A Natixis bond fund that sent fresh tremors through Europe's financial industry this week saw assets fall by a record on the day Morningstar raised concerns about its holdings.
Assets in the €2.3 billion H2O Allegro fund slumped by €113 million ($128 million) Wednesday, when the fund rating company published its report, according to data compiled by Bloomberg. That was its biggest one-day drop since it was started in 2011. Most of the decline was probably driven by client redemptions when taking into account the fund's performance on that day.
Morningstar suspended its rating on the Allegro fund, which is run by Natixis-controlled H2O Asset Management, over concerns about the "liquidity and appropriateness" of some corporate-bond holdings as well as potential conflicts of interest. The fund, which allows clients to make daily withdrawals, holds rarely traded bonds issued by companies linked to controversial German financier Lars Windhorst. H2O founder Bruno Crastes sits on an advisory board of Windhorst's investment vehicle Tennor Holding.
H2O Asset Management as a whole saw clients pull about €600 million this quarter through June 20, the bank said Friday. It didn't say how much of that came after the Morningstar report. An official for H2O declined to comment on the decline in the flagship fund's assets.
The rating suspension and redemptions come as a blow for one of Natixis's most successful investment boutiques in Europe. Natixis Chief Executive Officer Francois Riahi and Jean Raby, who oversees the bank's investment-management activities globally, moved to contain damage, asking Mr. Crastes to leave the Tennor board.
That didn't stop the decline in the shares, with Natixis falling as much as 6.3% in Paris trading after Thursday's 12% loss. H2O's woes are adding trouble for Mr. Riahi after a slump in trading revenue in the first quarter and losses on Korean derivatives announced in December.
Morningstar's decision added to growing jitters in the fund management industry about liquidity. Neil Woodford, once one of the U.K.'s most famous stock pickers, froze redemptions from his flagship equity fund, LF Woodford Equity Income, this month amid an investor exodus following months of poor performance. Swiss money manager GAM Holding is still in the process of unraveling hard-to-sell securities from a bond fund it froze last year.
European investment rules require funds to have no more than 10% of its capital in less liquid securities. In the case of H2O, which invests in corporate borrowings, the line between illiquid and liquid is more difficult to draw, according to Matias Mottola, the analyst who covers H2O's funds at Morningstar.
When it comes to the liquidity of bonds, "it is a question of interpretation," Mr. Mottola said. "We can't make a final judgment."
