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Will UTI Regain Its Glory?

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Some 60,000 milkmen, from the interiors of Bihar, will stand out in any list of India’s most successful retail investors over the past five years. Not many in India have consistently pocketed over 10 per cent returns since 2009 — according to money managers, the most difficult period for high-portfolio yields.

The fascinating story of the milkmen from Bihar investing in bonds and equities dates back to 2006 when Unit Trust of India (UTI) Asset Management forged an alliance with the Bihar State Co-operative Milk Producers’ Federation (Compfed) and offered its members a micro-pension scheme under the UTI Retirement Benefit Pension Fund. The fund, in its first monthly collection, mobilised over Rs 60 lakh across 50,000 initial investors.

“Most of them agreed to invest Rs 100. The arrangement was that we would deduct the amount desired by the milkmen from their monthly milk dues. The collected pool would then be passed on to UTI for investment,” says R.K. Mishra, AGM, Accounts, Compfed. “It is a successful initiative and we intend to continue it. The fund has returned 11.5 per cent over the past few years. Last year, we added 6,000 new subscribers,” he adds.

The milkmen can participate in the micro-pension scheme till they reach 55 years of age. The scheme is a big hit in Samastipur, Barauni and Ara regions of Bihar.

“This initiative helped us touch the bottom of the pyramid. But we have barely scratched the surface. We are trying to expand into rural India.  Our Kanya Suraksha Yojana scheme for the girl child in Bihar is also very popular. We have 17 lakh investors in this scheme,” says Debashish Mohanty, country head, Retail Business, and EVP, UTI Asset Management.



UTI Asset Management (alternatively called UTI Mutual Fund or UTI MF) has often tried to do things differently, albeit with limited success. As a result, the asset management company (AMC) has had a chequered five-decade history — marked with glory, minor victories, disgrace and shame.

In the past, several of the AMC’s schemes, assuring high returns, have failed. Mass-retail rural schemes such as the Rajlakshmi Yojana of 1992, which offered yields in excess of 16 per cent, went bust a few years later. US-64 is another example of how things went from good to bad to worse for UTI. In fact, time has not healed the scars left behind by the failure of US-64 13 years ago.

“As an institution, we will always be linked with it. US-64 has been a double-edged sword for us. The NAV breakdown of US-64 has scarred investor minds,” agrees Leo Puri, managing director, UTI Asset Management.

So, when Mohanty emphasises the need to spread out to micro-geographies with varied products, one cannot but help recollect the fate of some of UTI’s earlier schemes.
 
K.N. Atmaramani, Former Investment Chief, UTI
‘When markets tumbled in 1996 and 1998, the fund found it difficult to pay dividends. This proved fatal’
The Curious Case Of US-64
Seventy-five-year-old K.N. Atmaramani, former investment chief of UTI, remembers the mandate given to him by his boss, G.S. Patel, former chairman of UTI: “Atma, do whatever you want, but please bear in mind, we have to give a dividend that is at least 1 per cent higher than bank FDs”. This message formed the crux of what Patel would tell Atmaramani whenever they discussed UTI’s investments. The year was 1978. Bank rates hovered around 16 per cent per annum. Beating it was by no means an easy task for fund managers. But Atmaramani managed to churn out larger distributable profits.

Atmaramani and Patel had no choice but to perform. They had to meet the expectations of over 2.4 crore investors — many of whom had parked their life savings in the US-64 fund. Launched, as the name suggests, in 1964, it was India’s first mutual fund. 

“US-64 was quite manageable till about 1994–95. After that, the composition of the fund changed. By 1997, US-64 had a 70:30 equity-debt structure. When markets tumbled in 1996 and 1998, the fund found it difficult to pay dividends. This proved fatal for both US-64 and UTI,” says Atmaramani.

According to fund researchers, UTI failed to align its schemes with mutual fund regulations, and this paved the way for some of its marquee funds going bust. The top bosses did not see merit in following the daily net asset value (NAV) mode of fund valuation. They stuck to the old, outmoded ‘repurchase value’ method.

“UTI lacked transparency, which is critical to managing public funds. Its funds would have survived if they had aligned themselves with Securities and Exchange Board of India (Sebi) guidelines,” says Ashvin Parekh, managing partner at the eponymous advisory firm.   
 
The Reserve Bank of India began the process of deregulation of interest rates in the early 1990s. This made interest-bearing instruments such as bonds and government securities (G-secs) market-linked or, in other words, marked to market (MTM).

Post-liberalisation, improved liquidity also led to scaling down of interest rates. UTI was oblivious to such changes. It rolled out assured-return funds, with coupon rates as high as 14–15 per cent, when overall bank rates were sub-12 per cent. There came a point when most UTI funds, including US-64, failed to generate enough distributable profits to pay dividends. The tradable value of assets in their kitty (bonds, G-secs and equities) was far lower than the perceived value (based on which the repurchase value was calculated). This prompted UTI to commit the cardinal sin of digging into its investible pools and reserves to pay dividends.
 
Click here to read interview with Leo Puri
 
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“They should have aligned their portfolios to market values (NAV). More importantly, UTI should have shifted the risk onto customers; it should have stopped assured-return funds when it became difficult for them to generate indicated yields,” says Parekh.

In early 2000, UTI decided to repurchase its fund units at a discount to repurchase value. Investors were given two options: either to tender shares at lower value or sign up for government bonds that paid single-digit coupon rates. Investors viewed this as a betrayal of trust.

The failure of schemes and mismanagement of funds forced the government to split UTI into UTI Asset Management and Special Undertaking Unit Trust of India (SUUTI), in February 2003.

SUUTI, which contained illiquid assets of US-64 and other funds, was wholly acquired by the government. A decade later, and despite the split, the debacle of US-64 and other UTI funds continues to haunt the reputation and credibility of UTI Mutual Fund.

“US-64 is lingering in the minds of people. We need to re-brand UTI Mutual. That, perhaps, will change the perception of people. There is a need for positive recall of the brand,” says Karan Singh, EVP and country head, Banking Channel, UTI Mutual Fund.

The New Avatar
The government got State Bank of India (SBI), Bank of Baroda (BoB), LIC and Punjab National Bank (PNB) to seed UTI Asset Management. According to sources, the banks and Life Insurance Corporation (LIC) paid close to Rs 500 crore for a 25 per cent stake each in the company.
 
Imtaiyazur Rahman, CFO, UTI MF
‘We do not see people as cost centres. People are critical for success’
In 2009, the banks and LIC decided to partially dilute their shareholdings in UTI. Each sold 6.5 per cent of its holdings to investment firm T. Rowe Price for an undisclosed amount, making it the biggest shareholder in UTI Mutual Fund at 26 per cent.

According to fund researchers, the banks and LIC have already recovered their initial investments in UTI Mutual Fund; the next stake sale will bring in super-normal profits for them.

“Both the government and the banks-LIC consortium benefitted from the fall of UTI. The government still makes good money by selling assets locked in SUUTI. In return for bailing out UTI Mutual Fund in 2003, banks and LIC are sitting on highly profitable assets. These entities will make a lot of money when they exit UTI MF,” says Dhirendra Kumar, managing director of mutual fund research firm Value Research. Kumar is of the view that the government must share its gains from SUUTI investments with investors who lost money in UTI schemes such as US-64.

Too Many Cooks?

Banks and LIC may have reduced their stake to 18.5 per cent, but their control over UTI Mutual remains unchallenged. A section of the industry is of the view that the government is using banks and LIC to exert ‘indirect pressure’ on UTI Mutual. Dismissing the opinion, Puri says: “We have a good relationship with all our five shareholders. They have all been supportive of what UTI is trying to do.”

“Our idea is to become a professionally managed AMC. UTI’s shareholding structure will have to reflect that over time. I am sure the decision to offer T. Rowe Price a stake (by other UTI shareholders) was made keeping that in mind,” he adds.

Industry observers like Kumar believe UTI Mutual Fund has a very lopsided shareholding structure. So much so that rather than helping the fund house grow, the shareholders are lassoing UTI to the past, they say.

“UTI has a flawed ownership structure. Earlier, the entity had no parent. Now, it has too many,” says Kumar.

“And these shareholders have conflicting interests. All of them have their own mutual fund houses. Sebi does not allow dual ownership of asset management companies. And that rule is in place for the right reason,” he adds.

Life After The Split  
Following the split, UTI Mutual Fund wanted to dissociate from the past — and quickly. Under M. Damodaran, a career diplomat who was called in to clear the mess, UTI Mutual underwent a thorough rebranding. Damodaran’s first task was to make UTI a lean organisation. He formulated a voluntary retirement scheme (VRS) in 2003–04. The plan helped cut nearly 50 per cent of the workforce. Subsequently, the retirement age was reduced to 58 years from 60.



Interestingly, following the implementation of the VRS and the exit of many from the old guard, the AMC recruited 300-400 young officers for various business verticals. This, in a way, neutralised the effect of the VRS. Today, UTI Mutual Fund has 1,450 employees on its rolls. In comparison, top MFs like Reliance Mutual, HDFC Mutual Fund and ICICI Prudential have between 700 and 900 employees on their rolls.

“People cost accounts for nearly 33 per cent of our total revenues. That said, we do not see people as cost centres. People are critical for success,” says Imtaiyazur Rahman, CFO, UTI Mutual Fund.

Fund researchers and people who have worked at UTI talk about the existence of two worlds within the organisation. The first belongs to old-timers who moved into UTI Mutual after the split. These are people with 20-30 years of experience. The second comprises management graduates from top B-schools.

“We have relevant skills and experience. Ultimately, it is a matter of will, more than skill. I tend to think not in terms of old and new, but in terms of relevance, commitment, loyalty and impact. Merit, rather than seniority, will result in the growth of people here,” says Puri.

The MD’s defence appears weak. There have been quite a few strikes and protests at UTI Mutual Fund. These are mostly spearheaded by members of the All India UTI AMC Officers’ Association.
“The challenge for UTI Mutual will be to bring about synergies between its old and new employees. The youth will have to deliver and justify their presence,” says A.K. Sridhar, who heads the investment desk of a private insurance company. Sridhar has worked as chief investment officer at UTI Mutual Fund.

Consistent Performance
UTI Mutual Fund has turned in an appreciable performance over the past few years. Shortly after the split, the new guard at UTI Mutual broad-based investment decision-making powers held solely by the chairman. An investment committee was formed to look into all matters relating to fund management.

“Investment decisions are taken on the basis of research outcomes; research, fund management and risk management are delinked from each other. So, there is no compromise on the quality of paper we buy,” says Amandeep Chopra, group president and head, Fixed Income, UTI Mutual Fund.

Click here to read interview with Leo Puri

 
 
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“We do not take undue risks when it comes to investments. This, perhaps, is the reason why we did not have any trouble in our fixed maturity plan (FMP) portfolios in 2008, when the whole industry went through a liquidity crunch,” he adds.

UTI’s flagship equity funds such as UTI Equity, UTI Opportunities Fund, UTI Midcap Fund and UTI 100 have outperformed broader markets by a good measure — 3-6 per cent on average. On the fixed income side, funds such as UTI Bond Fund, UTI Floating Rate Fund, UTI Dynamic Bond Fund and UTI Short-term Income Fund have returned between 8.3 and 10.3 per cent over the past three years.

“Large-cap focus helped us generate better returns in the equity portfolio. We stick to our investment mandate; we do not believe in churning portfolios unnecessarily. In the normal course, we stay invested in a stock for two to three years,” says Anoop Bhaskar, head, Equities, UTI Mutual Fund.

While fund managers tom-tom investment frameworks and processes, they are not very conscious about their role as institutional shareholders. UTI Mutual Fund lacks the ‘broad-mindedness’ of an institutional investor when it comes to casting proxy votes on corporate resolutions.

“If I feel a company is going against investor interest, I’ll simply exit the company. I don’t have to vote for the sake of voting. Likewise, if investors do not like our limited participation in the voting process, they can exit the fund,” says a senior equity fund manager with UTI Mutual.

Non-stop Profits
Profits, year after year, have distinguished UTI Mutual Fund. A flawed distribution channel, the absence of an MD for two years, a high wage bill, stagnant asset base, etc., have not impacted its profitability.

UTI Mutual Fund is, in fact, the third most profitable fund in the country after HDFC Mutual Fund and Reliance Mutual Fund. The fund house, on average, has generated profits of Rs 140 crore every year since 2009. It logged profits of Rs 149 crore last year (see Holding Its Own).

“The asset management vertical brings in revenues. We have managed to retain investors in our funds. Also, we have a good product mix. Contrary to popular belief, we do not have ‘old load accounts’ to dig into,” clarifies Rahman. 

The asset base (assets under management) of UTI Mutual Fund has grown the slowest among peers since 2003. UTI topped the list of fund houses till early 2007. In the years that followed, Reliance, HDFC, ICICI Prudential and Birla Sun Life whizzed past UTI Mutual Fund, relegating it to the fifth spot.

“You should appreciate the fact that things have changed in the Indian asset management industry over the past 10 years. Competitive intensity is more these days. UTI was not able to get off the block quickly,” says Puri, adding, “AUM is important and we will not ignore it. We are keenly conscious that we need to re-establish leadership.”

Not aligning with banks and institutional distributors to sell its funds has been the biggest mistake of UTI Asset Management in its 10 years of existence. The trend of selling mutual funds through institutional distributors started in 2005-06. At that time, UTI only focused on retail channels.  “UTI lost out as it did not forge distribution tie-ups with banks and other institutional distributors. We started focusing on institutional channels only in 2008-09. Now, banking channels contribute 8-10 per cent of overall inflows,” says Singh.

Tapping Funds
UTI Mutual Fund boasts a net worth of over Rs 1,046 crore — all of it from fees collected over the past 10 years. The fund house has a strong war chest to finance its expansion plans. “We have lined up plans for the next few years. We may not even shy away from an merger and acquisition deal at the right price and an opportune time. We also have plans to expand our international presence,” says Rahman.

Unit Trust was the first asset manager in the country to launch an India-dedicated fund in 1985. The fund was launched in the UK and managed to raise £20 million in 30 days. Today, UTI Mutual Fund manages overseas investors’ assets to the tune of $2.5 billion, across nine funds.

Apart from managing India-dedicated funds, UTI also plans to strengthen its offshore advisory business. The fund has already started pitching for offshore advisory mandates.

If you split the asset base of UTI (Rs 74,350 crore as on 31 December 2013), the fund house manages Rs 19,473 crore in equities, Rs 8,576 crore in hybrid schemes, Rs 45,696 crore in debt and, Rs 605 crore in commodity-based funds. The focus of UTI Mutual Fund over the past few years has been to ramp up its asset base using debt funds.

“We see UTI playing a significant role in introducing new institutional clients to MFs. We also see a huge opportunity in pension funds in the years to come,” says Smita Vermani, EVP and country head, Institutional Sales, UTI Mutual Fund. UTI manages investments of over 1,900 SME clients.

Bhareth Ghia, country head, Distribution and SME channels, UTI Mutual Fund, intends to tap the SME segment to raise more funds.

The fund house will continue its relationship with independent financial advisors to drive the retail business. “The assumption that no more money can be raised from top-15 cities is wrong. Top-15 cities are not saturated. We will focus on savers across cities and towns,” says Mohanty.

Will The Golden Days Return?
Veteran investment banker Hemendra Kothari believes that UTI Mutual Fund will be able to regain its past glory. “UTI has a great pedigree. The fund house will be able to regain its numero uno spot, provided it gets its strategies right,” he says.

Click here to read interview with Leo Puri

According to management consultant Ashvin Parekh, UTI will have to brave strong industry headwinds; it will have to safeguard its profit and marketshare. Another big challenge for UTI is that it is not as lean and mean as other fund houses. “UTI is still a thick organisation. The trait of nimbleness you so associate with financial services firms is missing in UTI. The fund house needs to be lean and more aggressive,” says Parekh.

Old-timers like A.K. Sridhar stress on the need for more cohesion and teamwork between old and new employees of UTI. “The fund house will also have to be consistent in terms of fund performance,” adds Sridhar.

Dhirendra Kumar of Value Research expects more participation from T. Rowe Price in the running of UTI Mutual Fund. “As of now, I don’t see any change that could propel UTI to the top slot. T. Rowe Price will have to play a dominant role if the fund house is to succeed,” he says.

At the end of it all, one needs to view UTI Mutual Fund as a 50-year-old — the fund house celebrated its 50th anniversary in January — trying to unlearn past practices and adopt new ones. One cannot afford to write off UTI, for the ‘investment monolith of yore’ still manages the hard-earned savings of some 95.6 lakh Indian investors. 

shailesh@businessworld.in; alertsmenon@gmail.com
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(This story was published in BW | Businessworld Issue Dated 19-05-2014)