Yesterday Virtus [profile] switched out beleaguered subadvisor and ETF strategist F-Squared, and Virtus CEO George Aylward trumpeted the change on the Hartford, Connecticut-based subadvised mutual fund shop's first quarter 2015 earnings call. Yet the F-Squared saga may not be behind Virtus just yet.

Yesterday Virtus revealed Q1 2015 diluted earnings per share, as adjusted, of $2.22, down three percent year-over-year and $0.18 below expectations. Virtus' revenue clocked in at $103.8 million in Q1 2015, down four percent from Q1 2014 and $1.05 million below expectations. Assets under management fell three percent, both year-over-year and from Q4 2014, to $54.8 billion; mutual fund AUM, at $34.1 billion on March 31, 2015, suffered a bigger drop (percentage-wise) of nine percent year-over-year and six percent in Q1 2015 alone.

Aylward (on Virtus' earnings call yesterday morning) and Virtus' latest 10-Q (filed yesterday with the SEC) revealed a $5.2-million "loss contingency ... related to a regulatory matter" around the F-Squared performance reporting scandal. A loss contingency is Virtus estimating how much the regulatory matter might cost the company, though Aylward clarified that Virtus "has not received the Wells notice" (that was F-Squared).

"We are in active discussions with the SEC staff with the objective of resolving this matter," Aylward said in his introduction on the call with analysts, as transcribed by Seeking Alpha. "However, we cannot provide any assurance that a resolution will be reached nor can we provide any additional information or answer to any related questions."

Virtus suffered net outflows of $2.2 billion in Q1 2015, a 376-percent rise year-over-year, yet Aylward pointed out that Virtus would've had net inflows of $0.7 billion (including $0.5 billion in mutual funds alone) without the former AlphaSector funds that had been powered by F-Squared. (The five funds in question, now called the Virtus Trend funds, hold about $5.7 billion of Virtus' $34.1 billion in open-end mutual funds.)

In response to a question from Bank of America analyst Michael Carrier, Aylward noted several categories where Virtus funds are winning inflows, including emerging markets and fixed income:

In terms of the funds, we did highlight emerging markets which has been a very strong performing fund for us and continues to have great attraction to individuals. Acknowledging that it's capacity constrained, there is no comments to made at this point in terms of that capacity but I always do like to remind people that there is capacity constraint there. And we have seen other areas and funds that clearly we have mentioned in the past that have had some more acceptance in the market. The Herzfeld Fund, while still small has certainly got some attention and we are seeing activity in several other areas and we are very excited about some of our newer and emerging stuff. One of the fixed income funds from Newfleet, a strategic income fund, a very new fund, but again it's already put up very compelling performance and I hope it's something that financial advisors will consider given the incredible record that Newfleet has had over many years.

As for moving past F-Squared, Aylward insisted that the Virtus team "absolutely... will not make any predictions or any guidance" on how the switch from F-Squared to Dorsey Wright will impact Virtus' flows going forward. Yet Virtus did reveal the switch yesterday, the same day its earnings came out, and Aylward did devote the conclusion of his opening remarks (on the earnings call) to praising Dorsey Wright and talking up the shift.

Later, in the Q&A section of the call, Sandler O'Neill analyst Michael Kim asked whether Aylward was interesting in teaming up "with a bigger more global franchise that could maybe leverage [Virtus'] investment capabilities more from a distribution standpoint." Aylward brushed the question off:

"Again, we will always consider things that are in the long-term interest of what we want to do. I think we are very comfortable with our retail distribution and our affiliate model with sub-advisors. So there is nothing at this point really for us to be discussing related to anything along those lines.

To dig deeper into Virtus' results, read its Q1 2015 earnings release and its latest 10-Q, as well as Seeking Alpha's transcript of Virtus' earnings call. 

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