Natixis H2O Fund Controversy Hangs on an Arcane Definition

(Bloomberg) -- When is a bond not a bond?

That’s the question some analysts are raising about securities owned by H2O Asset Management, the third major European fund manager to face market turmoil in less than a year amid questions about the liquidity of its investments.

H20 funds came under scrutiny last week for holding bonds linked to private companies from lingerie to robotics in sales arranged by Lars Windhorst. Unlike traditional bonds, the notes are akin to loans repackaged into so-called private placements, according to research firm Autonomous.

The distinction matters because H20’s Allegro, Adagio and Multibonds funds are not permitted to hold loans, which are harder to trade than bonds and generally lack the serial codes known as ISINs that debt securities are assigned. Other U.K. fund managers including Neil Woodford have faced questions over whether they’ve circumvented liquidity restrictions by re-packaging assets amid heavy redemptions.

“Everything H2O and Natixis have said about the nature of the private placements suggests to us that they are economically loans, rather than debt securities,” analysts at Autonomous said in a client note after executives at the French bank - which owns London-based H20 - held a conference call for investors on Friday morning.

“There have been no obvious or major violations of rules, commitments or duties by H2O,” the analysts wrote. “But various angles of the story leave a bitter aftertaste.”

How Natixis’s H2O Funds Are Linked to German Financier Windhorst

Natixis said on Monday that it had marked down part of the Windhorst portfolio. A spokesman for H2O, whose assets doubled since 2017 to $37.6 billion before last week’s tumult, told Bloomberg on Friday that it rejects Autonomous’s analysis that the notes resemble loans. Bruno Crastes, H20’s founder, defended the investments in a French TV interview posted the same day saying that “you need to go where others don’t go” to generate superior returns.

Redemption Rush

H20’s flagship funds slumped by 1.1 billion euros ($1.25 billion) Thursday, after the research and rating company Morningstar published a report questioning the “liquidity and appropriateness” of some holdings. Morningstar’s decision to suspend the fund’s rating came after the Financial Times wrote about H2O’s exposure to the bonds last week.

Before suffering a rush of redemption requests and freezing his fund this month, U.K. stock-picker Woodford listed some of his unlisted securities on a stock exchange in Guernsey. That allowed him to stay within pre-set rules restricting illiquid holdings. GAM Holding AG also dismissed a senior money manager partly for performing insufficient due diligence on unlisted debt securities it has taken almost a year to sell.

“A piece of financial transformation is going on to take something from A to B, whether it’s in Guernsey or creating an ISIN out of thin air,” said Chris Redmond, global head of credit and diversifying strategies at Willis Towers Watson, which advises pension funds on where to place their money. “This is classic late-stage cycle behavior.”

The question now is whether the illiquid investments that have caused trouble for H20, GAM and Woodford represent a wider trend in the fund-management industry. Jacob Schmidt, CEO of Schmidt Research Partners, a global investment firm, argues that they are “isolated incidents.”

“Woodford was a 100% retail offering and ran his own independent start-up,” Schmidt said. “H20 was part of a major firm and mostly had institutional and high net worth clients. In a way, I’d expect higher standards from a firm like H20 or GAM than a firm like Woodford’s.”

--With assistance from Luca Casiraghi.

To contact the reporters on this story: Thomas Beardsworth in London at tbeardsworth@bloomberg.net;Lucca de Paoli in London at gdepaoli1@bloomberg.net;Suzy Waite in London at swaite8@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Abigail Moses

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