Thread by @BondHack

H2O is a top performing French fund manager, backed by Natixis, with €30bn AUM.

It also has €1bn+ invested in bonds related to Lars Windhorst, the German financier with a colourful past filled with legal issues.

Full story from @cynthiao and me here 👇
ftalphaville.ft.com/2019/06/18/156…

If you're not up to speed on Lars, Cynthia and @HarrietAgnew's 2015 profile is a great place to start: ft.com/content/cf7f48…

He's so (in)famous in his homeland that one politician insulted a rival as "the Lars Windhorst of German politics" in 2017

H2O meanwhile is bond fund manager that regularly beats the market by an exceedingly high margin.

CEO Bruno Crastes has faced questions about his exposure to Windhorst though. @Chris_Whittall asked him about it for this WSJ piece in 2017, for example wsj.com/articles/bond-…

What hasn't been previously laid out is the scale of their exposure. Bonds linked to Lars are split across an ever shifting network of obscure SPVs, making them hard to tally.

Totting these up we found €1.4bn of exposure across six funds, which are all open to retail investors.

Except for ABN Amro, all of these bonds are linked to Lars Windhorst. That's more than 13% of a daily liquidity fund's exposure to the highly illiquid bonds linked to one entrepreneur with an "interesting" past.

H2O acknowledges that some of these bonds are illiquid, applying a significant haircut to Chain Finance (a bond Cynthia and I wrote about in 2017).

But most of its Lars holdings have no such haircut, even though we hear they are equally illiquid ft.com/content/e622c3…

H2O appears to have previously sailed close to the wind with its valuations of Lars-related securities. PwC gave it following audit qualification related to its position in Sapinda Invest in 2016:

Tracking H2O's flows into new bonds is a great way to follow Windhorst's network - which added a new €1.5bn note to little fanfare yesterday.

The French fund manager holds €247m of a recently issued €850m bond from Trent Petroleum for example.

Why does this matter? Well, we've all been talking about the dangers of having illiquid and obscure securities in open-ended daily liquidity funds recently. It always bears taking a closer look at what's in the portfolio of funds you are invested in.

🚨 Morningstar has suspended its rating on a fund run by H2O Asset Management due to its holdings of illiquid bonds, after a Financial Times investigation into the substantial holdings related to a controversial German financier. 🚨

ft.com/content/48a062…

Also, unreported until now: H2O sent a message to clients this morning reassuring them about the liquidity of their holdings.

Here's the full Morningstar statement (in French). It not only cites exposure to "illiquid bonds issued by companies controlled by the German financier Lars Windhorst", but also "a possible conflict of interest" due to Mr Crastes' position on his board.

morningstar.fr/fr/news/193458…