Download Good Harbor, Windhaven, F-Squared Tumble in ETF Strategist Slump

 Good Harbor, Windhaven, F-Squared Tumble in ETF Strategist Slump
February 13, 2015 (FundFire)– Exchange-traded fund (ETF) strategist industry assets took a
tumble in the fourth quarter, as some of the biggest shops contended with outflows, performance
woes, management changes and regulatory problems.
As some of the bigger ETF strategists absorb such hits, second-tier shops may be poised to
benefit.
ETF strategist assets tracked by Morningstar dipped 5% in the fourth quarter, to $91 billion.
Some of the largest players that have historically dominated flows, including F-Squared
Investments, Windhaven Investment Management and Good Harbor Financial, saw assets under
management dwindle in the quarter. This follows years of rapid growth for those managers, and
the ETF strategist industry, as separately managed accounts of ETFs have gained popularity with
financial advisors. Assets tracked by Morningstar in such strategies peaked at $103 billion in the
first quarter of 2014. But a handful of shops had historically gobbled up most of the flows to
such strategies.
Outflows from some of the bigger shops could benefit smaller strategists, says Morningstar
analystLing-Wei Hew. "Because of what happened in the top three firms, we’re seeing assets just
being spread out among the second-tier firms."
Good Harbor Financial took the biggest hit, following an extended bout of underperformance
and outflows. Assets in the firm’s two ETF-based strategies plummeted about 41% in the fourth
quarter, to reach $3.6 billion, according to Morningstar data. And that’s down 65% from a year
earlier, when the firm had $10.4 billion in assets. In total, the firm lost $2.5 billion during the
fourth quarter, $2.3 billion of which was outflows, according to Morningstar.
Poor performance of the firm’s flagship strategy drove many investors to yank assets, Hew says.
Good Harbor’s flagship U.S. Tactical Core strategy, once the biggest ETF strategy in the
industry, declined 20% in 2014, according to Morningstar data. That compares with a 13.7%
gain in the S&P 500.
"A lot of the reason that Good Harbor made a good name for itself was its outstanding
performance," Hew says. "A lot of the people that were investing in Good Harbor [strategies] at
that time were just chasing performance. [Now] they are chasing performance elsewhere."
Good Harbor did not reply to requests for comment in time for deadline.
Charles Schwab’s Windhaven Investment Management also took a big hit, losing about 9% of
assets, despite positive returns for the strategies. The outflows were probably prompted by the
exit of founder Steve Cucchiaro last summer, says Hew. A Charles Schwab spokeswoman didn’t
respond to an interview request in time for publication deadline.
By: Danielle Verbrigghe
Reference: http://fundfire.com/c/1065023/110453?referrer_module=SearchSubFromFF&highlight=danielle%20verbrigghe
The largest ETF strategist tracked by Morningstar, F-Squared Investments, also saw a drop in
assets in the fourth quarter. Morningstar noted a decline of $3.3 billion in the fourth quarter,
driven mostly by outflows. This follows an Securities and Exchange Commission (SEC)
investigation that began in 2013, and ended with charges of defrauding investors through false
performance advertising, which the firm settled in December, as previously reported. Still, FSquared, which has been one of the fastest growing strategists over the past few years, was up
for the year, with about $1.97 billion more in assets at the end of 2014 than it had a year earlier.
"When they were first issued the subpoena, people weren’t sure what the outcome was, and FSquared continued to perform really well," says Hew. It appears that advisors are finally
reacting, she says. "It takes a while to find a replacement and actually execute on all of your
underlying accounts. I think we’re finally seeing that happen."
The Morningstar number doesn’t reflect F-Squared’s entire firm assets, according to information
from the firm. In total F-Squared had more than $24 billion in assets as of the end of 2014,
according to information from the firm. Although the Morningstar numbers were only a piece of
the picture, the quarterly and year-over-year changes tracked by Morningstar reflect overall
trends seen at the firm, says F-Squared CEO Laura Dagan. Dagan assumed the CEO role in
November after the resignation of former chief Howard Present, who also faced SEC charges.
"It’s hard to be able to say what exactly affects flows," Dagan says. Although there may be ups
and downs, Dagan says she expects F-Squared and the broader ETF strategist market will
continue to grow over time.
"You just don’t generally grow straight up forever," Dagan says. "There’s just a bit of leveling
off right now in the marketplace."
The industry dip in assets over the past few quarters doesn’t mean the ETF-strategist industry’s
growth is over, says Michael Jones, chairman and CIO of RiverFront Investment Group.
"Like every emerging industry, the ETF strategist space will go through growing pains," Jones
says. "The natural progression of any new investment discipline and style is that initially people
who show a great track record get all the assets."
But performance chasers can quickly change gears, wreaking havoc on fast growing shops.
"If assets flow in based on short-term performance, they will tend to flow out when short-term
performance reverses," Jones says. "That’s a very tenuous platform to build your business on.
When performance reverses, the flows will reverse."
RiverFront’s Jones points to the story of the tortoise and the hare. "Slow and steady wins the
race," Jones says. "We are building our business very slowly and methodically through partner
financial advisors who come for a two day intensive training process in how we management
money, what we believe in and how they can incorporate our portfolios into their practice."
Indeed, RiverFront has been one of the managers to climb up the Morningstar rankings, notching
up assets even as other managers have been falling.
By: Danielle Verbrigghe
Reference: http://fundfire.com/c/1065023/110453?referrer_module=SearchSubFromFF&highlight=danielle%20verbrigghe
For its part, Sage Advisory Services was able to recover assets after declines at the end of 2013,
says president and CIO Robert Smith.
After strained performance in mid-2013, Sage’s performance rebounded, Smith says. "We had
some showers in 2013, and we made some unfortunate asset allocation adjustments, but we
corrected those and got back on our feet," he says. "In 2014 we basically reconstructed, and got
ourselves back to our basic fundamentals of how we do things and it really paid off."
While the Morningstar quarter-to-quarter growth looks inflated, because of the fourth quarter
inclusion of existing collective investment trust and target date strategies that weren’t previously
being counted, Sage saw positive net flows of a "couple of hundred million," in the past quarter,
Smith says. The firm also benefited from outflows from some competitors.
"Some of the other major [ETF strategist] leaders have tripped and [fallen] over the course of the
second half of the year," Smith says. "That helped us, and I’m sure it helped other members of
the community as well."
But at the same time, ETF strategists are facing more competition from other places, he says.
Brokerages have been gearing up their own home-office built ETF allocation models, creating
more competition for ETF-based SMA managers, Smith says.
"Some of those firms have put together reasonably viable alternatives to what might be offered
by a Sage or someone else out there," Smith says. "That’s the other trend we’re battling."
In addition, so-called robo-advisors are gaining more attention and becoming more competitive
players in offering tactical, ETF-based portfolios directly to clients, he says.
Another manager to move up the rankings despite declining assets under management in its ETF
strategies is Stadion Money Management. Stadion’s defensive bias has put the firm’s strategies
out of favor in the recent bull market, but the firm is focused on educating advisors about the
benefits of incorporating a defensively tilted strategy before a market downturn, saysWill
McGough, v.p. of portfolio management for Stadion Money Management.
"Ultimately the industry chases performance, so we’ll see an influx of flows if a bear market
does come along," McGough says. "Our performance doesn’t shine until after a market decline
or bear market."
By: Danielle Verbrigghe
Reference: http://fundfire.com/c/1065023/110453?referrer_module=SearchSubFromFF&highlight=danielle%20verbrigghe