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You wouldn't know it from year-to-date returns, but Manulife Financial Corporation (NYSE:MFC) carries one of the highest rates of negativity in terms of short interest on the TSX. As the chart below illustrates, short interest on the company grew about 9.2 percent from approximately 48.1 million shares as of January 31 to roughly 52.5 million shares as of February 15, 2012.

The spike in shorts comes as Manulife gained more than 14 percent along with other industry peers Prudential (NYSE:PUK), Sun Life (NYSE:SLF), Aviva (NYSE:AV) and Metlife (NYSE:MET) in year-to-date terms.

COMPANY

RETURN YTD

MARKET CAP (Billions)

MFC

14.8%

22.98

PUK

14.2%

28.85

AV

20.3%

16.98

SLF

8.0%

12.66

MET

21.3%

40.98

Percentage Move Year-to-Date:

Investors in the Canadian-based insurer with international operations in North America and Asia were convinced their investment was in a solid blue chip dividend payer, however, the complexity of its operations made it difficult to understand just how much it was leveraged to the stock markets.

The pain for shareholders did not end with the 2008 recession. Although the company's shares participated in the market rally that started in early 2009, it never fully recovered to the mid-forty levels it was prior to the 2008 crash. In addition, the company's shares began a tedious long decline ever since it chopped its dividend in half on August 2009.

Analysts Are Mixed

Analysts covering the company are mixed in their ratings. As the table below illustrates, seven have a buy rating, while seven have a hold rating. Notice that last year, the majority of analysts had a hold on the stock, but none actually had a sell (To see what to make of the rating see here).

Analyst rating breakdown

Latest

4 weeks ago

2 months ago

3 months ago

Last year

Strong Buy

5

7

7

7

3

Buy

2

3

2

2

1

Hold

7

4

5

5

11

Underperform

0

0

0

0

1

Sell

0

0

0

0

0

As of Tue Feb 21, 2012 5:25 PM EST

Source

Why the Negativity?

A possible explanation for the negative sentiment is hedging long equity positions. As shown below, the correlation between the TSX and Manulife is quite high, at about 94, while the correlation of the S&P 500 and Manulife is significant, at roughly 65.

High correlations between stocks or assets attract hedge funds that hedge their long equity positions by shorting another, often in a related industry.

Correlation

MFC

TSX

MFC

1

TSX

0.94

1

Correlation

MFC

S&P500

MFC

1

S&P500

0.65

1

Percentage Move 2011-Present:

Manulife is also highly leveraged to interest rates, like most life insurance companies. Laws and regulations governing the industry require these companies to invest a portion of their premiums in safe investments such as government bonds to secure future payouts to clients.

As I see it, Manulife will continue to be highly volatile, resembling its earnings. As long as interest rates remain ultra low, bond holders like Manulife will continue to suffer and remain vulnerable to potential shocks.

Market black swan type events such as the 2008-2009 crash can result in Manulife needing to raise its tier one capital ratios by cutting its dividend again and issuing more shares.

Therefore, until rates begin heading higher, Manulife is a tactical bet and not a buy and hold investment.

Source

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Negativity Runs High On Manulife