The fund, run by Natixis subsidiary H2O Asset Management, had previously had its rating placed under review by the agency "given concerns on the liquidity and appropriateness of several holdings in the fund's corporate-bond sleeve".
On Thursday, Mara Dobrescu, director of fixed income strategies at Morningstar, said the Allegro fund is "run by an experienced team adept at making top-down calls on government bonds and currencies".
However, she added: "This team's decision to invest a sleeve of Allegro's portfolio in illiquid, high-risk corporate bonds, all linked to German entrepreneur Lars Windhorst, raises concerns about the robustness of the security-selection process applied here. This adds to our pre-existing concerns on the effectiveness of this fund's risk controls."
Separate fund structure
The news comes on the same day as the Financial Times reported H2O is weighing up the creation of a separate entity for its illiquid bond holdings after suffering outflows worth billions of euros.
The newspaper said CIO Vincent Chailley told clients that the group may remove all the bonds linked to the controversial German financier Lars Windhorst from its main funds and place them in a separate portfolio, though nothing has been decided yet.
In a client call, the CIO said: "I suspect we will dispose of these assets in the [daily liquid] funds when prices rise in the coming weeks or months," the FT reports. He also added that some major investment banks have expressed interest in the bonds but were offering "extremely low" prices.
The Allegro fund is an absolute return strategy managed with "an annual ex-post volatility target comprised between 7% and 12% over the recommended investment horizon of four years". It invests in sovereign debt, investment grade credit and high yield paper, and currency markets.
Company response
In an effort to reassure investors, H2O has removed all entrance fees, which had been implemented on all their funds a few months ago, until further notice.
The group also said it has seen "substantial inflows" since Monday (24 June), as redemptions subsided from their peak of 21 June to €450m yesterday (26 June).
It also said it had sold part of its non-rated private bonds and the aggregate market value of illiquid securities is now just 2% of H2O's AUM.
Bruno Crastes, CEO of H2O Asset Management, said: "We are pleased to report that fund flows are returning to normal. We would like to thank our investors for their continued commitment to H2O and to reiterate that 98% of assets held by our funds are perfectly liquid."
Meanwhile, Natixis told investors last week that although none of the securities in question are in default, the H2O team has decided to record these securities at their transactional value rather than standard market value in case of a need to sell immediately.
"The liquidity of the securities is ensured and will allow to face potential additional withdrawals, if some clients decide to partially sell their funds due to a concern about the media coverage associated with these securities," Natixis said.
At the same time, the group also said it performed its periodic audit on affiliate H2O earlier than planned, on 21 June (last Friday).
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