Academics accuse Morningstar of inaccurate assessment of bond funds, and other business-critical industry news

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Luxembourg Funds Intelligence Briefing
18th November 2019

A study by US-based academic researchers says Morningstar is understating the risk to investors by relying on self-reported summaries from US fixed-income funds that exaggerate their holdings of triple-A and double-A rated bonds. The true portfolio breakdown was obtained from data filed by the funds with the Securities and Exchange Commission. The researchers estimate that around 30% of high and mid-range credit quality funds have received a less risky classification from Morningstar as a result, saying this makes the funds look like a better value than they really are.

— Simon Gray, Editor in Chief


Sustainable Finance
Adoption of sustainability criteria will take time: Union Investment’s Schindler

Sustainability criteria will play a growing role in the regulation of banks, insurers and asset managers, but it will take time to fully filter through into concrete rules, according Alexander Schindler, an executive board member at German asset manager Union Investment. He says European regulators are focusing more on sustainability but recognise there is still insufficient data to gauge risks. For this reason, Schindler doesn’t fear over-regulation, but expects firms to adopt environmental, social and governance criteria step by step.

Best source:

Börsen-Zeitung

(subscription required, in German)


Asset Management
Morningstar is mis-classifying bond funds by understating risk: academics

Morningstar has come under fire for allegedly mis-classifying bond funds by relying on self-reporting on holdings that overstate the proportion of high-quality bonds. US university professors Huaizhi Chen, Umit Gurun and Lauren Cohen say as many as 30% of high-end funds were rated less risky than they are in reality, encouraging investors to buy improperly classified products. Morningstar says the critics have misunderstood its proprietary methodologies.

Best source:

Financial Times

(subscription required)


Fund Services
Banque Havilland to distribute BlackRock private equity ELTIF

Luxembourg’s Banque Havilland is to offer its clients the BlackRock Private Equity Opportunities ELTIF, which offers direct investment in a portfolio of private equity assets through co-investments and is designed to offer investors access to an institutional private equity solution within a regulated framework. Stefano Torti, asset management and advisory group head at Banque Havilland, says the offering gives private clients access to the same alternative investment opportunities as institutions.

Best source:

InFinance


Regulation
Fund directors to sue PwC Luxembourg over failure to report loan defaults

The board of troubled investment fund LFP I SICAV SIF is suing PwC Luxembourg for damages of almost €6m, claiming the auditor failed to warn investors that loans extended by the Aventor Funds sub-fund were in default for three years, by which time Aventor was in liquidation. The lawsuit alleges that PwC also attributed the wrong maturity to the loans, and maintained their value in the accounts despite the defaults. Aventor is one of at least four sub-funds of LFP I that have collapsed amid allegations of mismanagement and fraud, along with the Columna Commodities Fund, BlackStar Commodities Fund and Equity Power Fund. The board is also suing fund administrator Alter Domus, which acquired LFP I’s management company, Luxembourg Fund Partners, in 2017, an Antwerp-based businessman who is accused of defrauding the Equity Power Fund, and Luxembourg-based Société Générale Bank & Trust, which was custodian to the Columna fund.

Best source:

Luxembourg Times

(subscription required)

Natixis’s H2O Asset Management reportedly breached UCITS rules on counterparty risk

London-based H2O Asset Management, a subsidiary of French investments bank Natixis, is reported to have breached limits on counterparty risk during its liquidity crisis in June, when clients redeemed €8bn from the funds after reports of illiquid bond holdings linked to controversial financier Lars Windhorst. The annual report of the Allegro fund contains a disclosure by auditor KPMG that the fund exceeded the 5% limit on net assets from non-bank institutions imposed by the French law on UCITS, with 9.9% exposure to a single counterparty.

Best source:

Financial Times

(subscription required)


Technology
LHoFT and UK body launch Luxembourg Academy of Digital Finance

The Luxembourg House of Financial Technology and the UK-based Centre for Finance, Technology and Entrepreneurship have established the Luxembourg Academy of Digital Finance to provide training in financial technology. The institution, which will cover areas such as blockchain, AI applications, digital asset management, regulatory compliance technology, insurtech and cyber-security, is intended to contribute to the digital transformation of Luxembourg’s financial industry.

Best source:

InFinance

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