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Bruno Crastes: ‘French Soros’ fights for H2O’s future

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“There is a very simple rule in investment,” said Bruno Crastes with a wry smile. “If you are not able to get poor, you will never get richer. When you don’t want to lose, you will never make money.”

The tanned and silver-haired chief executive of H2O Asset Management articulated his philosophy of risk-taking at an awards ceremony in 2018, where he was collecting a trophy for market-beating returns.

The Frenchman used his acceptance speech to assert that his industry had become “corrupted by all this regulation and all this risk management”, which made investors “behave like software”.

Two years later, Mr Crastes’ approach to investing is under strain. The fate of his €20bn investment firm hangs in the balance. A year of drastic losses, renewed scrutiny around risk controls and regulatory difficulties pushed H2O’s majority shareholder Natixis to cut ties.

Natixis, the French bank that has backed H2O since its inception a decade ago, declared earlier this month that it was looking to sell out of the London-based asset management subsidiary.

It marked a sharp U-turn from a partner that had previously given H2O its unequivocal backing. That endured through a bruising 18 months, which began when the FT revealed that H2O had poured more than €1bn into hard-to-sell bonds linked to the controversial German financier Lars Windhorst.

Now, cut off from the powerful Natixis fund marketing machine that helped H2O grow to more than €30bn in assets at its peak, Mr Crastes faces the biggest test of his more than 30-year career. He will need all of his charisma and self-confidence to retain investors, many of whom once regarded him as the finest European fund manager of his generation.

“He’s super charming, very smart and very arrogant,” according to an investment consultant, who said that the 55-year-old inspires “cult-like” loyalty in some of his clients.

Even among his most ardent supporters, cracks have begun to appear. Several of France’s biggest life insurance firms — once the backbone of H2O’s domestic investor base — have halted new investments.

If Mr Crastes cannot cure the crisis of faith among some of his disciples, it would prove a stunning downfall for a star fund manager once lionised for his moneymaking bets on the direction of bond and currency markets. He declined to be interviewed for this article.

Column chart of Total return (%) showing Bruno Crastes's track record

The smartest guys in the room

In his heyday, the UK’s fallen star stockpicker Neil Woodford was known as the “man that made Middle England rich”. Mr Crastes’ Midas touch, in contrast, generated outsized returns for a truly international group of investors. His fan base stretched from retail investors in France and Italy to professional money managers in Switzerland and South Korea.

That broad appeal was no mystery. In the 25 years to the end of 2019, Mr Crastes recorded an astonishing return of close to 2,500 per cent, according to H2O marketing materials. In its first decade, the asset manager recorded annual returns of over 30 per cent on five separate occasions.

The firm’s 2019 accounts show that its discretionary profit shared between H2O’s management team and Natixis topped £400m, the largest ever annual pre-tax payout to its owners. By then Mr Crastes had swapped a home in London’s Kensington for the tax haven of Monaco.

“Bruno was seen as the French Soros,” said one former investor, referring to legendary hedge fund billionaire George Soros.

A trained actuary and mathematics graduate of the University of Lyon, Mr Crastes began his fund management career in 1989 after a brief stint as a proprietary bond trader. He made his name in the early 2000s at the asset management arm of Crédit Agricole, France’s largest retail bank, running a team in London that became known for skilfully navigating swings in bond and currency markets.

One investor recalled how the Frenchman’s desk was at the centre of a large room in Crédit Agricole’s offices near the Bank of England. Trading teams would sit around it, with those in favour often parked closest to him. “It was like a royal court with the king in the centre,” the investor said.

It was here that he earned a reputation for an uncanny ability to bounce back — even from periods of extreme losses.

In 2007, Mr Crastes dismissed the brewing US subprime mortgage crisis as “something that shouldn’t damage the state of the real economy”. This disastrous misjudgement meant that several of his team’s funds at Crédit Agricole were sitting on huge losses. But the following year, they staged a stunning comeback.

With a stellar period of performance behind him, Mr Crastes struck out on his own in 2010, setting up shop with his longtime business partner Vincent Chailley as chief investment officer. The pair convinced Natixis, Crédit Agricole’s rival co-operative lender, to snap up a 50.01 per cent share in the newly minted H2O Asset Management — named after the importance of managing liquidity risks that Mr Crastes learned during the financial crisis, he said at the time.

Natixis operates a multi-boutique asset management model, where subsidiaries are run at arm’s length but can tap into the parent group’s marketing might. Mr Crastes became a fixture at the French bank’s fundraising roadshows, drawing attention with his bold and often contrarian macroeconomic outlooks. When economists from other investment firms spoke, the H2O chief had no qualms about publicly disagreeing with or dismissing their predictions, according to attendees. 

“Stop listening to economists; listen to traders!” he implored during one such presentation.

H2O’s team “weren’t in any doubt about their own brilliance”, said another former investor. “They were firmly of the view that they were the smartest guys in the room.”

The talented Mr Windhorst

H2O’s present predicament arose after Mr Crastes strayed far from his usual area of expertise. He invested heavily in the debts of a ragbag assortment of businesses linked to one man: Lars Windhorst, a financier who had previously weathered the collapse of two companies, personal bankruptcy and served a suspended prison sentence.

H2O began dabbling in trading bonds linked to Mr Windhorst just over five years ago, after he met the firm’s co-founder Mr Chailley. In the past few years, Mr Windhorst developed a close relationship with the H2O duo. He and Mr Crastes would sometimes socialise together on the German businessman’s yacht or at private members’ clubs, according to people who also attended.

H2O’s investors and members of Mr Windhorst’s circle have questioned why a firm whose bread and butter was trading government bonds decided to pour billions of euros into thinly capitalised businesses such as La Perla, a lossmaking lingerie maker.

In June 2019 the Financial Times revealed the scale of H2O’s exposure to Mr Windhorst. Initially Mr Crastes appeared unruffled, coolly assuring clients in a video address that the financier was “extremely talented”.

But one week and €8bn of investor withdrawals later, Mr Crastes appeared rattled. In a second video, this time much more emotional, he pledged that — unlike Mr Woodford’s eponymous firm — H2O would “never gate” its investment vehicles.

The bold promise halted the stampede. Loyal investors were once again rewarded for sticking with Mr Crastes through another difficult period: his main fund finished 2019 up by more than a third.

By mid-March of this year, however, Mr Crastes’ flagship fund had halved in value as fears about the coronavirus pandemic roiled markets. His losses were amplified by the high leverage that had previously boosted returns.

Since then, the Frenchman struck a deal with Mr Windhorst where the German was to buy back his illiquid bonds, but so far progress has been “very partial”. In a recent video message to clients, Mr Crastes appeared solemn, and had swapped his suit for a grey jumper. His face was uncharacteristically covered in light stubble.

In a September address to investors, Mr Crastes admitted that investing with Mr Windhorst had “created more problems than it has created performance”, but pledged that he would do everything possible to reward clients’ trust.

“We will fight to our last breath to ensure that these transactions, despite everything, won’t cost the investment portfolio.”

H2O’s bruising 18 months

June 18, 2019

Financial Times investigation reveals H2O has bet over €1bn on hard-to-sell bonds linked to the controversial German financier Lars Windhorst

June 19, 2019

Morningstar suspends rating on H2O’s Allegro fund because of its holdings of illiquid bonds

June 21, 2019

Natixis’s fund management chief reassures investors that H2O’s bonds linked to Mr Windhorst are “quite diversified”

June 28, 2019

H2O co-founder Bruno Crastes tells investors “we will never gate” funds. H2O later blames “unfair media” for the €8bn of outflows it suffered

October 25, 2019:

H2O’s auditor first flags breaches of open-ended fund rules due to trades in illiquid bonds

March 9, 2020

H2O warns clients of “surprisingly large” losses after market turmoil. Mr Crastes’ fund is down 50 per cent by end of the week

late april, 2020

Mr Windhorst strikes a deal to buy back illiquid stocks and bonds from H2O

August 28, 2020

The French market regulator makes H2O temporarily suspend a series of its funds because of their “significant exposure” to illiquid debt 

October 13, 2020

H2O reopens the seven retail funds it suspended, but with substantial illiquid assets trapped in side-pockets

November 6 2020

Natixis announces it is seeking to sell its majority stake in H2O, as the French bank looks to sever all ties with its controversial subsidiary that exposed weaknesses in its risk management



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Pimco’s Ivascyn warns of inflationary pressure from rising rents

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US Inflation updates

A leading US bond manager has warned of inflationary pressure from housing rental costs that could push interest rates higher and overturn a sense of complacency among investors.

The comments by Dan Ivascyn, chief investment officer at Pimco, which has $2.2tn under management, comes after US 10-year interest rates eased in recent months to about 1.25 per cent. Fears of an inflation surge sparked alarm among bond investors at the start of the year and pushed the important benchmark to a peak of 1.75 per cent by the end of March.

“There is a lot of uncertainty on inflation and while our base case is that it proves transitory, we are watching the relationship between home prices and rents,” Ivascyn told the Financial Times. “There may be more sustained inflation pressure from the rental side.”

Owners’ equivalent rent is a key input used for calculating the US consumer price index. As rents become more expensive, investors could become increasingly concerned about “sticky inflation”, pushing the 10-year Treasury yield back towards 1.75 per cent, said Ivascyn. 

Line chart of US 10-year expected rate of inflation showing long-term bond market inflation expectations loiter near decade peaks

The Federal Reserve said in its latest policy statement last week that it had made “progress” towards its goals of full employment and 2 per cent average inflation. Jay Powell, the Fed’s chair, said there was more “upside risk” to the inflation outlook, although he expressed confidence in transitory price pressure over time.

The latest measure of core consumer prices, which is followed by the central bank, ran at 3.5 per cent over the 12 months to June, the fastest pace since July 1991.

“There is a lot of noise and uncertainty in the data” and “the Fed has a difficult job deciphering the economic information coming in”, said Ivascyn.

The fund manager said the potential for much higher bond yields is probably capped by the prospect of the central bank tightening policy in the event of inflation expectations breaking higher.

Bar chart of assets under management ($bn) showing Pimco Income ranks as the largest actively managed bond fund

“We do believe if the Fed sees inflation expectations rise out of their comfort zone, that they will probably act,” said Ivascyn. “That has been the message from Powell’s last two press conferences.”

Pimco expects the central bank will announce a tapering of its current $120bn monthly bond purchases later this year, with a view to starting the process in January. While the policy shift is being “well telegraphed” and data dependent, Ivascyn said higher bond yields and more market volatility were likely.

“This is a tough market environment and it is a time when you want to be careful,” he said, adding that Pimco had been reducing its exposure to interest rate risk as the bond market had pulled borrowing costs lower. 

“Valuations are stretched and it makes sense to adjust our portfolios.”

Ivascyn oversees the world’s largest actively managed bond fund, according to Morningstar. The $140bn Pimco Income Fund co-managed with Alfred Murata, has a total return of 2 per cent this year, versus a slight decline in the Bloomberg Barclays US Aggregate index. Over the past year, the fund has extended its long record of beating its benchmark, according to Morningstar.



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Wall Street stocks follow European and Asian bourses lower

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Equities updates

Wall Street stocks followed European and Asian bourses lower on Friday after markets were buffeted this week by jitters over slowing global growth and Beijing’s regulatory crackdown on tech businesses.

The S&P 500 closed down 0.5 per cent, although the blue-chip index still notched its sixth consecutive month of gains, boosted by strong corporate earnings and record-low interest rates.

The tech-focused Nasdaq Composite slid 0.7 per cent, after the quarterly results of online bellwether Amazon missed analysts’ forecasts. The tech conglomerate’s stock finished the day 7.6 per cent lower, its biggest one-day drop since May 2020.

According to Scott Ruesterholz, portfolio manager at Insight Investment, companies which saw significant growth during the pandemic may see shifts in revenue as consumers move away from online to in-person services.

“[Consumers are] going to start spending more on services, and so those businesses and industries which have benefited in the last year, companies like Amazon, will be talking about decelerating sales growth for several quarters,” Ruesterholz said.

The sell-off on Wall Street comes after the continent-wide Stoxx Europe 600 index ended the session 0.5 per cent lower, having hit a high a day earlier, lifted by a bumper crop of upbeat earnings results.

For the second quarter, companies on the Stoxx 600 have reported earnings per share growth of 159 per cent year on year, according to Citigroup. Those on the S&P 500 have increased profits by 97 per cent.

But “this is likely the top”, said Arun Sai, senior multi-asset strategist at Pictet, referring to the pace of earnings increases after economic activity rebounded from the pandemic-triggered contractions last year. Financial markets, he said, “have formed a narrative of peak economic growth and peak momentum”.

Column chart of S&P 500 index, monthly % change showing Wall Street stocks rise for six consecutive months

Data released on Thursday showed the US economy grew at a weaker than expected annualised rate of 6.5 per cent in the three months to June, as labour shortages and supply chain disruptions caused by coronavirus persisted.

Meanwhile, China’s regulatory assault on large tech businesses has sparked fears of a broader crackdown on privately owned companies.

“It underlines the leadership’s ambivalence towards markets,” said Julian Evans-Pritchard of Capital Economics. “We think this will take a toll on economic growth over the medium term.”

Hong Kong’s Hang Seng index closed 1.4 per cent down on Friday, while mainland China’s CSI 300 dropped 0.8 per cent, after precipitous slides earlier in the week moderated.

Japan’s Topix closed 1.4 per cent lower, after the daily tally of Covid cases in Tokyo surpassed 3,000 for three consecutive days. South Korea’s Kospi 200 dropped 1.2 per cent.

The more cautious investor mood on Friday spurred a modest rally in safe haven assets such as US government debt, which took the yield on the 10-year Treasury, which moves inversely to its price, down 0.04 percentage points to 1.23 per cent.

The Federal Reserve, which has bought about $120bn of bonds each month throughout the pandemic to pin down borrowing costs for households and businesses, said this week that the economy was making “progress” but it remained too early to tighten monetary policy.

“Tapering [of the bond purchases] could be delayed, which in many ways is not bad news for the market,” said Anthony Collard, head of investments for the UK and Ireland at JPMorgan Private Bank.

The dollar, also considered a haven in times of stress, climbed 0.3 per cent against a basket of leading currencies.

Brent crude, the global oil benchmark, rose 0.4 per cent to $76.33 a barrel.

Unhedged — Markets, finance and strong opinion

Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday



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US regulators launch crackdown on Chinese listings

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US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.



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