Windhaven Investments may have lost $2.9 billion in assets in the past year, but it still managed to claim bragging rights as the biggest ETF strategist. That ascension came thanks to the deepening challenges that F-Squared, the long-standing leader in the ETF strategist space, continues to face.
The latest “ETF Strategist Landscape” report compiled by Morningstar showed F-Squared bled $7.5 billion in assets in the past 12 months ended March 31 after its founder resigned in a hail of regulatory scrutiny that resulted in a $35 million fine by the Securities and Exchange Commission. The embattled firm now has $15.09 billion in ETF fee-paying assets, compared with Windhaven’s $15.57 billion.
More recently, F-Squared lost its most consequential client, Virtus, the money management firm that almost single-handedly gave F-Squared a ticket to the big leagues. Virtus legitimized F-Squared’s ambitions to market ETF-based mutual funds designed with its tactical overlays. The loss of Virtus in mid-May almost surely means Morningstar’s report doesn’t reflect the full extent of the asset loss.
In broader terms, Morningstar’s report painted a portrait of an ETF strategist space in transition. Good Harbor—another giant in the space that relied on a high-turnover big promises approach to managing ETF portfolios—also fell to Earth amid faltering performance, losing $8.8 billion in the past 12 months ended March 31. The firm now has $2.25 billion in assets as of the end of the first quarter, Morningstar says.
On the flip side, ETF strategists such as RiverFront Investment Group—a firm with an active hand in its portfolio management but a focus on carefully managing risk-adjusted returns—pulled in $645 million in the 12-month period to end the first quarter with $5.05 billion in assets. RiverFront is now the No. 3 ETF strategist by assets.
The rise of firms like RiverFront that haven’t marketed outperformance in any overblown way could suggest that firms with more sober approaches have stickier assets. Conversely, the F-Squareds and the Good Harbors of the world with “beat the market” pitches may be inspiring investor skepticism after such promising beginnings.
“The challenges faced by several of the industry’s top firms continued to take their toll as outflows continued during the first quarter of 2015,” the Morningstar report said. “While outflows slowed significantly at Good Harbor Financial and Windhaven Investment Management, F-Squared Investments saw over $5 billion in outflows this quarter.”
The report tracked 700 strategies from 151 firms with total assets of $86 billion. In all, ETF strategists saw total assets in these strategies shrink 5 percent in the first quarter of 2015, according to Morningstar.