The Hindu Business Line : Bail-out: No marks for UTI, yet

FOR existing investors in the UTI's assured returns schemes, the fact that the Government will meet the shortfall between assured returns and actual performance and ensure capital protection provides a high degree of comfort. They constitute the second large mass of UTI investors sheltered from the Fund's mismanagement of assets.

The first, of course, are those in US-64, which has had a bail-out package aggregating close to Rs 9,700 crore in the last three years. That the Government had to bankroll contractual obligations in assured returns schemes was clear from the beginning, after it had extended a helping hand to US-64 which had no such obligation.

Not a confidence measure: But the fact that the commitments made by the UTI are being met should not in any way be treated as reason for investor confidence. The commitments are not being met by performance-based returns. For investors, the best shelter is the one where sustainable returns are available based on actual performance.

That is not case with US-64 and assured return schemes.So investors should view the bail-out with a high degree of scepticism (except for the fact that those invested in these schemes will get a decent packet).

They should not let this aspect influence their investment decision-making in other UTI schemes in any significant way. This is despite the fact that the UTI's management has expressed the view that the package would "re-inforce confidence in the largest fund manager''.

Go by performance: Far from it. Investors should ignore this whole business of bail-out and look at UTI schemes purely on performance basis. In fact, the yardstick to evaluate the UTI would be the performance of what is now officially called UTI-II, which is to be vested with the NAV-based schemes. US-64 will be vested with UTI-I as also the assured return schemes where there are problems and the Government is set to bail-out them.

In the category of NAV-based schemes, the UTI has a few with a good track record such as UTI Bond Fund, UTI Petro Fund, UTI Services Fund, US-95 and UTI Index Select Equity Fund. Most other schemes have turned in an unimpressive performance.

They may have beaten the benchmark indices but the actual returns to investors have been on the low side. Some of the larger schemes, such as Mastershare, Mastergain 1992 and Masterplus, fall into this category.

Negative factors out: But what the restructuring would do for UTI-II schemes is to remove the negative factors that were the legacy of US-64 and assured return schemes:

The management of funds in these schemes would no longer be subject to the pressures imposed by the requirements of US-64. Since 1997-98, the problems of US-64 were the Fund's prime concern. This meant that quite a few other schemes suffered as a consequence.

Especially when it came to churning the portfolio, the impact of actions in a scheme on US-64's portfolio value appears to have had a bearing on other fund's performance. This may not have been the case in the last one year when there has been a higher degree of transparency.

The major factor that affected many UTI schemes is the inter-scheme transfers (a trend which has been marginal only in the last one year). For private sector schemes — especially those with FII linkage — inter-scheme transfers have been less than a percentage of net assets. But for US-64, inter-scheme transfers were almost a way of life. In fact, its dividend in 2000-01 of 10 per cent was solely due to the profits generated from inter-scheme transfers.

The sheer size of the schemes with problematic assets — at around Rs 35,000 crore before the recent redemption of a few schemes — was also a factor that weighed on the other schemes in the 1990s.

For long, the UTI did not have clearly identified fund managers, and stocks were often sold and allocated to various schemes. In such a structure, the primacy accorded to schemes such as US-64 and Mastershare (both of which had a track record of regular dividends since 1964 and 1986 respectively) was only to be expected.

Judgment period: In the last year so, there were indications that decision-making has moved to a scheme-specific basis, which is how it should be. The full effect of the changes (the two-way split) may be evident only over a two-to-three year period.

The performance of the NAV-based UTI-II schemes would then provide a good indicator on whether UTI is a fund in which investors can repose confidence.

Till then, it is better to ignore any claims to this effect and just track the performance of these schemes.

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