial statements. The following summarizes the significant accounting policies of the fund:
Security valuation. Investments are stated at value as of the scheduled close of regular trading on the New York Stock Exchange (NYSE), normally at 4:00 P.M., Eastern Time. In case of emergency or other disruption resulting in the NYSE not opening for trading or the NYSE closing at a time other than the regularly scheduled close, the net asset value (NAV) may be determined as of the regularly scheduled close of the NYSE pursuant to the fund's Valuation Policies and Procedures.
In order to value the securities, the fund uses the following valuation techniques: Equity securities, including exchange-traded or closed-end funds, are typically valued at the last sale price or official closing price on the exchange or principal market where the security trades. In the event there were no sales during the day or closing prices are not available, the securities are valued using the last available bid price. Debt obligations are typically valued based on the evaluated prices provided by an independent pricing vendor. Independent pricing vendors utilize matrix pricing which takes into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data, as well as broker supplied prices. Futures contracts are typically valued at last traded price on the exchange on which they trade. Swaps are generally valued using evaluated prices obtained from an independent pricing vendor.
In certain instances, the Pricing Committee may determine to value equity securities using prices obtained from another exchange or market if trading on the exchange or market on which prices are typically obtained did not open for trading as scheduled, or if trading closed earlier than scheduled, and trading occurred as normal on another exchange or market.
Other portfolio securities and assets, for which reliable market quotations are not readily available, are valued at fair value as determined in good faith by the fund's Pricing Committee following procedures established by the Board of Trustees. The frequency with which these fair valuation procedures are used cannot be predicted and fair value of securities may differ significantly from the value that would have been used had a ready market for such securities existed.
The fund uses a three-tier hierarchy to prioritize the pricing assumptions, referred to as inputs, used in valuation techniques to measure fair value. Level 1 includes securities valued using quoted prices in active markets for identical securities, including registered investment companies. Level 2 includes securities valued using other significant observable inputs. Observable inputs may include quoted prices for similar securities, interest rates, prepayment speeds and credit risk. Prices for securities valued using these inputs are received from independent pricing vendors and brokers and are based on an evaluation of the inputs described. Level 3 includes securities
| | ANNUAL REPORT | JOHN HANCOCK Preferred Income Fund II | 21 |
valued using significant unobservable inputs when market prices are not readily available or reliable, including the fund's own assumptions in determining the fair value of investments. Factors used in determining value may include market or issuer specific events or trends, changes in interest rates and credit quality. The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in those securities. Changes in valuation techniques and related inputs may result in transfers into or out of an assigned level within the disclosure hierarchy.
The following is a summary of the values by input classification of the fund's investments as of July 31, 2019, by major security category or type:
| | Total
value at
7-31-19 | Level 1
quoted
price | Level 2
significant
observable
inputs | Level 3
significant
unobservable
inputs |
| Investments in securities: | | | | |
| Assets | | | | |
| Preferred securities | | | | |
| Communication services | $48,791,137 | $48,791,137 | — | — |
| Consumer staples | 14,080,000 | — | $14,080,000 | — |
| Energy | 5,625,900 | 5,625,900 | — | — |
| Financials | 216,008,600 | 208,459,200 | 7,549,400 | — |
| Industrials | 9,984,554 | 9,984,554 | — | — |
| Real estate | 45,545,782 | 39,524,782 | 6,021,000 | — |
| Utilities | 206,126,463 | 198,325,843 | 7,800,620 | — |
| Common stocks | 16,862,859 | 16,862,859 | — | — |
| Corporate bonds | 115,490,397 | — | 115,490,397 | — |
| Capital preferred securities | 6,006,096 | — | 6,006,096 | — |
| Short-term investments | 224,000 | — | 224,000 | — |
| Total investments in securities | $684,745,788 | $527,574,275 | $157,171,513 | — |
| Derivatives: | | | | |
| Liabilities | | | | |
| Futures | $(1,150,809) | $(1,150,809) | — | — |
| Swap contracts | (891,294) | — | $(891,294) | — |
Repurchase agreements. The fund may enter into repurchase agreements. When the fund enters into a repurchase agreement, it receives collateral that is held in a segregated account by the fund's custodian, or for tri-party repurchase agreements, collateral is held at a third-party custodian bank in a segregated account for the benefit of the fund. The collateral amount is marked-to-market and monitored on a daily basis to ensure that the collateral held is in an amount not less than the principal amount of the repurchase agreement plus any accrued interest. Collateral received by the fund for repurchase agreements is disclosed in the Fund's investments as part of the caption related to the repurchase agreement.
Repurchase agreements are typically governed by the terms and conditions of the Master Repurchase Agreement and/or Global Master Repurchase Agreement (collectively, MRA). Upon an event of default, the non-defaulting party may close out all transactions traded under the MRA and net amounts owed. Absent an event of default, assets and liabilities resulting from repurchase agreements are not offset in the Statement of assets and liabilities.
| 22 | JOHN HANCOCK Preferred Income Fund II | ANNUAL REPORT | |
In the event of a default by the counterparty, realization of the collateral proceeds could be delayed, during which time the collateral value may decline or the counterparty may have insufficient assets to pay back claims resulting from close-out of the transactions.
Security transactions and related investment income. Investment security transactions are accounted for on a trade date plus one basis for daily NAV calculations. However, for financial reporting purposes, investment transactions are reported on trade date. Interest income is accrued as earned. Interest income includes coupon interest and amortization/accretion of premiums/discounts on debt securities. Debt obligations may be placed in a non-accrual status and related interest income may be reduced by stopping current accruals and writing off interest receivable when the collection of all or a portion of interest has become doubtful. Dividend income is recorded on the ex-date, except for dividends of foreign securities where the dividend may not be known until after the ex-date. In those cases, dividend income, net of withholding taxes, is recorded when the fund becomes aware of the dividends. Non-cash dividends, if any, are recorded at the fair market value of the securities received. Distributions received on securities that represent a tax return of capital and/or capital gain, if any, are recorded as a reduction of cost of investments and/or as a realized gain, if amounts are estimable. Gains and losses on securities sold are determined on the basis of identified cost and may include proceeds from litigation.
Real estate investment trusts. The fund may invest in real estate investment trusts (REITs). Distributions from REITs may be recorded as income and subsequently characterized by the REIT at the end of the fiscal year as a reduction of cost of investments and/or as a realized gain. As a result, the fund will estimate the components of distributions from these securities. Such estimates are revised when the actual components of the distributions are known.
Foreign investing. Assets, including investments, and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate. Purchases and sales of securities, income and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on the value of securities is reflected as a component of the realized and unrealized gains (losses) on investments. Foreign investments are subject to a decline in the value of a foreign currency versus the U.S. dollar, which reduces the dollar value of securities denominated in that currency.
Funds that invest internationally generally carry more risk than funds that invest strictly in U.S. securities. Risks can result from differences in economic and political conditions, regulations, market practices (including higher transaction costs), accounting standards and other factors.
Foreign taxes. The fund may be subject to withholding tax on income, capital gains or repatriation taxes imposed by certain countries, a portion of which may be recoverable. Foreign taxes are accrued based upon the fund’s understanding of the tax rules and rates that exist in the foreign markets in which it invests. Taxes are accrued based on gains realized by the fund as a result of certain foreign security sales. In certain circumstances, estimated taxes are accrued based on unrealized appreciation of such securities. Investment income is recorded net of foreign withholding taxes.
Overdrafts. Pursuant to the custodian agreement, the fund’s custodian may, in its discretion, advance funds to the fund to make properly authorized payments. When such payments result in an overdraft, the fund is obligated to repay the custodian for any overdraft, including any costs or expenses associated with the overdraft. The custodian may have a lien, security interest or security entitlement in any fund property that is not otherwise segregated or pledged, to the maximum extent permitted by law, to the extent of any overdraft.
| | ANNUAL REPORT | JOHN HANCOCK Preferred Income Fund II | 23 |
Expenses. Within the John Hancock group of funds complex, expenses that are directly attributable to an individual fund are allocated to such fund. Expenses that are not readily attributable to a specific fund are allocated among all funds in an equitable manner, taking into consideration, among other things, the nature and type of expense and the fund’s relative net assets. Expense estimates are accrued in the period to which they relate and adjustments are made when actual amounts are known.
Statement of cash flows. A Statement of cash flows is presented when a fund has a significant amount of borrowing during the period, based on the average total borrowing in relation to total assets, or when a certain percentage of the fund’s investments is classified as Level 3 in the fair value hierarchy. Information on financial transactions that have been settled through the receipt and disbursement of cash is presented in the Statement of cash flows. The cash amount shown in the Statement of cash flows is the amount included in the fund’s Statement of assets and liabilities and represents the cash on hand at the fund’s custodian and does not include any short-term investments or collateral on derivative contracts, if any.
Federal income taxes. The fund intends to continue to qualify as a regulated investment company by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required.
For federal income tax purposes, as of July 31, 2019, the fund has a short-term capital loss carryforward of $1,043,969 and a long-term capital loss carryforward of $8,653,775 available to offset future net realized capital gains. These carryforwards do not expire.
As of July 31, 2019, the fund had no uncertain tax positions that would require financial statement recognition, derecognition or disclosure. The fund's federal tax returns are subject to examination by the Internal Revenue Service for a period of three years.
Distribution of income and gains. Distributions to shareholders from net investment income and net realized gains, if any, are recorded on the ex-date. The fund generally declares and pays dividends monthly. Capital gain distributions, if any, are typically distributed annually.
The tax character of distributions for the years ended July 31, 2019 and 2018 was as follows:
| | July 31, 2019 | July 31, 2018 |
| Ordinary income | $29,832,159 | $33,612,659 |
| Long-term capital gains | — | 2,131,874 |
| Return of capital | 5,952,981 | — |
| Total | $35,785,140 | $35,744,533 |
As of July 31, 2019, there were no distributable earnings on a tax basis.
Such distributions and distributable earnings, on a tax basis, are determined in conformity with income tax regulations, which may differ from US GAAP. Distributions in excess of tax basis earnings and profits, if any, are reported in the fund's financial statements as a return of capital.
Capital accounts within the financial statements are adjusted for permanent book-tax differences. These adjustments have no impact on net assets or the results of operations. Temporary book-tax differences, if any, will reverse in a subsequent period. Book-tax differences are primarily attributable to contingent payment debt instruments and derivative transactions.
| 24 | JOHN HANCOCK Preferred Income Fund II | ANNUAL REPORT | |
Note 3—Derivative instruments
The fund may invest in derivatives in order to meet its investment objective. Derivatives include a variety of different instruments that may be traded in the over-the-counter (OTC) market, on a regulated exchange or through a clearing facility. The risks in using derivatives vary depending upon the structure of the instruments, including the use of leverage, optionality, the liquidity or lack of liquidity of the contract, the creditworthiness of the counterparty or clearing organization and the volatility of the position. Some derivatives involve risks that are potentially greater than the risks associated with investing directly in the referenced securities or other referenced underlying instrument. Specifically, the fund is exposed to the risk that the counterparty to an OTC derivatives contract will be unable or unwilling to make timely settlement payments or otherwise honor its obligations. OTC derivatives transactions typically can only be closed out with the other party to the transaction.
Certain derivatives are traded or cleared on an exchange or central clearinghouse. Exchange-traded or centrally-cleared transactions generally present less counterparty risk to a fund than OTC transactions. The exchange or clearinghouse stands between the fund and the broker to the contract and therefore, credit risk is generally limited to the failure of the exchange or clearinghouse and the clearing member.
Centrally-cleared swap contracts are subject to clearinghouse rules, including initial and variation margin requirements, daily settlement of obligations and the clearinghouse guarantee of payments to the broker. There is, however, still counterparty risk due to the potential insolvency of the broker with respect to any margin held in the brokers’ customer accounts. While clearing members are required to segregate customer assets from their own assets, in the event of insolvency, there may be a shortfall in the amount of margin held by the broker for its clients. Collateral or margin requirements for centrally-cleared derivatives are set by the broker or applicable clearinghouse. Margin for centrally-cleared transactions is detailed in the Statement of assets and liabilities as Receivable/Payable for centrally-cleared swaps. Securities pledged by the fund for centrally-cleared transactions, if any, are identified in the Fund's investments.
Futures. A futures contract is a contractual agreement to buy or sell a particular currency or financial instrument at a pre-determined price in the future. Risks related to the use of futures contracts include possible illiquidity of the futures markets and contract prices that can be highly volatile and imperfectly correlated to movements in the underlying financial instrument and potential losses in excess of the amounts recognized on the Statement of assets and liabilities. Use of long futures contracts subjects the fund to the risk of loss up to the notional value of the futures contracts. Use of short futures contracts subjects the fund to unlimited risk of loss.
Upon entering into a futures contract, the fund is required to deposit initial margin with the broker in the form of cash or securities. The amount of required margin is generally based on a percentage of the contract value; this amount is the initial margin for the trade. The margin deposit must then be maintained at the established level over the life of the contract. Payable for futures variation margin is included on the Statement of assets and liabilities. Futures contracts are marked-to-market daily and an appropriate payable or receivable for the change in value (variation margin) and unrealized gain or loss is recorded by the fund. When the contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Collateral or margin requirements are set by the broker or applicable clearinghouse. Collateral is detailed in the Statement of assets and liabilities as Collateral held at broker for futures contracts. Securities pledged by the fund, if any, are identified in the Fund's investments.
During the year ended July 31, 2019, the fund used futures contracts to manage against anticipated interest rate changes. The fund held futures contracts with USD notional values ranging from $61.6 million to $66.3 million as measured at each quarter end.
| | ANNUAL REPORT | JOHN HANCOCK Preferred Income Fund II | 25 |
Swaps. Swap agreements are agreements between the fund and counterparty to exchange cash flows, assets, foreign currencies or market-linked returns at specified intervals. Swap agreements are privately negotiated in the OTC market (OTC swaps) or may be executed on a registered commodities exchange (centrally cleared swaps). Swaps are marked-to-market daily and the change in value is recorded as a component of unrealized appreciation/depreciation of swap contracts. The value of the swap will typically impose collateral posting obligations on the party that is considered out-of-the-money on the swap.
Upfront payments made/received by the fund, if any, are amortized/accreted for financial reporting purposes, with the unamortized/unaccreted portion included in the Statement of assets and liabilities. A termination payment by the counterparty or the fund is recorded as realized gain or loss, as well as the net periodic payments received or paid by the fund.
Entering into swap agreements involves, to varying degrees, elements of credit, market and documentation risk that may provide outcomes that are in excess of the amounts recognized on the Statement of assets and liabilities. Such risks involve the possibility that there will be no liquid market for the swap, or that a counterparty may default on its obligation or delay payment under the swap terms. The counterparty may disagree or contest the terms of the swap. In addition to interest rate risk, market risks may also impact the swap. The fund may also suffer losses if it is unable to terminate or assign outstanding swaps or reduce its exposure through offsetting transactions.
Interest rate swaps. Interest rate swaps represent an agreement between the fund and a counterparty to exchange cash flows based on the difference between two interest rates applied to a notional amount. The payment flows are usually netted against each other, with the difference being paid by one party to the other. The fund settles accrued net interest receivable or payable under the swap contracts at specified, future intervals.
During the year ended July 31, 2019, the fund used interest rate swap contracts to manage against anticipated interest rate changes. The notional values at the period end are representative of the fund's exposure throughout the period. No interest rate swap positions were entered into or closed during the year ended July 31, 2019.
Fair value of derivative instruments by risk category
The table below summarizes the fair value of derivatives held by the fund at July 31, 2019 by risk category:
| 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 | Futures1 | — | $(1,150,809) |
| Interest rate | Swap contracts, at value | Interest rate swaps2 | — | (891,294) |
| | | | — | $(2,042,103) |
| 1 | Reflects cumulative appreciation/depreciation on futures as disclosed in the 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, and Swap contracts, at value, which represents OTC swaps, are shown separately on the Statement of assets and liabilities. |
Effect of derivative instruments on the Statement of operations
The table below summarizes the net realized gain (loss) included in the net increase (decrease) in net assets from operations, classified by derivative instrument and risk category, for the year ended July 31, 2019:
| 26 | JOHN HANCOCK Preferred Income Fund II | ANNUAL REPORT | |
| | Statement of operations location - Net realized gain (loss) on: |
| Risk | Futures contracts | Swap contracts | Total |
| Interest rate | $(2,946,530) | $272,087 | $(2,674,443) |
| | Statement of operations location - Change in net unrealized appreciation (depreciation) of: |
| Risk | Futures contracts | Swap contracts | Total |
| Interest rate | $(1,024,741) | $(2,588,757) | $(3,613,498) |
Note 4—Guarantees and indemnifications
Under the fund's organizational documents, its Officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into contracts with service providers that contain general indemnification clauses. The fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the fund that have not yet occurred. The risk of material loss from such claims is considered remote.
Note 5—Fees and transactions with affiliates
John Hancock Investment Management LLC (the Advisor) serves as investment advisor for the fund. The Advisor is an indirect, wholly owned subsidiary of Manulife Financial Corporation (MFC). Prior to June 28, 2019, the Advisor was known as John Hancock Advisers, LLC.
Management fee. The fund has an investment management agreement with the Advisor under which the fund pays a daily management fee to the Advisor, equivalent on an annual basis, to 0.75% of the fund’s average daily managed assets including any assets attributable to the Credit Facility Agreement (see Note 7) (collectively, managed assets). The Advisor has a subadvisory agreement with Manulife Investment Management (US) LLC, an indirectly owned subsidiary of MFC and an affiliate of the Advisor. Prior to May 7, 2019, Manulife Investment Management (US) LLC was known as John Hancock Asset Management a division of Manulife Asset Management (US) LLC. The fund is not responsible for payment of the subadvisory fees.
The Advisor has contractually agreed to waive a portion of its management fee and/or reimburse expenses for certain funds of the John Hancock group of funds complex, including the fund (the participating portfolios). This waiver is based upon 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. During the year ended July 31, 2019, this waiver amounted to 0.01% of the fund’s average daily net assets. This arrangement expires on July 31, 2021, unless renewed by mutual agreement of the fund and the Advisor based upon a determination that this is appropriate under the circumstances at that time.
The expense reductions described above amounted to $51,011 for the year ended July 31, 2019.
Expenses waived or reimbursed in the current fiscal period are not subject to recapture in future fiscal periods.
The investment management fees, including the impact of the waivers and reimbursements as described above, incurred for the year ended July 31, 2019, were equivalent to a net annual effective rate of 0.74% of the fund's average daily managed assets.
Accounting and legal services. Pursuant to a service agreement, the fund reimburses the Advisor for all expenses associated with providing the administrative, financial, legal, compliance, accounting and recordkeeping services to the fund, including the preparation of all tax returns, periodic reports to shareholders and regulatory reports, among other services. These accounting and legal services fees incurred for the year ended July 31, 2019 amounted to an annual rate of 0.01% of the fund's average daily managed assets.
| | ANNUAL REPORT | JOHN HANCOCK Preferred Income Fund II | 27 |
Trustee expenses. The fund compensates each Trustee who is not an employee of the Advisor or its affiliates. These Trustees receive from the fund and the other John Hancock closed-end funds an annual retainer. In addition, Trustee out-of-pocket expenses are allocated to each fund based on its net assets relative to other funds within the John Hancock group of funds complex.
Note 6—Leverage risk
The fund utilizes a Credit Facility Agreement (CFA) to increase its assets available for investment. When the fund leverages its assets, shareholders bear the expenses associated with the CFA and have potential to benefit or be disadvantaged from the use of leverage. The Advisor’s fee is also increased in dollar terms from the use of leverage. Consequently, the fund and the Advisor may have differing interests in determining whether to leverage the fund’s assets. Leverage creates risks that may adversely affect the return for the holders of shares, including:
| • | the likelihood of greater volatility of NAV and market price of shares; |
| • | fluctuations in the interest rate paid for the use of the credit facility; |
| • | 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. |
To the extent the income or capital appreciation derived from securities purchased with funds received from leverage exceeds the cost of leverage, the fund’s return will be greater than if leverage had not been used; conversely, returns would be lower if the cost of the leverage exceeds the income or capital appreciation derived.
In addition to the risks created by the fund’s use of leverage, the fund is subject to the risk that it would be unable to timely, or at all, obtain replacement financing if the CFA is terminated. Were this to happen, the fund would be required to de-leverage, selling securities at a potentially inopportune time and incurring tax consequences. Further, the fund’s ability to generate income from the use of leverage would be adversely affected.
Note 7—Credit Facility Agreement
The fund has entered into a Credit Facility Agreement (CFA) with a subsidiary of BNP Paribas (BNP) that allows it to borrow up to $238,000,000 (maximum facility amount) and to invest the borrowings in accordance with its investment practices.
The fund pledges a portion of its assets as collateral to secure borrowings under the CFA. Such pledged assets are held in a special custody account with the fund’s custodian. The amount of assets required to be pledged by the fund is determined in accordance with the CFA. The fund retains the benefits of ownership of assets pledged to secure borrowings under the CFA. Interest charged is at the rate of one month LIBOR (London Interbank Offered Rate) plus 0.70% and is payable monthly. As of July 31, 2019, the fund had borrowings of $238,000,000 at an interest rate of 2.92%, which are reflected in the Credit facility agreement payable on the Statement of assets and liabilities. During the year ended July 31, 2019, the average borrowings under the CFA and the effective average interest rate were $238,000,000 and 3.11%, respectively.
The fund is required to pay a commitment fee equal to 0.60% on any unused portion of the maximum facility amount, only for days on which the aggregate outstanding amount of the loans under the CFA is less than 80% of the maximum facility amount. For the year ended July 31, 2019, there were no commitment fees incurred by the fund.
The fund may terminate the CFA with 30 days’ notice. If certain asset coverage and collateral requirements,
| 28 | JOHN HANCOCK Preferred Income Fund II | ANNUAL REPORT | |
minimum net assets or other covenants are not met, the CFA could be deemed in default and result in termination. Absent a default or facility termination event, BNP generally is required to provide the fund with 360 days’ notice prior to terminating or amending the CFA.
The fund has an agreement with BNP that allows BNP to borrow a portion of the pledged collateral (Lent Securities) in an amount not to exceed the lesser of: (i) outstanding borrowings owed by the fund to BNP or (ii) 331/3% of the fund’s total assets. The fund can designate any security within the pledged collateral as ineligible to be a Lent Security and can recall any of the Lent Securities. The fund also has the right to apply and set-off an amount equal to 100% of the then-current fair market value of such Lent Securities against the current borrowings under the CFA in the event that BNP fails to timely return the Lent Securities and in certain other circumstances. In such circumstances, however, the fund may not be able to obtain replacement financing required to purchase replacement securities and, consequently, the fund’s income generating potential may decrease. Even if the fund is able to obtain replacement financing, it might not be able to purchase replacement securities at favorable prices. Income earned from Lent Securities of $44,281 for the year ended July 31, 2019 is recorded as a component of interest income on the Statement of operations.
Note 8—Purchase and sale of securities
Purchases and sales of securities, other than short-term investments, amounted to $235,520,386 and $243,460,064, respectively, for the year ended July 31, 2019.
Note 9—Industry or sector risk
The fund generally invests a large percentage of its assets in one or more particular industries or sectors of the economy. If a large percentage of the fund's assets are economically tied to a single or small number of industries or sectors of the economy, the fund will be less diversified than a more broadly diversified fund, and it may cause the fund to underperform if that industry or sector underperforms. In addition, focusing on a particular industry or sector may make the fund’s NAV more volatile. Further, a fund that invests in particular industries or sectors is particularly susceptible to the impact of market, economic, regulatory and other factors affecting those industries or sectors. Financial services companies can be hurt by economic declines, changes in interest rates regulatory and market impacts.
Note 10—New accounting pronouncement
In March 2017, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2017-08, Premium Amortization on Purchased Callable Debt Securities, which shortens the premium amortization period for purchased non contingently callable debt securities. The standard is effective for annual periods beginning after December 15, 2018 and interim periods within those fiscal years. Management has performed an analysis and has determined that the ASU will not have a material impact to the fund.
| | ANNUAL REPORT | JOHN HANCOCK Preferred Income Fund II | 29 |
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of John Hancock Preferred Income Fund II
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the Fund’s investments, of John Hancock Preferred Income Fund II (the "Fund") as of July 31, 2019, the related statements of operations and cash flows for the year ended July 31, 2019, the statements of changes in net assets for each of the two years in the period ended July 31, 2019, including the related notes, and the financial highlights for each of the five years in the period ended July 31, 2019 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of July 31, 2019, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period ended July 31, 2019 and the financial highlights for each of the five years in the period ended July 31, 2019 in conformity with accounting principles generally accepted in the United States of America..
Basis for Opinion
These financial statements are the responsibility of the Fund���s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of July 31, 2019 by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
September 20, 2019
We have served as the auditor of one or more investment companies in the John Hancock group of funds since 1988.
| 30 | JOHN HANCOCK PREFERRED INCOME FUND II | ANNUAL REPORT | |
TAX INFORMATION
Unaudited
For federal income tax purposes, the following information is furnished with respect to the distributions of the fund, if any, paid during its taxable year ended July 31, 2019.
The fund reports the maximum amount allowable of its net taxable income as eligible for the corporate dividends-received deduction.
The fund reports the maximum amount allowable of its net taxable income as qualified dividend income as provided in the Jobs and Growth Tax Relief Reconciliation Act of 2003.
The fund reports the maximum amount allowable of its Section 199A dividends as defined in Proposed Treasury Regulation §1.199A-3(d).
Eligible shareholders will be mailed a 2019 Form 1099-DIV in early 2020. This will reflect the tax character of all distributions paid in calendar year 2019.
Please consult a tax advisor regarding the tax consequences of your investment in the fund.
| | ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II | 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 November 29, 2002 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. In addition, the fund normally invests 25% or more of its total assets in the industries composing the utilities sector.
Dividends and distributions
During the year ended July 31, 2019, distributions from net investment income totaling $1.4006 per share and tax return of capital totaling $0.2794 per share were paid to shareholders. The dates of payments and the amounts per share were as follows:
| | |
| Payment Date | Distributions |
| August 31, 2018 | $0.1400 |
| September 28, 2018 | 0.1400 |
| October 31, 2018 | 0.1400 |
| November 30, 2018 | 0.1400 |
| December 31, 2018 | 0.1400 |
| January 31, 2019 | 0.1400 |
| February 28, 2019 | 0.1400 |
| March 29, 2019 | 0.1400 |
| April 30, 2019 | 0.1400 |
| May 31, 2019 | 0.1400 |
| June 28, 2019 | 0.1400 |
| July 31, 2019 | 0.1400 |
| Total | $1.6800 |
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
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 32
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. Pursuant to regulatory changes, effective September 5, 2017, the settlement date is changed from three business days after the shares have been sold to 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
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 33
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.
Effective November 1, 2013, the Plan was revised to provide that Computershare Trust Company, N.A. no longer provides mail loss insurance coverage when shareholders mail their certificates to the fund's administrator.
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.
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 34
Shareholder meeting
The fund held its Annual Meeting of Shareholders on Thursday, February 7, 2019. The following proposals were considered by the shareholders:
Proposal: To elect one (1) Trustee (Marianne Harrison) to serve for a two-year term ending at the 2021 Annual Meeting of Shareholders. To elect (4) Trustees (Andrew G. Arnott, Deborah C. Jackson, James M. Oates and Steven R. Pruchansky) to serve for a three-year term ending at the 2022 Annual Meeting of Shareholders.
| | | |
| | Total votes
for the nominee | Total votes withheld
from the nominee |
| Independent Trustees | | |
| Deborah C. Jackson | 18,478,290.905 | 743,089.000 |
| James M. Oates | 18,543,250.905 | 678,129.000 |
| Steven R. Pruchansky | 18,432,918.905 | 788,461.000 |
| Non-Independent Trustee | | |
| Andrew G. Arnott | 18,514,772.905 | 706,607.000 |
| Marianne Harrison | 18,489,781.905 | 731,598.000 |
Trustees whose term of office continued after the Annual Meeting of Shareholders because they were not up for election are: James R. Boyle, William H. Cunningham, Grace K. Fey, Hassell H. McClellan, Gregory A. Russo, Charles L. Bardelis, Peter S. Burgess and Theron S. Hoffman.
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 35
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 II (the fund) of the Advisory Agreement (the Advisory Agreement) with John Hancock Investment Management, LLC (the Advisor, formerly known as "John Hancock Advisers, LLC") and the Subadvisory Agreement (the Subadvisory Agreement) with Manulife Investment Management (US) LLC (the Subadvisor, formerly known as John Hancock Asset Management a division of Manulife Asset Management (US) LLC). The Advisory Agreement and Subadvisory Agreement are collectively referred to as the Agreements. Prior to the June 23-26, 2019 in-person meeting at which the Agreements were approved, the Board also discussed and considered information regarding the proposed continuation of the Agreements at an in-person meeting held on May 28-30, 2019.
Approval of Advisory and Subadvisory Agreements
At in-person meetings held on June 23-26, 2019, 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 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
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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; | |
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| | | | | | | | | |
| | | | | (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 three-, five- and ten-year periods and underperformed its benchmark index for the one-year period ended December 31, 2018. The Board also noted that, based on its net asset value, the fund outperformed its peer group average for the one- and five-year periods and underperformed its peer group average for the three- and ten-year periods ended December 31, 2018. The Board took into account management's discussion of the fund's performance, including the favorable performance relative to the benchmark for the three-, five- and ten-year periods and to the peer group for the one- and five-year periods. 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
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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) | | | noted that the fund's Subadvisor is an affiliate of the Advisor; | |
| | | | | (g) | | | 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 | |
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| | | | | | | | | |
| | | | | (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
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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 fund's subadvisory fees were below the peer group median. 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. |
| * * * |
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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.
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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 | 213 |
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 | 213 |
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 | 213 |
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 | 213 |
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 | 213 |
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 | 213 |
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). |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 43
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 |
| Theron S. Hoffman,4 Born: 1947 | 2012 | 213 |
Trustee
Chief Executive Officer, T. Hoffman Associates, LLC (consulting firm) (since 2003); Director, The Todd Organization (consulting firm) (2003-2010); President, Westport Resources Management (investment management consulting firm) (2006-2008); Board Member, Senior Managing Director, Partner, and Operating Head, Putnam Investments (2000-2003); Executive Vice President, The Thomson Corp. (financial and legal information publishing) (1997-2000). Trustee of various trusts within the John Hancock Fund Complex (since 2008). |
| | | |
| Deborah C. Jackson, Born: 1952 | 2008 | 213 |
Trustee
President, Cambridge College, Cambridge, Massachusetts (since 2011); Board of Directors, National Association of Corporate Directors/New England (since 2015); Board of Directors, Association of Independent Colleges and Universities of Massachusetts (since 2014); 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,2Born: 1946 | 2012 | 213 |
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 | 213 |
Trustee and Vice Chairperson of the Board
Managing Director, Pru Realty (since 2017); Chairman and Chief Executive Officer, Greenscapes of Southwest Florida, Inc. (2000-2014); 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 | 213 |
Trustee
Director and Audit Committee Chairman (since 2012), and Member, Audit Committee and Finance Committee (since 2011), 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). |
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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 | 213 |
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 | 213 |
Non-Independent Trustee
President and CEO, John Hancock (since 2017); President and CEO, Manulife Canadian Division (2013-2017); 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 (since 2017); 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 |
| Francis V. Knox, Jr.,Born: 1947 | 2005 |
Chief Compliance Officer
Vice President, John Hancock Financial Services (since 2005); Chief Compliance Officer, various trusts within the John Hancock Fund Complex, John Hancock Investment Management LLC, and John Hancock Variable Trust Advisers LLC (since 2005). |
| | |
| 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). |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 45
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 |
| 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). |
The business address for all Trustees and Officers is 200 Berkeley Street, Boston, Massachusetts 02116-5023.
| 1 | Mr. Boyle, Mr. Cunningham, Ms. Fey, Mr. McClellan and Mr. Russo serve as Trustees for a term expiring in 2020; 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 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. |
| 4 | Mr. Hoffman retired as Trustee effective August 31, 2019. |
ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 46
| | |
Trustees
Hassell H. McClellan,Chairperson
Steven R. Pruchansky,Vice Chairperson
Andrew G. Arnott†
Charles L. Bardelis*
James R. Boyle
Peter S. Burgess*
William H. Cunningham
Grace K. Fey
Marianne Harrison†
Theron S. Hoffman#
Deborah C. Jackson
James M. Oates*
Gregory A. Russo
Officers
Andrew G. Arnott
President
Francis V. Knox, Jr.
Chief Compliance Officer
Charles A. Rizzo
Chief Financial Officer
Salvatore Schiavone
Treasurer
Christopher (Kit) Sechler**
Secretary and Chief Legal Officer
| Investment advisor
John Hancock Investment Management LLC
Subadvisor
Manulife Investment Management (US) LLC
Portfolio Managers
Joseph H. Bozoyan, CFA
Brad Lutz, 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: HPF
|
* Member of the Audit Committee
† Non-Independent Trustee
** Effective 9-13-18
# Retired effective 8-31-19
For shareholder assistance refer to page 34
| | | | |
| | You can also contact us: |
| | 800-852-0218
jhinvestments.com | Regular mail:
Computershare
P.O. Box 505000
Louisville, KY 40233
| Express mail:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
|
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 asmonthly portfolio holdings, and other fund details available on our website at jhinvestments.com or by calling 800-852-0218.
The report is certified under the Sarbanes-Oxley Act, which requires closed-end funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.ANNUAL REPORT | JOHN HANCOCK PREFERRED INCOME FUND II 47
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
Value Equity
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
Spectrum Income
Strategic Income Opportunities
Tax-Free Bond
ALTERNATIVE AND SPECIALTY FUNDS
Absolute Return Currency
Alternative Asset Allocation
Disciplined Alternative Yield
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.
| | | |
ASSET ALLOCATION
Balanced
Income Allocation
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
Communications ETF
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
GOVERNANCE FUNDS
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
representing one of America's most trusted brands, 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 800-852-0218 n jhinvestments.com
ITEM 2. CODE OF ETHICS.
As of the end of the period, July 31, 2019, 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 $44,779 for the fiscal year ended July 31, 2019 and $42,869 for the fiscal year ended July 31, 2018. 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, 2019 and $0 for the fiscal year ended July 31, 2018. Additionally, amounts billed to control affiliates were $113,000 and $110,200 for the fiscal years ended July 31, 2019 and 2018, respectively.
(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, 2019 and $3,725 for the fiscal year ended July 31, 2018. 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 $84 for the fiscal year ended July 31, 2019 and $234 for the fiscal year ended July 31, 2018. 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, 2019, 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 $885,470 for the fiscal year ended July 31, 2019 and $4,152,121 for the fiscal year ended July 31, 2018.
(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
Theron S. Hoffman
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, 2019.
Joseph Bozoyan, CFA
Portfolio Manager
Managing Director and Senior Investment Analyst, Intrinsic Value Team,
Manulife Investment Management (US) LLC (2014–2015)
Director and Senior Investment Manager, Intrinsic Value Team,
Manulife Investment Management (US) LLC (2011–2014)
Began business career in 1993
Managed the fund since 2015
Brad 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, 2019. 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.
| PORTFOLIOMANAGERNAME | OTHERACCOUNTSMANAGED BY THEPORTFOLIOMANAGER |
| Joseph Bozoyan, CFA | Other Registered Investment Companies: Approximately $4.2 billion |
| Other Pooled Investment Vehicles: Approximately $272 million |
| Other Accounts: None |
| Brad Lutz, CFA | Other Registered Investment Companies: Approximately $4.2 billion |
| Other Pooled Investment Vehicles: $223 million |
| Other Accounts: Approximately $300 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.
| ● | Aportfolio 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 afterthe offering was allocated to a single account, that account may be expected to have betterinvestment 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 investmentopportunities in an equitable manner and generally to allocate such investments proportionatelyamong 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.
|
| ● | Aportfolio manager could favor an account if the portfolio manager’s compensation is tied to theperformance of that account rather than all accounts managed by the portfolio manager. If, forexample, the portfolio manager receives a bonus based upon the performance of certain accountsrelative to a benchmark while other accounts are disregarded for this purpose, the portfoliomanager 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 portfoliomanager may favor that account, whether or not the performance of that account directlydetermines the portfolio manager’s compensation. The investment performance on specificaccounts is not a factor in determining the portfolio manager’s compensation. See “Compensationof 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.
|
| ● | Aportfolio manager could favor an account if the portfolio manager has a beneficial interest in theaccount, in order to benefit a large client or to compensate a client that had poor returns. Forexample, 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 accountsare not favored over other accounts.
|
| ● | If the different accounts have materially and potentially conflicting investment objectives orstrategies, 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 theInvestment 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 thatis tied to the investment professional achieving superior investment performance and alignsthe 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 excessof 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 determiningbonuses 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 incomeaccounts, relative yields are also used to measure performance.
|
| ● | The Profitability of the Subadvisor: The profitability of the Subadvisor and its parentcompany are also considered in determining bonus awards.
|
| ● | Non-Investment Performance: To a lesser extent, intangible contributions, including theinvestment professional’s support of client service and sales activities, new fund/strategyidea 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 aninvestment team derived from a number of factors including, but not limited to, client assetsunder 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 dateof grant. The option can be exercised for a set period (normally a number of years or untiltermination of employment) and the investment professional would exercise the option if themarket 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’semployment 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/individual as well as other Manulife AssetManagement 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 Bozoyan, CFA | $0 | $10,001-$50,000 |
| Brad Lutz, CFA | $0 | $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 8 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.
(b)(1) Separate certifications for the registrant's principal executive officer and principal financial officer, as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule 30a-2(b) under the Investment Company Act of 1940, are attached. The certifications furnished pursuant to this paragraph are not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certifications are not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates them by reference.
(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".
(c)(3) Registrant’s notice to shareholders pursuant to Registrant’s exemptive order granting an exemption from Section 19(b) of the Investment Company Act of 1940, as amended and Rule 19b-1 thereunder regarding distributions made pursuant to the Registrant’s Managed Distribution Plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the InvestmentCompany 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 II
| By: | /s/ Andrew Arnott |
| Andrew Arnott |
| | President |
| |
| |
| |
| Date: | September 20, 2019 |
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 20, 2019 |
| |
| |
| By: | /s/ Charles A. Rizzo |
| Charles A. Rizzo |
| Chief Financial Officer |
| |
| |
| Date: | September 20, 2019 |
