AGF Investments Inc. is standing by its relationship with a U.S. sub-advisor that agreed this week to a US$35-million settlement with the U.S. Securities and Exchange Commission for false performance advertising.
The SEC’s settlement with F-Squared Investments relates to its flagship AlphaSector strategy, which is the strategy employed by the C$467-million AGF U.S. AlphaSector Class.
A senior AGF official told Morningstar today the company is pleased that F-Squared has reached a settlement with the SEC. AGF’s position is that AGF U.S. AlphaSector Class “continues to perform in accordance with expectations and in line with our assessment at the time of our initial due diligence prior to our launch of the AlphaSector product in August of 2013.” Another AGF official told Morningstar analysts that “the performance data in question was not part of AGF’s marketing strategy here in Canada.”
Investing primarily in exchange-traded funds that track U.S. equity sectors, the mutual-fund series of AGF U.S. AlphaSector Class has a one-year return of 21.3% in the 12 months ended Nov. 30. This places it in the second quartile for performance in the U.S. Equity category. The fund is too new to have a Morningstar Rating for historical risk-adjusted returns, and is not under coverage by Morningstar’s manager-research team.
As with U.S.-based funds that employ the AlphaSector methodology, the AGF fund’s quantitative-based strategy aims to produce superior risk-adjusted returns by overweighting sectors that it expects to perform well while avoiding weak sectors that are likely to lag the broad market and/or have negative returns.
F-Squared, which is based in the Boston area, said in a release that the SEC settlement order is focused on the firm’s marketing and advertising of historical index-performance data for the period 2001 to 2008. This data was based on information acquired from a third party in 2008, F-Squared said.
Announced on Dec. 22, the settlement with the SEC requires F-Squared to pay a US$5-million civil penalty and disgorge US$30 million in profits. In addition, F-Squared said it has agreed to retain the services of an independent compliance consultant it voluntarily hired at the beginning of 2014 for an additional nine months.
Separately, the SEC charged Howard Present, the co-founder and former CEO of F-Squared , with making false and misleading statements to investors as the public face of F-Squared. The SEC’s investigation of Present’s conduct is continuing.
F-Squared appointed Laura Dagan as CEO in November, replacing Present. “We are pleased to put this matter behind us so that we can focus on our clients and continue to invest to ensure that our compliance, research, analytics and operational teams are best in class,” Dagan said in a release. As of Sept. 30, F-Squared- affiliated entities had more than US$28 billion in fee-generating assets.
According to the SEC, F-Squared falsely advertised a successful seven-year track record for the AlphaSector strategy which it claimed was based on real investments held for real clients. In fact, the data used in F-Squared’s advertising was derived from backtesting. Furthermore, the hypothetical data contained a substantial calculation error that inflated the results of the backtesting, the SEC said.
“Investors must be able to trust that performance advertisements are accurate,” said Andrew Ceresney, director of the SEC’s enforcement division, in the SEC release. “F-Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.”
AGF Investments Inc., one of Canada’s largest independent investment management firms, is a unit of AGF Management Ltd. (TSX:AGF.B).