The Hindu Business Line : `We expect earnings to grow at twice the GDP rate'<br> Mr A. K. Sridhar, Chief Investment Officer, UTI Mutual Fund

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`We expect earnings to grow at twice the GDP rate'
Mr A. K. Sridhar, Chief Investment Officer, UTI Mutual Fund

Aarati Krishnan

Fund management is in some respects, like a cricket game. Individuals do matter, but they need to be good team players. An individual may have great talent in batting or bowling. But he cannot function without the team.

WHAT has changed at UTI Mutual Fund after the recent stake sale by the Government to four new sponsors? How is the fund coping with the churn in its fund management team? Business Line caught up Mr A. K. Sridhar, the Fund's Chief Investment Officer, to find out. Mr Sridhar was in Chennai to flag off the new UTI Leadership Fund. Excerpts:

How do you explain the trend of fund managers quitting mutual funds to move to private equity or hedge funds?

Whenever the GDP of a country grows this sharply, you are bound to have more opportunities. Today, the movement is because of the growth and visibility of India and the expansion of opportunities in private equity, venture capital and BPO research, every country allocation manager is having one research analyst/fund manager here. When the size of opportunity suddenly expands by 4-5 times, supply cannot catch up.

The easy platform for someone wanting to get an immediate start on the market is to hire an experienced man. This is a transitional issue. Maybe one year down the line, you will have supply picking up as more people are trained for this profession and are ready to deliver.

You have had two or three senior fund managers quitting to join other houses. How are you replacing them?

We believe people are very important in fund management because they contribute to the ideas; but at the same time we rely on process-driven fund management. For every fund, we have a fund manager and one or two assistant fund managers to back him.

We also have a team of 10 research analysts to track the sectors and companies. So, at any point of time, we have at least 30-40 professionals working in the funds, dealing and research. This is slightly costly because we have to maintain a larger team. But I believe it is worth the cost in the long term.

We did have a couple of exits from our team. But we have been able to seamlessly graduate the assistant fund manager to fund manager status because of this system. The fund managers who took over were not from the market; they were from our research team.

Now we have Mr Chandraprakash Padiyar managing our value and mid cap funds, Ms Gautami Desai and Mr Sidharth Dembi managing some of our large equity funds and Mr Amandeep Chopra overseeing monthly income plans. We have clearly demarcated research, dealing and funds management. Anybody who wants to become a fund manager will have to first spend 3-5 years as a research analyst, and then to dealing briefly. Only then, can he progress to fund management.

Process-driven research can help, but isn't there a substantial individual input in selecting stocks?

Fund management is, in some respects, like a cricket game. Individuals do matter, but they need to be a good team player as well. In cricket, an individual may have great talent in batting or bowling. But he cannot function without the team. He needs fielders to back him up, he needs practice, he needs a coach and he also an audience to applaud. So a fund manager is important, but without the team he cannot function. I have seen from experience that only a few people are cut out to be fund managers. A few analysts may be best suited to do research and would prefer to remain in research through their career.

Last year, you spoke of a performance-linked compensation system for UTI Mutual Fund. Is this now completely in place?

Yes, we have taken the help of Hewitt Consultants to restructure paypackages for all our personnel. Fund managers will now be compensated on the basis of performance of their funds. Even marketing professionals and operational people are covered under the performance linked compensation structure. For senior people such as the CEO, it will be a combination of four or five parameters.

We also have a `balanced scorecard system' by which we have key result areas for each person, on which we appraise them.

The Indian markets are already valued at a premium to the other emerging markets. Aren't valuations stretched?

Investors should expect earnings growth to stabilise at lower levels over the next couple of years, from 20 per cent plus to about 16-17 per cent. We expect the earnings of the listed universe of stocks in India to grow at twice/thrice the GDP growth rate.

However, this still provides justification for the present valuations. The Indian market is now trading at a trailing PE of about 20 times and a forward PE of about 16 times.

Though this seems steep, when you compare it to other emerging markets such as Korea, Russia or Brazil, the Indian market probably deserves this premium.

India's GDP growth is consumption driven, the population is getting younger and richer and Indian companies have better financial and operating parameters than those in other emerging markets.

We are also relatively insulated against a global slowdown whenever it happens.

You also have to look at the possibility of a higher amount of the domestic savings getting diverted into the equity markets.

After a sharp re-rating over the past six months, valuations of quite a few large cap stocks are at a substantial premium to the 16-17 times that you are mentioning. Is this a good time to launch a Leadership Fund?

The word `leadership' is very generic. How you define `leader' is very important. The definition we have adopted for this fund is unique. We plan to select these leaders on the basis of high market-share and strong brand equity. Leaders usually have better operating efficiencies and access to cheaper capital. This makes them better placed to weather economic cycles and handle a slowdown, should one occur. We have back-tested the results for a portfolio of leaders for the past five years and have found that the leaders also make up a good defensive portfolio in a falling market such as the one from mid-2000 to mid-2003.

This apart, we also expect the listed universe of leaders to expand as the government disinvests from some of the large PSUs. You should also remember that the listed universe, in India, is skewed towards certain sectors. We expect many more strong companies, leaders in their businesses, to enter the listed domain over the next few years. This will present us with more opportunities for this fund.

What has changed at UTI Mutual Fund after the stake sale to the four public sector sponsors?

When UTI Mutual Fund first came into being as a separate entity on February 1, 2003, the sponsors, namely SBI, Punjab National Bank, Bank of Baroda and LIC, had only contributed the bare legal minimum of Rs 2.5 crore each towards the company's capital.

Now, after paying the full value of the organisation to the Government of India, they are the complete owners of the UTI Mutual Fund. This has had three implications. With effect from the date of the deal, UTI Mutual Fund has become a completely privately owned fund, with no government role.

Second, none of the employees, directors, sponsors will be on our Board, from now on. This makes us a completely independent professionally-run mutual fund house.

Third, we have reconstituted our Board. We have a blend of professionals from diverse fields now represented — an academician, an HR specialist and prominent people from the investment area and the corporate world as well.

What has this meant for your fund management operations?

Nothing has changed in the fund management operations. We will continue to emphasise fund management processes. With new and professional Board members, our products, risk control measures and HR initiatives will only get a further boost.

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