Virtus Investment Partners Inc. said Monday it cut ties with F-Squared Investments Inc., the troubled investment adviser whose once-popular strategies were undermined by an admission it misled clients about its performance.
Virtus said it replaced F-Squared as a subadviser on five “AlphaSector” mutual funds, including Virtus Premium AlphaSector (VAPAX), which has some $5.7 billion in assets.
“F-Squared Investments, an unaffiliated former subadviser, no longer provides services to the funds,” Hartford, Conn.-based Virtus said in a statement.
Virtus stock was trading down 6.9% Monday morning, as the firm also reported
first-quarter results damaged by outflows, primarily from AlphaSector, which lost $2.9 billion to outflows. The stock is off about 33% over the last year.
“While Virtus' decision is disappointing, it is not unexpected and does allow us to pursue new opportunities in the mutual fund space," F-Squared said in a statement. "We have been making contingencies since the beginning of the year, building a leaner, more profitable business model and pursuing new client opportunities particularly in the retirement savings space.”
(More: Ex-F-Squared CEO's conduct 'did not cause loss or harm to anyone,' according to lawyers)
The change comes five months after
F-Squared agreed to pay $35 million to settle SEC charges it made false claims about the performance of its flagship investment product, an index of exchange-traded funds that predated AlphaSector.
Its chief executive and co-founder, Howard B. Present,
also resigned. Mr. Present is currently fighting the Securities and Exchange Commission in federal court. The regulatory agency indicated it wants to claw back some of the millions Mr. Present earned and bar him from the securities industry.
In March, F-Squared
cut a quarter of its workforce, and is now also reportedly
exploring a sale.
Virtus replaced F-Squared with Dorsey, Wright & Associates, a registered investment adviser, recently acquired by Nasdaq OMX Group Inc., that builds a popular, rules-based, momentum investment strategy.
Virtus also renamed the funds from the AlphaSector brand name to “Virtus Trend” and reduced the management fees on three of the strategies.
In the federal-court complaint against Mr. Present, lawyers for the SEC imply the firm was on its last legs when it won a contract to manage, or sub-advise, mutual funds for Virtus in late 2009.
“[Mr.] Present had wooed the fund company for months, making many false and misleading statements along the way,” the SEC said.
Virtus lent credibility to the firm. The money manager's executives are on a first-name basis with top brokerage houses, making it the linchpin to F-Squared's adoption by the largest adviser-serving firms,
InvestmentNews reported in March, citing two people familiar with Virtus' broker-dealer relationships.
F-Squared's assets would grow more than 24 times over the following two years after the Virtus contract, to $6 billion, the SEC said.
