AGF's Kevin McCreadie on fund stewardship (Part 2)

Click here for Part 1 of our interview with AGF's Kevin McCreadie.

Christopher Davis: I wanted to move the discussion to talk about AGF itself. The most timely thing I wanted to bring up was the recent news surrounding F-Squared, which is a subadvisor to the AGF U.S. Alpha Fund. I'm sure you know the story, maybe everybody else does, that F-Squared was settled with the SEC in the U.S. for $30 million, admitting they had actually more than misstated the returns – they had made up returns. So I'm wondering, given that backdrop, what's the reasoning for continuing to trust F-Squared as an advisor, or subadvisor to one of your funds?

Kevin McCreadie: Yeah, I know the issues around F-Squared have been pretty well-documented. They used their back-tested track record from 2002. We've had the fund; they have been a subadvisor to us about a year-and-a-half now. The track record we've actually used was post-2008, so a legitimate live money track record that we based our analysis on. Obviously, in the earlier instance we were not shown the light at that point, but we remain comfortable with the fact that the investment team has stayed together, remains together. The company is actually going through a sell process right now and will hopefully find a better backdrop in terms of their capital. But it's something we continually monitor, as we do with all our subadvisors. It's not just about the investment performance, which has done exactly what it is intended to do. It's about the process which has been consistent and it's also about, again, the firm infrastructure, et cetera, which we will continue to monitor. But from an investment standpoint, 2008 on is where we have been focused and that's a legitimate track record. Products have done what they are intended to do.

Davis: I mean, it's a relatively short record to base yourself on, and when you think about F-Squared's quality as a steward of capital, it's a pretty egregious violation of the investors' trust. So it's kind of difficult to get your arms around why an investor might want to continue to trust this firm.

McCreadie: Yeah, we take the same view as you do, obviously, from that standpoint. The founder of the firm and present CEO has left the firm after the SEC allegations came to light. A very seasoned veteran had been brought in as someone on the board who had been an industry expert, a very high-quality, high-caliber person. So we felt comfortable that the right leadership changes have been made there. And again, as I focus on the investment team which really didn't have anything to do with the marketing issues, they were really driven by some of the former executives who are no longer there. They left us in a place where we thought that, at the end of the day, we had a team and process that we had hopefully brought to our client base that was going to basically fulfill the objective that we had set out. But I do agree with you. I never like to see those types of issues. It always gives me pause. And if we were thinking about the past and had always full clarity of the past, you always have different decisions. But I think we've done the right analysis.

Davis: I think it was the last week F-Squared declared bankruptcy, and so this is not the most financially healthy operation. I know it's up for a sale, but typically not the kind of environment that encourages folks to stay around or to recruit new talent, often leads to more money flowing out the door, which makes it more untenable for those left behind. What's your take on that?

McCreadie: We have been apprised all the way along and continue to do our due diligence throughout the process, whether it's starting from the SEC findings throughout the process of their sale and as a part of their sales process to shield the firm from future liabilities of the acts of the former CEO. Any buyer would frankly want to shield themselves from that tale and essentially put the firm into what is a prepackaged bankruptcy in the U.S. as a part of that sale process. Unlike the typical bankruptcy, you see, is the company running or going away, this is more about future liabilities, et cetera. The investment teams, in my understanding with the buyer, have been locked down, but it's something we will continue to monitor as we do with all subadvisors.

Davis: Just one last thing about AGF itself. You came up from the U.S. You're an outsider to AGF. Obviously, you knew what you were getting into when you joined them. Just kind of curious what's surprised you most since you came aboard.

McCreadie: Not much. I mean, I know you probably would have a different reaction, but I think the surprises have been that the talent that I thought was there is there. We have a lot of work to do. As you know, we've suffered from some investment issues or performance issues several years back. We're well on our way to recovering. If you look at our short-term one-year and three-year performance numbers, we're roughly either above or median for most of our funds or 50-odd percent of them in both those cases. That will play out over time as we continue to grind through.

We've installed a lot of risk processes to drive that consistency that we think about, and at the end of it we have refocused the firm to think about the client. I think the industry – and I want to underscore the industry – tends to lose sight of that. We've gone through a few exercises, starting at the core of our firm, to start thinking about the client. If you think about new product development that we will bring to bear, we will be trying to find a solution to a client need. We've rolled out a new global convertible fund this year as a way to think about how we play defense against rising rates, which we think will come in certain parts of the world over time. So, again, we're really trying to refocus the firm around risk, consistency of performance, and the fact that we should be a solutions provider and keep sight of that end client. So, those have been the positives about being able to affect change and I have a very long-term view. I'm here for a long time. So, I don't get caught up in the short-term-ism of certain things.

Davis: I think that's really healthy to many folks in our industry who are very much focused on the short-term or the next quarter or even the shorter months at a time. So, with that, I want to thank you very much. I'm Christopher Davis with Morningstar.ca.

McCreadie: Thanks Chris.

Davis: Thanks.