Myners attacks H2O chief over ‘we will never gate’

City grandee Paul Myners has asked the UK government and financial regulator if they approved a statement made by the chief executive of investment manager H2O that trading in its funds would never be suspended.

Lord Myners, the former City minister who made his name as the long-term chief executive of investment manager Gartmore, said he found it “extraordinary” that Bruno Crastes had made the comment last month after heavy outflows from several H2O funds.

The redemptions were sparked by an FT Alphaville investigation into the funds’ holdings of illiquid debt linked to the controversial German financier Lars Windhorst. Within days of the first report, investors pulled nearly €7bn from H2O funds, prompting a 14 per cent fall in the share price of French bank Natixis, the fund manager’s parent company.

Liquidity mismatches between funds that offer daily dealing and their hard-to-sell underlying holdings has emerged as the most pressing concern for European investors following the suspension of trading, known as gating, of Neil Woodford’s flagship fund last month. The Bank of England and the Financial Conduct Authority, the UK regulator, last week announced a review into the issue, which could result in new rules on fund dealing.

“No fund manager should say ‘we will never gate’, because gating is frequently the right thing to do. But we have bundled it with a run on the bank,” Lord Myners told FTfm.

In a video posted by H2O on June 28, aimed at calming investor nerves, Mr Crastes said: “We never gated and we will never gate.” Last week, Mr Crastes likened the episode to a bank run.

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Lord Myners submitted written questions to parliament, asking whether the Treasury or FCA were consulted by H2O over Mr Crastes’ comments, and whether H2O had been asked to back up the statement with a guarantee or line of credit.

He also asked the Treasury if it intended to investigate H2O over the valuation of its unlisted investments and the accuracy and completeness of Mr Crastes’ statement.

He said he had yet to receive a response. The FCA and H2O declined to comment.

A Treasury spokesperson said: “There is no requirement for asset management firms to discuss their specific investment strategies with either HM Treasury or the FCA, but the FCA is required to approve the investment objective and policy of funds based in the UK.

“The FCA’s detailed rule book ensures that firms treat their customer fairly, and its robust supervision and enforcement powers mean it can, and does, take action where a firm breaches the rules.”

Lord Myners said it was wrong to vilify gating, which is a tool used by fund managers to ensure investors are treated fairly.

“If I’m in a fund, I will reasonably presume that if the manager or the authorised corporate director have gated the fund it’s either because there’s a huge amount of money wanting to come in or a huge amount of money wanting to go out, and they are protecting me,” he said.

“They are protecting me from dilution or protecting me from my portfolio being lowered in quality by the most liquid investments being sold. So when a manager says, ‘we will never gate’, it strikes me as missing the point.”

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Gating rose to prominence in the UK in the aftermath of the Brexit referendum three years ago, when several property funds suspended trading in response to heavy outflows.

UK investors have been frozen in two high-profile incidents of gating in the past year: at GAM, the crisis-hit Swiss manager last summer, and at Woodford Investment Management six weeks ago.

GAM, which locked investors in its absolute return bond funds in August, said last week it planned to draw a line under the issue and return cash to unit holders from Monday.

On Thursday the Bank of England said it was stepping up scrutiny of funds that offer daily dealing but hold assets that are hard to sell, following comments by governor Mark Carney that such funds are “built on a lie”.

“The bank and the FCA review will examine the costs and benefits of aligning redemption terms, including pricing and notice periods, with the typical time it takes to realise market prices for funds’ assets in normal and stressed conditions,” the BoE wrote in its twice-yearly update on the resilience of the UK’s financial sector.



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