Morningstar has downgraded its rating on H2O Asset Management’s Allegro fund due to ongoing concerns over illiquidity, as redemptions slow for the first time since doubts arose regarding the firm’s bonds.
Before being put under review last week, the Allegro fund previously held a bronze rating. It is now deemed as “neutral” – the second lowest in Morningstar’s five-tier rating system.
“This team’s decision to invest a sleeve of Allegro’s portfolio in illiquid, high-risk corporate bonds, all linked to German entrepreneur Lars Windhorst, raises concerns about the robustness of the security-selection process applied here,” said Mara Dobrescu, Morningstar’s director of fixed income strategies.
“This adds to our pre-existing concerns on the effectiveness of this fund’s risk controls,” she added.
H2O is currently considering medium-term solutions to re-organise its holdings in non-rated corporate bonds, “in order to eliminate entirely any liquidity concerns” in its Ucits funds, the firm has stated.
“In the meantime, H2O sees value in these bonds and will not dispose of them at the current discounted price,” a spokesperson said on Thursday.
Investors rushed to pull cash out of the Natixis Investment Management subsidiary after reports first emerged last week regarding illiquidity at the firm. Redemptions have now subsided to €450 million – five times less than their peak of €2.25 billion on June 21, according to the fund manager.
In a bid to stem outflows, H2O sold off part of its non-rated private bonds, it said on Wednesday. It also cut the aggregate market value of bonds to below 2% of its assets under management (AuM) and marked down the balance in an attempt to prevent further withdrawals.
Entry fees across all H2O’s funds have been removed “until further notice”, the London-based asset manager has confirmed.
The firm has since seen “substantial inflows”. As of June 26, AuM stood at €27 billion, a spokesperson said.
“We are pleased to report that fund flows are returning to normal,” said chief executive Bruno Crastes.
According to Crastes, nearly 100% of the assets held by the firm’s funds are “perfectly liquid”. He thanked investors for “their continued commitment to H2O” in a statement.
H2O’s Allegro fund was initially put under review by Morningstar after it found various conflicts of interest within the fund. Over 4% of H2O Allegro’s assets are invested in illiquid bonds connected to German financier, Lars Windhorst, according to the US-based research company.
Dobrescu flagged “the concentration of investments in a series of companies related to the same individual” as a “cause for concern”.
Chief executive Crastes had also been appointed to the advisory board of Windhorst’s fund Tennor Holding in May this year, creating another “possible conflict of interest”, according to Morningstar. He has subsequently resigned from the post.
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