H2O started investing in private or unlisted securities back in 2015, in accordance with the UCITS directive, which allows up to 10% of on-balance sheet exposure, per fund, to unlisted securities. These securities had the following characteristics: a high yield, providing diversification from the “Global Macro” strategies, and acting as a buffer to drawdowns.
Following the June 2019 events, we tried to sell some of the Tennor related securities, however, the transactions unfortunately failed to settle. Therefore, we decided to restructure these transactions in the form of temporary purchases of securities ("buy and sell backs"), remunerated at an attractive rate. The objective for us has remained to sell these positions at the best price, and in the best interest of our investors.
At the start of 2020, the market dislocations following the COVID-19 crisis and the subsequent closure of the economies which we had not anticipated, affected the proportion of the transactions linked to the private securities within our portfolios. The underperformance of our “Global Macro” strategies, combined with the high yield of the buy and sell back operations, mechanically increased their weight within our portfolios.
As a result, from the end of February 2020, ahead of the COVID-19 crisis, to the end of August 2020, the private or unlisted security exposure increased from between 2.7% and 4.7% (for H2O Adagio, H2O Moderato, H2O Vivace, H2O MultiBonds, H2O MultiStrategies and H2O Allegro) to between 2.8% and 9.0%, depending on the risk level of the funds. As for the "buy and sell back" exposures, they increased from between 1.8% and 15% to between 3.1% and 25%.
In full transparency with the AMF, we have worked to settle all transactions in private securities via a "Securities Purchase Agreement" with a group of private investors. Such an agreement was finalized in the spring (the “Evergreen” contract) covering both the on-balance-sheet private placements and the “buy and sell back” transactions. A specific execution timeline was agreed, with half of the positions to be closed by the end of June 2020 and the remaining transactions to settle before the end of June 2021. This agreement was duly communicated to the AMF, the FCA and our shareholder, Natixis. The execution of this agreement has been slowed down in part due to compliance and due diligence requirements, causing operational delays.
End of August 2020, acknowledging the delay in the execution of this contract and therefore the implied valuation uncertainties, the AMF asked H2O to suspend three French-domiciled funds. In order to ensure the fair and equal treatment of our investors, we decided to suspend all UCITS which contain transactions related to these securities. The objective of this technical and as short as possible suspension, is to have, on the one hand, ring-fenced side-pocket funds solely holding these "private" securities and, on the other, funds containing our "Global Macro" strategies.
Our objective is to sell these securities, either within the framework of the aforementioned "Evergreen" contract, or by any other means, while bearing in mind that we will act as quickly as possible but as slowly as necessary, and in the best interests of investors.
Finally, it is important to provide you with an assessment of the proportions of the future side-pocketed funds, expressed as a percentage of the existing funds’ assets. These will be subject to changes dependent on the market effect on the liquid pocket and on the disposal of the transactions linked to "private" securities. The final size of the side-pockets will be confirmed after the effective split. As a reminder, at the end of this period and subject to the approval of the “Autorité des Marchés Financiers”, you will hold two UCITS: the side-pocketed fund, which will be liquidated, and the new "Global Macro" fund with the same management and performance engine currently in place, excluding private securities.
We want to provide you with full transparency on the situation of each fund. Please see the below table, which includes an estimation of each fund’s side-pocket.
Edited in London, on Friday 4th September 2020.
H2O AM LLP is a portfolio management company authorised and regulated by the Financial Conduct Authority (FCA) and listed on the UK Financial Services Register under firm reference number 529105. Registered address: 10 Old Burlington Street, London W1S 3AG, United Kingdom. Company Number: OC356207.
H2O AM is an affiliate of Natixis Investment Managers. Natixis Investment Managers is the holding company of a diverse line-up of specialised investment management and distribution entities worldwide. As a multi-affiliate management organization, each of the investment affiliates is a separate legal entity with separate investment teams and investment decision making. The investment management subsidiaries of Natixis Investment Managers conduct any regulated activities only in and from the jurisdictions in which they are licensed or authorised. Their services and the products they manage are not available to all investors in all jurisdictions. It is the responsibility of each investment service provider to ensure that the offering or sale of fund shares or third-party investment services to its clients complies with the relevant national law.