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Sunday, Jul 06, 2003

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`Fund managers have greater accountability' — Mr A. K. Sridhar, Chief Investment Officer, UTI Mutual Fund

Aarati Krishnan

A spanking new office at the Bandra-Kurla complex and a new public face are just the visible facets of the transformation that UTI Mutual Fund has silently wrought over the past year. The fund has brought about significant changes in areas such as fund management and investment-monitoring systems. Mr A. K. Sridhar, Chief Investment Officer at UTI Mutual Fund, speaks to Business Line on the changes ushered in at UTI Mutual Fund. The focus is on a tighter rein on costs, performance-based pay and an elaborate state-of-the-art system of checks and balances to ensure adherence to prudential investment norms.

Excerpts from the interview

What has changed about fund management at UTI?

Earlier, decision-making for fund management was centralised and power concentrated in a few hands. Starting from September 2001, we have decentralised the decision-making, bringing in specific fund managers for each fund. Each manager focusses on two-three schemes and decision-making ends with him. We have 10 fund managers now — four handling pure equity funds, four handling debt and balanced funds and two handling the offshore funds. The fund managers get inputs from the advisory team and they execute their decisions through the dealing room. We have consciously adopted a five-layer structure.

These are: Advisory, fund management, dealing, back-office and compliance/audit. Each has complete independence and will report directly to the CEO. This is a structure that you will probably not find at any of the funds in India, mainly because this elaborate structure can be used only with funds that manage a very large asset base.

The final decision-making rests with the fund manager. What is your role in the investment process?

Every fund manager normally arrives at a strategy for his fund, probably once every three months.

This strategy paper is discussed with me. I also have a final say on asset allocation for each fund. I also ensure that investment decisions made by the fund managers are compliant with our investment policies and rules.

And, finally, I measure performance. I leave individual stock selection to the fund managers.

Are the fund managers new recruits or have they continued from the earlier dispensation?

They are not new. Back in 1991-92, UTI started directly recruiting fund managers from management schools. Most of our fund managers belong to the 1993-94 cadres. Earlier, these fund managers played a suggestive role. They were not hands-on fund managers and were not clearly responsible for the schemes for which they made suggestions. But we have now fixed responsibility with them.

Have you linked fund manager pay to their performance?

Yes. Since July 2002, we have introduced a variable pay concept, which links pay to performance.

All fund managers get a base pay; but the "incentive" is linked to performance. We measure the performance of each fund vis--vis a benchmark. A percentage of the out-performance is paid as incentive to the fund manager.

As Chief Investment Officer, I take home an incentive only if the performance of all the fund managers adds up to a positive figure. But variable pay applies to staff outside fund management too. We have a different version of the concept for the marketing department. Our advisory team runs a model portfolio which we use to measure performance.

For our dealing function, we measure performance based on the weighted average price secured for each deal. We measure this price against the prevailing market price to measure his efficiency. This set-up has fallen in place very smoothly over the past year.

UTI Mutual Fund's asset base is a third of the former UTI's. Yet all the employees of UTI have been absorbed under UTI Mutual Fund. How will expense ratios be maintained? (SEBI mandates that fund expenses cannot exceed 2.5 per cent of assets managed.)

We are confident of maintaining the expense ratios. To start with, we receive support fees from UTI I for any services that they get from UTI AMC. But we are already preparing for this. We have already transferred employees to UTI Investor Services Limited (ISL) and will continue to do so.

We are trying to position UTI- ISL as a BPO company, which will provide back-office services to a range of customers. We have already accepted the processing of PAN cards for the Income-Tax Department. We may also provide other back-office services for banks and other customers. We expect to move a large part of our employees to ISL. Those who are unwilling to move may be offered a VRS package. So I am working on two initiatives to cut costs. One is to reduce our costs and the second is to improve the asset base, so that our costs remain in check. The exercise has already started and we expect everything to fall in place over the next six months.

Have you overhauled the investment process? Do you have ceilings on your holdings in individual stocks and sectors?

Yes, we have. In fact, we drafted a comprehensive set of investment policies just before February 1. The first step was to make all our schemes SEBI-compliant before February 1, which we did. Then, we set up norms on the prudent limits for exposures in different schemes. We have tried to lay down policies for every market we operate in.

We also have a separate set of norms for investments in IPOs and investments in private placement issues.

How are these enforced?

We have also captured these norms in our front-office automation system. The system automatically enforces certain controls, and risk measurement norms on investment decisions of our fund managers. Today, all of our investments are routed through the system; nothing is manual. Through this, I can see, live on my screen, what each fund manager is doing with his portfolio today. The system automatically stalls investment decisions which exceed prudential exposure limits or do not meet certain criteria that we apply.

This includes elaborate checks and balances. Say, if a fund manages Rs100 crore, if it trades more than 20 per cent of the fund size in a day, it alerts me. When a buy order will lead to us acquiring a significant portion of the paid-up capital of a company, the system again alerts me. If anybody disturbs a fund size over and above a certain limit, the system alerts me. All such transactions will be required to be re-confirmed by me.

Will all this improve fund performance?

Give us a year-and-a-half, and I am sure we will be able to show performance. We have restructured the portfolios of our schemes and each now has a fundamentally strong portfolio with a strong investment rationale. But this will take some time to deliver.

Your equity schemes have traditionally invested largely in index stocks. But much of the market action over the past year has been outside of these stocks. Will you consider changing your investment focus?

I will not consider change for the sake of change. I admit there are some very good second-line stocks and we have bought them for our mid-cap fund-the Master Value Fund. But we cannot think of buying the stock for a large fund like Mastergain. To acquire a significant exposure for this fund we may have to acquire a significant portion of the floating stock for some of the smaller stocks.

We would not be comfortable with such exposure. A Rs 50 crore or Rs 100 crore fund may be in a position to buy such stocks and drop them, in the event of poor performance. Nor do I believe in buying a very small exposure, just for the sake of adding a stock to the portfolio.

This would mean holding 100 or 120 stocks in my portfolio, which is not effective. But we do reserve 10-15 per cent of our bigger funds for investments in second line stocks and we do pick them. The portfolio composition of larger funds, such as Mastershare and Mastergain, have also changed a lot over the past few months. The markets have become far more liquid than before and this has helped our restructuring.

The performance of your equity funds has not been very impressive...

I believe that our portfolios are quite strong, fundamentally. On a one-year return basis, two of my funds are in the first quartile. All other funds are either in the second or third quartile, none in the last quartile. But give us some time and I am sure performance will improve. The action in the markets in recent times has been of a hit-and-run nature.

But I think the real action will happen over the next six months, when I expect a re-alignment of valuations. If interest rates decline further, some of the liquidity is bound to enter the equity markets. I think this time the mid-cap rally is far more reasonable and linked to fundamentals than the one in 1999.

The concept of dividend yield appears to have made a comeback. Would you invest based on the dividend yield of a stock?

I think it is a welcome trend. With interest rates declining so sharply, the concept of dividend yield was bound to make a comeback.

Today, some of the companies are borrowing at rates lower than their stock's dividend yield. Some triple A companies find their debt issues subscribed within an hour of their floatation. But the same company's stock may be languishing, though the dividend yield is much more attractive. But I will not buy stocks based on dividend yield. It will just be one of the inputs I use. I may, however, use the dividend yield to decide whether to sell a stock. If the dividend yield is attractive, I may not liquidate the stock. Or I may not liquidate it unless I find another stock to replace it with an equally attractive yield.

"Buy and hold" does not seem to work in the Indian context. Investors who regularly book profits on their stocks are the ones who have been successful in generating reasonable returns...

Yes. But I think if you stick to certain exposure limits for individual stocks, that takes care of profit-booking. So does a good dividend distribution policy. Say, if I have a 3 per cent exposure to a stock and the stock triples, the exposure will triple to 9 per cent.

I may automatically book profits in the stock because I am not comfortable with that exposure. So it is the weightage that matters and not the absolute price. I do not believe in booking profits based on target prices and stop-losses.

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