F-Squared Investments Inc. lost its position as the top ETF portfolio strategist last quarter, as the boutique money manager's settlement of fraud charges failed to stanch nearly $8 billion in asset declines in the last year, according to Morningstar Inc.
F-Squared now says that $15 billion tracks its 20 exchange-traded fund-managed portfolio strategies, down $7.6 billion or 33% from the end of the 2014 first quarter. The firm's indexes generate signals telling investment firms when to buy and sell ETFs that track slivers of the financial markets, known as sectors.
Charles Schwab Corp.-owned Windhaven Investment Management now ranks number one among those strategists, despite losing $3 billion in managed-portfolio assets since the departure of its founder, Stephen J. Cucchiaro, last year.
The new asset data on the portfolios-of-ETFs, released last week, comes nearly two weeks after mutual fund distributor Virtus Investment Partners Inc. cut F-Squared as a manager on five of its products with some $5.7 billion in assets, including Virtus Premium AlphaSector (VAPAX).
Since the financial crisis, managers claiming prowess in ETF selection, including F-Squared, touted to market-weary financial advisers an ability to protect investors in market downturns. The now-terminated contract with Virtus
contributed to the uptake of F-Squared's separate-account strategies on broker-dealer platforms.
GROWTH HAS STALLED
But the firms' growth has stalled. Total assets in the ETF managed-portfolio strategies fell by 5% last quarter.
Those declines followed F-Squared's agreement, in December,
to pay $35 million to settle SEC charges it falsely claimed its performance results was based on results with real money. In fact, the performance was both hypothetical and miscalculated, F-Squared
admitted as part of the settlement. The firm cut a quarter of its workforce in March,
InvestmentNews previously reported, and is said to be
exploring a sale.
A spokeswoman representing F-Squared did not immediately respond to a request for comment.
INDUSTRY 'CHALLENGING'
In an interview last month, Daniel Gamba, head of the Americas institutional iShares business at BlackRock Inc., a big seller of ETFs to strategists, said the industry has been “challenging” to boutique managers. He encouraged them to examine the growth opportunities with institutional clients and international markets for growth.
“It's an industry in evolution,” he said. “I wouldn't discount any of the ones who had issues.”
And F-Squared has expanded its reach abroad. It announced May 18 that it struck an agreement with SoHo Asset Management to manage portfolios for that firm's clients in Singapore and the U.S.
F-Squared's largest index, Premium AlphaSector, is down 2.6% this year, as of March 31, Morningstar said. Over three years, it's delivered a cumulative 13.4% gain.
Morningstar's investment management division also runs its own ETF strategies. Its quarterly report, written by analyst Ling-Wei Hew, included a new section specifying whether the performance reported by a strategist is based on live money or hypothetical.
F-Squared's performance is listed as “hypothetical” and a footnote indicates the firm “did not successfully confirm performance was based on live assets for all periods reported. Periods of backtested returns may be included.”
