(Bloomberg) -- Bank of England Governor Mark Carney reprimanded investment funds that hold illiquid assets but allow unlimited withdrawals, adding to pressure on firms like H2O Asset Management.
"These funds are built on a lie, which is that you can have daily liquidity, and that for assets that fundamentally aren’t liquid,” Carney told a parliamentary committee on Wednesday. “That leads to an expectation of individuals that it’s not that different than having money in a bank. You get a series of problems, you get a structural problem but then you get a consumer issue.”
H20, backed by France’s Natixis SA, suffered the steepest ever one-day decline in assets for a group of its largest funds. After almost a decade of near-constant inflows, clients last week started to yank money from some of its funds over concerns about illiquid holdings tied to a controversial German businessman. Assets in six of its funds fell more than 5.6 billion euros ($6.4 billion) over just four days through Monday to less than 16 billion euros.
H2O said in a statement that net outflows had “slowed significantly” since Monday, and that it had received some “material inflows” on Tuesday. It didn’t provide further details.
H2O, founded by Bruno Crastes and Vincent Chailley in 2010, attempted to stem the decline in assets last week with a series of measures meant to assure investors it can meet redemptions while making it more painful for those seeking to get out. The goal was to avoid a similar fate of Swiss asset manager GAM Holding AG and famed U.K. stock picker Neil Woodford which both froze funds amid an investor exodus.
Between 2017 and the end of April, H2O’s assets doubled to $37.6 billion, according to an investor letter seen by Bloomberg.
What Bloomberg Intelligence Says
Natixis’ share-price slide and outflows across various funds reflect “fears of further withdrawals and loss of performance fees. Timely H2O action to boost liquidity for redemptions is key, and more may be required.”
--Jonathan Tyce and Georgi Gunchev, banking industry analystsClick here to view the research
“On this broader systemic point around the structure of these funds, this is a big deal,” Carney said. “You can see something that could be systemic.”
H2O has sold some 300 million euros of unrated private bonds and marking down the remaining ones. The firm dropped its entry fees altogether and said it would appoint an independent auditor to restore investor confidence.
The sale and a marking down of the non-rated corporate bond holdings across H2O’s range reduced the value of the rarely traded notes to 500 million euros, the company said in a statement on Monday, without elaborating on the size of the previous holdings.
The crisis is also weighing on Natixis’s share price, which lost almost 12% last week and has yo-yoed since Monday. This is partly because the funds have been lucrative for the bank. One strategy, H2O Multibonds, made more than 30% for its investors last year, according to data compiled by Bloomberg.
H2O’s crisis started after the Financial Times showed the exposure of several of its funds to companies related to Lars Windhorst, a German financier with a history of troubled investments. Morningstar Inc., an influential research firm used by investors as a guide to buy or sell funds, subsequently suspended its bronze rating on the H2O Allegro fund on Wednesday over concerns about the “liquidity and appropriateness” of some of its holdings.
The Allegro Fund’s assets under management plunged by 42% from June 18, the day before the Morningstar note, through June 24. Assets in H2O’s Adagio fund dropped by 26.5% in the same period.
The move led jittery investors, still reeling from star stock picker Woodford’s decision to freeze withdrawals from his flagship fund, to start yanking cash from H2O. More than a dozen of the firm’s funds allow clients to invest or exit on a daily basis.
Until recently, H2O had been growing rapidly. Last year, the firm introduced entry fees of as much as 5% to slow the amount of new cash as several funds neared capacity. Between 2017 and the end of April, H2O’s assets doubled to $37.6 billion, according to an investor letter seen by Bloomberg.
--With assistance from Kateryna Hrynchak and Vivianne Rodrigues.
To contact the reporters on this story: Lucca de Paoli in London at firstname.lastname@example.org;Lucy Meakin in London at email@example.com;Carolynn Look in Frankfurt at firstname.lastname@example.org
To contact the editors responsible for this story: Vivianne Rodrigues at email@example.com, James Hertling, Patrick Henry
©2019 Bloomberg L.P.