Morningstar Places H20 Fund Under Review Again

Morningstar cited concerns over losses tied to the recent market downturn as the reason for review.


Morningstar is placing an H20 Asset Management fund under review for the second time in less than a year over concerns about “extreme losses,” it said Tuesday.

Morningstar previously downgraded H20’s Allegro Fund to neutral, highlighting loose risk controls, according to Matias Möttölä, associate director for multi-asset and alternatives manager research at Morningstar.

H20, a £25.7 billion ($31.1 billion) London-based asset management firm, is one of the several majority-owned by asset management giant Natixis Investment Managers.

H20’s Allegro Fund managers use a global macro strategy to invest in government bonds, currencies, and credit, according to Morningstar. The investment team has a “very flexible” mandate, according to Morningstar.

On March 9, when the S&P 500 fell 7.6 percent, the Allegro Fund fell 17.9 percent. Similarly, when the S&P 500 fell 9.5 percent on March 12, the Allegro Fund lost 25.4 percent of its value. According to Morningstar, as of February 29, H20’s Allegro Fund has lost 13.77 percent of its value since January.

The Allegro Fund targets a volatility of between 7 and 12 percent, but has “routinely exceeded” that number, according to Morningstar. As of March 12, the fund’s volatility over the trailing one-year period was 40 percent annualized, per Morningstar’s report.


“The extent of the recent derailment is alarming,” Möttölä said via email. “These risks come on top of the issues raised in 2019 regarding the fund’s exposure to illiquid bonds that were revealed by the Financial Times.

According to Morningstar, in 2015, H20 began purchasing non-rated corporate private placements. Many of those placements were at companies backed by German entrepreneur Lars Windhorst, Natixis told Institutional Investor previously. By June 2019, those holdings amounted to almost 10 percent of the fund’s assets under management.

“Significant outflows” forced the firm to sell or markdown many of these holdings, which now make up roughly 3.8 percent of the portfolio, per Morningstar. These issues, coupled with concerns over conflicts of interest between H20’s chief executive officer and Windhorst, led to the initial rating review by Morningstar.

[II Deep Dive: Natixis Shares Fall as Morningstar Questions Fund Volatility]

H20, for its part, is sticking to its guns.

“H2O has a robust risk management framework in place and the firm has reduced significantly its exposures across its portfolios,” a spokesperson for H20 said via email Tuesday. “Risks must be assessed with regards to the investment horizon of each fund which, in the case of H2O Allegro, is three years.”

As of 1:30 p.m. EST Tuesday, the Allegra Fund’s value had increased 6.8 percent since the market’s open.