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* Natixis shares down 4.4%, after 11.8% fall Thursday
* Follows review of H2O fund by Morningstar
* HSBC downgrades Natixis, cautious on outflows (Adds KBW analyst note, Castres resignation from Tennor, fund manager quote)
PARIS/LONDON, June 21 (Reuters) - Natixis shares fell on Friday, extending heavy losses on fears that one of the French bank's asset management companies H2O could suffer outflows of client cash after ratings agency Morningstar placed one of its funds under review.
London-based H2O, a key contributor of profits at Natixis Investment Managers, was put in the spotlight on Thursday when Morningstar flagged its review, citing questions over liquidity and governance at the H2O fund.
Morningstar's concerns are focused on H2O's holdings in debt issues from private companies linked to German entrepreneur Lars Windhorst, as well as the fund's board seat on his privately-held Tennor Holdings, which declined to comment.
Concerns about liquidity in funds that allow investors to get their money back on a daily basis have risen recently, particularly in Britain where money manager Neil Woodford was forced to suspend trading in his flagship fund.
Natixis said in a statement on Friday that H2O, which managed $32.5 billion in assets at the end of 2018, had seen outflows of 600 million euros ($678 million) between the start of the second quarter and June 20.
It added that H2O Chief Executive Bruno Castres would resign his seat on the Tennor board and be replaced by H2O's chief investment officer, Vincent Chailley.
Natixis and H2O, one of the bank's boutique asset managers, both defended the fund's holdings on Thursday, and the bank held a conference call with investors and analysts on Friday.
KBW analyst Jean Pierre Lambert, who was on the call, said one of the key issues was Natixis' decentralized governance model of buying up boutique asset managers and letting them operate at arm's length.
H2O is one of 26 affiliates of Natixis IM. Others include Harris Associates and Loomis & Sayles in the United States.
While H2O's relationship with Windhorst could lead to good investment opportunities, it needed monitoring, Lambert said.
"If there is a close relationship at the top level, the risk management function by junior staff runs the risk of becoming clouded and subordinated to the views of senior management," he wrote in a note to clients, flagging an 'underperform' rating.
H2O is recruiting a Paris-based internal controls and compliance officer, a job advertisement on its website showed, tasked with "ensuring that H2O, its employees, and its products meet the principles and rules set out by regulators."
Jerome Legras, head of research at Axiom Alternative Investments, said questions remained after the Natixis call.
"Basically their view is that they didn't do anything wrong so they don't have an internal investigation," Legras said.
"I don't think they really answered the important questions," he added.
Natixis shares were trading down 4.4% at 1010 GMT, compounding Thursday's 11.8% fall.
Downgrading Natixis to 'hold' from 'buy' with a reduced target price of 4 euros from 6 euros, HSBC's Kiri Vijayarajah said he would wait to see if investors withdrew money from H2O.
"Adverse news around high-margin H20 affiliate could prompt outflows and possible forced sales of illiquid positions," he wrote in a note to clients. ($1 = 0.8849 euros) (Reporting by Sudip Kar-Gupta, Thyagaraju Adinarayan, Simon Jessop and Josephine Mason; Editing by Alexander Smith)