Reshuffling of US-64 portfolio gains urgency

By Oommen A. Ninan

MUMBAI, JULY 3. The benchmark Bombay Stock Exchange 30-share sensitive index (Sensex) tumbled by 114 points at close to 3312 today as sentiment on the bourses was affected by the UTI's decision to suspend sales and repurchase of the widely held US-64 units. This is the first time in the scheme's 37-year history that the Trust has suspended both sales and repurchases of US-64 units. It has also announced the lowest ever dividend of 10 per cent for the financial year ended June 30, 2001 against 13.75 per cent in the previous year. In better times, as was the case in 1994, the scheme had paid as much as 26 per cent.

The UTI Chairman, Mr. P. S. Subramanyam, also stated on Monday in New Delhi that the reserves of its flagship scheme would become negative triggering concerns of fresh withdrawals in other schemes managed by UTI. The shares which comprised UTI's core holdings came under severe selling pressure amid fears that the fund could press sales in the event of a sudden surge in redemptions in its other schemes. The top five holdings of US-64 - Reliance Industries, ITC, Reliance Petroleum, Infosys and Tisco - lost heavily as markets anticipated that UTI could be a seller in these counters to make up for the hole in its balance sheet.

``The policy which has been pursued by UTI with regard to US-64 right from the beginning has been a faulty one,'' said Mr. M. R. Mayya, Chairman, Inter-Connected Stock Exchange. They should have related the sale and repurchase prices to the net asset value (NAV). The UTI should have segregated the activities relating to the mutual fund from its other activities, he said. ``They chose not to do so.'' He felt that the present chairman of UTI had brought in realism and started taking necessary corrective steps in this direction. ``This has naturally led to the action he has announced''. Luckily the Finance Minister is contemplating to come out with a salvage operation. The loss in investor confidence, it is hoped, will be temporary.

Management of funds is not an ordinary job. It needs tremendous expertise and these days their performance has to be through more trading activity than investment activity. In other words, constant shuffling of portfolio is a must for a successful operation of any mutual fund as the mutual fund will then make profits not only in a rising market but also in a falling market which is precisely what the foreign institutional investors (FIIs) are doing. Said Mr. Mayya, ``Mutual funds will have to follow the same strategy if they have to survive.''

However, the UTI has all the excuses, and noted, ``the business environment last year saw extremities on all fronts - sluggish industrial growth, volatility in stock markets, successive scaling down of interest rates, both in domestic and international markets, global slowdown, worldwide tech and dotcom meltdown, uneven distribution of monsoon, rising fiscal deficit coupled with lower credit growth in the domestic economy and so on. The mutual fund industry also witnessed lower mobilisation and higher redemptions.''

The UTI further argued that ``despite a market friendly and growth-oriented budget, markets, after an initial euphoric rise to 4272 on March 1, went into a tailspin touching a low of 3184 on April 12, recovering only by 6 per cent to trade in a narrow range ever since.'' Here, the UTI admits that the post-budget rise was an ``euphoric rise''. It further stated that ``the mutual fund industry in India has had its share of problems as a result of the unusual events in both the domestic and international markets. .... Another trend witnessed was the investor preference for liquid and gilt funds across the country..., a closer analysis of sales mobilisation in the industry reveals that some high net worth investors and corporates appear to be churning their investments in mutual funds at a much faster rate. This means that the same investment appears under sales mobilisation a number of times reflecting increased velocity of money or the multiple deposit creation and the resultant increase in sales mobilisation by the mutual fund industry.

The UTI's performance was a setback for retail investors. It has done a tremendous damage to investor confidence in mutual funds as a result of its action. However, Mr. A. P. Kurien, chairman, Association of Mutual Funds of India (AMFI), said, ``Because it is a product specific situation, it has no effect or impact on the mutual fund industry.'' According to him, the unit scheme 64 is a very unique product and by the very nature of it, it has certain problems which have to be solved. If it has to be made market related, then it needs some time to restructure itself and this is what UTI is trying to do.

The fact that the UTI needs six months is probably justified to make all necessary technical and supporting arrangements to move into daily NAV. And also within the six months hopefully, the market will turn positive which will enable the underlying values to go up. This is in the long term interest of the unitholder. Mr. Kurien, who was also the longest serving executive trustee of UTI concluded, ``The fact that the exit route is not there for six months is indeed a limiting factor but on balance of consideration, I think this is the most appropriate thing they can do in the long term interest of the scheme.''

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