H2O Cuts Bond Exposure

Mayfair asset manager H20 has reduced its exposure to non-rated bonds and cut entry fees for its funds in response to fears over illiquid assets and fund outlows

Jocelyn Jovene 24 June, 2019 | 9:20AM James Gard
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Decision making

Under-fire Mayfair asset manager H2O said on Monday it had cut its exposure to "non-rated private bonds" to below 2% of assets under management. Following "press reports which dried up market liquidity and widened bid-ask spreads", H2O's funds will now be priced at a discount between 3% and 7%. The firm has also decided to remove entry fees for its funds "until further notice".

H2O owner confirmed last Friday that CEO Bruno Crastes has left a role that prompted Morningstar analysts to place €2.3 billion global macro fund H2O Allegro “Under Review”.

Shares in French investment bank Natixis (KN) slumped last week as Morningstar flagged up concerns over the “appropriateness and liquidity” of the H2O fund’s corporate bond allocation.

Morningstar analyts were concerned by the “highly illiquid bonds issued by several business ventures backed by German entrepreneur Lars Windhorst”, says Mara Dobrescu. Concerns over illiquid assets in open-ended funds have blown up since Neil Woodford gated his equity income fund at the start of June.

On Wednesday, Dobrescu flagged up a “possible conflict of interest” after H2O’s CEO Bruno Crastes was named as a member of the board of Tennor, a holding company run by Lars Windhorst. Natixis confirmed on Thursday that Crastes has resigned from Tennor and said the risk of a possible conflict of interest was "groundless".

The Allegro fund was previously rated as Bronze and is now Under Review, which is usually prompted by a change of fund manager or material change to the fund's outlook. Dobrescu added that “the concentration of these investments in a cohort of companies linked to the same individual is cause for concern”.

The fund is under review "while we investigate the potential implications of these concerns for fundholders", Dobrescu said.

Bruno Crastes, CEO of H2O Asset Management, said on Thursday: “For absolute clarity, our aggregate exposure to illiquid assets is limited to between 5% and 10% of each of these three funds’ net assets. We emphasize to our investors that liquidity is not an issue in these funds. Subscriptions and redemptions are always adjusted on a real time basis. We continue to be committed to providing investors with fully transparent updates as to our funds’ holdings.”

Natixis said that H2O had seen fund outflows of €600 million during the second quarter of 2019.

Swiss broker UBS said the market reaction, with Natixis shares off 10%, "seems harsh", given that H2O only contributes 6-7% of Natixis net income. Broker Jefferies said that "yesterday's market reaction was overdone".

Global Macro Fund

Dobrescu describes the H2O Allegro as a “heavily top-down global macro fund” which expresses H20’s house views through government bonds, currencies and credit “with a very flexible mandate”. She said that over the past five years, global government bonds and currencies “have been by far the biggest contributors” to the fund’s risk budget and overall performance.

The fund has €2.3 billion in assets, according to Morningstar data, and has produced a market-beating three year annualised performance of 32%. The fund launched in March 2011 and has been managed since then by Vincent Chailley and Loic Cadiou. Its top five holdings are a range of Mexican government bonds of differing maturities.

H2O is a Mayfair-based asset management firm with a range of funds available to European investors. It was set up by French bond investor Bruno Crastes with the help of Natixis, which remains the parent company. H2O, as well as other firms owned by Natixis, have a "large degree of operational autonomy", Morningstar says, which includes how they implement their investment philosophy. 


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Jocelyn Jovene

Jocelyn Jovene  is Senior Financial Analyst and Senior Editor for Morningstar France.

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