Waiting for the Sun

Leo Puri has a plan to help UTI AMC get its mojo back. But it may be difficult to make it work.
by Mahesh Nayak   Delhi     Print Edition: February 26, 2017
Waiting for the Sun

Leo Puri, Managing Director, UTI MF, has been meeting top executives of sponsor shareholders Life Insurance Corporation (LIC), State Bank of India (SBI), Bank of Baroda (BoB) and Punjab National Bank (PNB) to convince them to let the fund list on an exchange. The aim is to put life into a fund that, in spite of giving respectable returns and earning decent profits, has been consistently losing market share. While the listing proposal has been sent to the finance ministry, UTI MF has asked an investment bank to start the process for the public issue . "The goal is to create an independent asset manager that is professionally managed, has a culture of meritocracy, and is listed and widely held," says Puri.

There is another reason too. A stock market listing will secure UTI MF's existence - after all, institutional shareholders SBI and LIC are said to be interested in merging UTI MF with their own fund houses. "It all depends on synergies and each other's strengths. We would like to see what UTI MF brings to the table," says a senior SBI MF executive, on condition of anonymity.

"While SBI has other intentions, it has not been able to get support from other shareholders, and so the only way out is to list. That will be in the interest of all stakeholders," says Puri. Most shareholders, including T. Rowe Price, LIC, BoB and PNB, support listing. "It's a matter of time before UTI MF is listed on an exchange," says Puri.

Listing or no listing, the moot point remains - will UTI MF, once among the top ranked mutual funds, be able to get its mojo and independence back? Or, will the big shareholders continue to fight among themselves, even as it keeps ceding market share to rivals?

Second-Time Lucky?

This is UTI MF's second attempt at listing. In 2008/09, bearish market conditions had forced it to drop the plan. That time, it was valued at Rs 2,500 crore. Thereafter, all four shareholders, LIC, SBI, PNB and BoB, sold 6.5 per cent share each to T. Rowe Price, which paid Rs 650 crore for the 26 per cent stake.

In 2015/16, UTI MF posted a profit of Rs 266 crore. Financial services companies are, as a thumb rule, valued at nine-ten times profits. This means UTI AMC will at best get a valuation of Rs 2,700 crore, up just 8 per cent from the 2009 figure. At 3 per cent assets under management, or AUM, it will be valued at Rs 3,900 crore, on the basis of the December 2016 AUM. "The way the business has been functioning at UTI MF, they should be happy that the valuation has not been eroded," says a senior industry official involved in the T. Rowe Price deal.

Are things really that bad at an institution that, from 1964 to 1987, was for retail investors the only vehicle for taking indirect exposure to capital markets? And, can listing and other changes in strategy stem the slide and transform its fortunes?

The Slide Story

Swati Kulkarni, Executive Vice President & Fund Manager, UTI MF, remembers how, around the turn of the century, the asset management company, or AMC, used to look at overtaking SBI. "We used to set targets to overtake SBI in assets," she says. In 2000, SBI's assets were over Rs 2.61 lakh crore, compared with UTI's Rs 76,547 crore. In 16 years since then, SBI's assets have risen 8.5 times to Rs 22 lakh crore; UTI MF's AUM was just Rs 1.29 lakh crore in Deceember 2016.

Even among mutual funds, UTI MF has been losing market share in terms of AUM. In March, for the first time, it slipped from the top five slots.

"Being conservative at the start of the century is the reason we lost out to competition," says Debashish Mohanty, President & Country Head, Retail Business, UTI MF. "Unlike competition, which chased AUM and alpha without considering risk or doing business at a loss - with focus on increasing market share and then exiting - we followed a conventional approach. This meant keeping profitability in mind. Yes, there have been gaps, but we have been slowly closing them," he says.

One of the biggest blows for UTI was the 2003 split under the government bailout package for meeting liabilities on the flagship US-64 and assured return schemes. UTI-I got US-64 (for which an assured repurchase price was announced) and assured return schemes while net asset value-based schemes were shifted to UTI-II. This meant loss of crucial years for putting the house in order, giving competitors an opportunity to poach customers. Second, after 2003, banks started playing a big role in selling mutual funds, and UTI MF started using the banking channel to sell funds only in 2007. Third, focus on non-retail cost it dearly.

SRIKANTH MEENAKSHI Founder and Director, FundsIndia.com “In our seven-year association with UTI MF, the past two years have been the best in terms of engagement and outreach. Of the 45 funds that we recommend, fi ve are from the UTI MF stable”

But can it bounce back? Though there is no escaping the fact that UTI MF has been losing market share, one can say that the worst seems to be over. The difference in AUM between it and the next in rank, Kotak AMC, is over Rs 48,000 crore. "They will have to mess it up really bad to go down further. It won't be easy to dislodge UTI MF from its current rank," says a senior industry official, on condition of anonymity.

Does that mean recovery is on the cards? It's too early to say that, according to experts. "In our business, you have to deliver returns. UTI MF's returns have been mediocre, the primary reason it has lost out to competition," says a senior industry executive. "After all, the game is about AUM. The bigger the AUM, the bigger the profits," he says.

In the one year ended December 2016, UTI MF's funds have given an average return of 8.14 per cent, almost similar to what the top 10 fund houses have given (8.25 per cent). In equities, though, its one-year returns have been dismal - just 3.24 per cent - compared with the 6.4 per cent given by the top 10 fund houses. Since 2003, the market share in terms of AUM has declined from 17 per cent to below 8 per cent. Prior to the 2003 split, it was 68 per cent. (See Shrinking Share).

Looking for Relevance

"While the AMC has been increasing its reach, it all boils down to performance and making a mark on minds of investors. UTI doesn't have a great recall value today," says Hemant Rustagi, CEO, Wiseinvest Advisors. "Their performance lacks consistency. They do not have any evergreen fund that one can recommend to clients," says Pawan Agrawal, Founder of investguru.in, which advises 4,000 clients. "Every fund and fund manager goes through a bad period but bounces back. In case of UTI AMC, the bounce-back period has been long. This doesn't give us the confidence to recommend its funds to clients. They are also poor in product differentiation," he says. Agarwal cites the example of three large-cap funds - UTI Equity, UTI Opportunity and UTI Top 100 - all of which have a 80:20 concentration of large-cap/mid-cap stocks.

"They have been late. During the past few years, when the biggies were launching close-ended equity funds and debt funds, UTI MF hardly launched any fund, which was one of the reasons it lost market share," says the CEO of a domestic mutual fund.

PAWAN AGRAWAL Founder, investguru.in “They lack consistency in performance. They do not have any evergreen fund in their bouquet of products that one can recommend to a client...they are also poor in product differentiation”

"In short, it was role reversal between us (UTI MF) and others. We started chasing institutional money and our competition focused on retail assets and started growing the market," says Mohanty. "But now, things have changed. Close to 80 per cent energy now goes into cracking the big guys with a wallet of Rs 50-200 crore, while using the blue ocean strategy to attract clients that are no more with us and have low wallet share." Blue ocean strategy refers to the building of a new, uncontested market space that makes competitors irrelevant.

The plan may be just starting to bear fruit. Says Srikanth Meenakshi, Founder, FundsIndia.com: "Out of our seven-year association with UTI MF, the past two years have been the best in terms of engagement and outreach. They are taking care of distributors and are involved in investor education with different media initiatives. Of the 45 funds across asset classes that we recommend, five are from the UTI MF stable."

Sharpening Focus

Leo Puri, who completed three years at UTI MF in August 2016, feels listing will ensure smooth functioning. But he also realises that it's not going to be easy to bring back UTI MF's glorious days without making fundamental changes in the way it is run. And he is doing exactly that.

"For the first time, we have aligned our sales with operations," says Mohanty, adding, "What is good for the customer is good for me." The step has been taken on a recommendation by McKinsey.

"Investment performance, brand and distribution are the three critical elements of a business model that you need to deploy effectively," says Puri. He agrees that some competitors have had an advantage on the distribution front. "Unlike the large funds, we are not really bank-driven. This has short-term disadvantages as we don't get access to a captive distribution network. Given how important a role banks have played in the past decade, this has certainly been a strategic weakness."

Puri says the listing will improve governance. Once the confusion over ownership is over, he says, they will accelerate the process of building UTI MF into a professional, meritocratic company. "Listing will remove the conflict of interest that exists because our primary shareholders have own AMCs that compete with us. We do see instances where that conflict is felt directly. It's not theoretical. It is a real and actual conflict that we deal with. We need to resolve this, as it's also a regulatory breach, highlighted by Sebi. Therefore, it concerns us," he says.

"We had baptism by fire. The journey is on and our priorities are investor focus and taking care of employees, shareholders and other stakeholders," says Imtaiyazur Rahman, Group President & Chief Financial Officer, UTI MF. "I am not bothered about AUM. My vision for 2020 is making UTI MF a world-class company. We are moving towards it. I want to be an Apple and a Google, a long-term player, and not a short-sighted player."

Puri knows UTI MF isn't a Goliath but a David which has to rethink strategy to ensure it is not swept away. "We're competing with well-resourced capital-driven companies. We know our strengths and weaknesses and may choose to grow inorganically," says Puri.

Whichever way the story turns, the fact is that money flows to the biggies. Performance matters, but size is equally important. It will be interesting to see how Puri manages to keep UTI MF relevant in the face of cut-throat competition. It's not going to be an easy ride. ~


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