The Transformer of UTI

Being a civil servant, U.K. Sinha is a very particular man. For instance, he likes to have his tea black, but not entirely. He likes to add just two spoonfuls of milk to it. That makes the tea a bit richer and thicker without losing its essential bitter-sweet feel.

It is with the same sense of delicate balance that Sinha has run UTI Mutual Fund in the last four plus years. This Bihar-cadre, union finance ministry veteran inherited in 2005 an organisation that had lost its direction and reputation, not to mention the senior talent that had fled the devastation. More and more long-time customers were deserting the asset management company (AMC) every month. The country’s first mutual fund was being overtaken by private sector upstarts in attracting new investors.
Sinha knew he would have to go in for a radical surgery to stop the bleeding at UTI, but it wasn’t clear if the organisation, with its public sector character and devoid of key competitive advantages, had the strength to take it. Sinha would need all the tact and patience that years of government service had taught him.

Cut back to 2010 and you see a revitalised UTI. The brightest stamp of recognition came recently from T Rowe Price, a global investment management firm with assets of over $350 billion that took a 26 percent stake in it.

This has helped UTI reduce its dependence on its four principal shareholders — Punjab National Bank, State Bank of India, Bank of Baroda and Life Insurance Corporation — each of which runs its own mutual fund.

UTI’s customer service has improved so much that it has almost erased the bitter memory of 2001, when the organisation’s assured returns schemes sank it under a flood of redemptions, stopped only by a government bail-out and a split of the company into two.

From there, to becoming the fourth largest mutual fund in the country with 10 million customers, rebuilding assets to nearly Rs. 80,000 crore, attracting the best talent in the industry with competitive pay packages and getting ready for a global presence, UTI has had a phenomenal turnaround under Sinha. It is now working out novel distribution methods to reach out to the next 10 million customers and even stepping into venture capital and private equity.

But just how did he do it? And where does UTI go from here?

A House in Disarray
Over the years, Sinha had built up a reputation for his ability to manage a crisis and pushing through change. The government called him often to sort out some of its big problems. In his stint at the banking division of the finance ministry, Sinha helped banks on bad loan recovery and corporate debt restructuring plans. He contributed to banking, capital market and mutual fund reforms. He also dealt with the Ketan Parekh scam.

Ask him what he counts as his biggest achievement and he recalls resolving a dispute in Jamshedpur in 1978 as a 26-year-old sub-divisional officer. Contractors of Tata Steel were confronting tribals who had been taking metal pieces from the slag that came out of the steel plant. It had led to violence and six people had died. Sinha intervened. He started a co-operative society for tribals and got Tata Steel to help it. Within a year, the society had a school, a crèche and a dispensary and there was bonhomie all around.

At UTI, Sinha got a chance to better that. When the government appointed him the chairman and managing director of the then moribund organisation, Sinha knew he was walking into a place that resembled a war-ravaged field. But UTI still surprised him.

“Four years ago, when I came into UTI, I was shocked to notice that this organisation did not even have a human resource (HR) head,” recalls Sinha. That explained the low employee morale and the fact that 40 of its best people had left. The company was living on the brink. Sinha realised he needed to fix the human resource department before taking any other measure.

After getting the board on his side, Sinha started looking for a new HR head. Finding one wasn’t easy. The rigid organisational structure at UTI was hardly appealing to private sector candidates. Sinha cast his net wider. He eventually found a willing candidate in T.N. Radhakrishna, who came from the information technology outsourcing industry. He didn’t have much of an idea about how a mutual fund functioned. But Sinha wasn’t bothered. He wanted a good people’s person and was convinced Radhakrishna was one such.

 

 

Radhakrishna came on board and almost instantly drew up the priorities. The key morale dampener was the low level of salaries. UTI’s pay packages were linked to PSU banks and were uncompetitive against private sector mutual funds. Radhakrishna decided to go along with the industry norms and raised salaries. Next, he tackled labour issues one by one and moved decisively in showing the door to under-performers. And then, he opened up an employee options scheme for all the employees. All this arrested the talent drain and boosted morale.

Sinha was now free to look at the performance metrics. He realised UTI didn’t have enough good fund managers to make the schemes a compelling investment invitation to investors. In particular, he needed a smart manager for equity schemes. Sinha zeroed in on Anoop Bhaskar, who was heading equity at Sundaram Asset Management, Chennai. It took Bhaskar more than six months to be convinced of the offer from UTI. “It was not an easy decision to come and join UTI. It was still a PSU organisation and I was not sure if I wanted to take this up,” Bhaskar says about his initial hesitation. But soon, Sinha’s persuasion worked and Bhaskar came on board too. “Over the last two years, the performance of our scheme speaks for itself and the overall fund management team is motivated,” says Bhaskar.

Bhaskar basically cleaned up the existing equity portfolio and took a decentralised approach to fund management. Under him, the equity schemes of UTI mutual funds have shown a marked improvement. According to Morningstar rankings, UTI dividend yield and UTI opportunities growth funds have provided the highest returns at 20 percent for the last three years in the large cap category that has a total of 343 schemes. These funds have also maintained high alphas (the ability to give returns above the markets) as compared to any other funds. On his part, Sinha gave his portfolio management team a free hand.

With staffing and performance sorted out, Sinha turned his attention to marketing. Most investment advisors of the day had stopped recommending UTI schemes. The fund house’s presence in the big cities was particularly weak. The big distributors, mainly private banks, focussed on selling private sector schemes and UTI was not even on their radar. Again, UTI had an image that it was a fund house for people above 40 years of age. The young India was giving it a miss.

Sinha asked Jaideep Bhattacharya, chief marketing officer, to come up with a renewed plan.
Bhattacharya pointed out that UTI followed a “horizontal selling architecture” that the same salesperson would handle all types of clients. There was no focus to selling and most salespeople tended to stick to the easy targets, independent financial advisors. The large potential of selling through foreign banks and private banks was thus missed. Bhattacharya suggested moving to a vertical structure, in which separate sales teams will focus on reaching out to specific groups. Sinha gave his nod to this plan and Bhattacharya got down to work.

In the two years before Sinha took over, UTI’s market share had halved to 8.5 percent. Today, the fall has not only been arrested but the share has also begun to climb. UTI schemes now account for 10 percent of the market. “You have to understand that this fall was arrested not by calling in corporate investors. We decided to attack where we were weak and defend where we were strong. Thus we defended our turf in small towns. Even in a bad year of the global crisis, we increased our branch network into 450 districts. Now we understand how to play this game,” says Sinha.

UTI has an offshore fund with a tiny $55 million but has been ranked Number One in performance over three years. The other funds in the category have assets of several billion dollars. The dichotomy is clear. UTI has the performance but isn’t able to scale up the fund size. Sinha hopes that the entry of T Rowe Price will help its offshore funds marketed much better globally. Sinha has not only convinced his four big shareholders to dilute 6.5 percent stake each in favour of T Rowe Price, he is also likely to let the global investment firm raise its stake. He will bet on this international affiliation giving it weight in the foreign markets.

The problems at UTI sometimes boiled down to micro issues that other mutual funds could take for granted. For instance, UTI had four registrars but they did not communicate with each other. That meant simple things like changing an address or bank account detail took months. Customer information was fragmented among the four players. Sinha thought it was unacceptable. He got Karvy Computershare as the sole registrar and migrated all the data to it. While this was a massive exercise, it has gone the farthest in convincing investors about the new customer-friendly face of UTI.

Sinha believes all these changes have prepared UTI for a much bigger play, especially with offshore funds in the global market. He is already drawing up the agenda. Nobody knows UTI outside India but the alliance with T Rowe Price should address that.

But Sinha wants UTI to reclaim its reputation as a financial powerhouse. So, he has launched a venture capital company with a corpus of $175 million. He is also eyeing stakes in unlisted infrastructure companies through a private equity fund that will raise as much as $400 million.

While these two new initiatives will widen UTI’s footprint, Sinha is also fine-tuning his mutual fund business model. In a complete break from the industry’s obsession with asset size, UTI spends much of its energy chasing money from retail investors for equity funds. Sinha points out that what lies under huge assets under management is corporate treasury money parked for very short periods.
He is pushing UTI to reach out to new customers. One of the initiatives taken by Bhattacharya is to sell the schemes through post offices, a credible last-mile connection to the remotest parts of
the country.
UTI is now preparing to adapt to the fundamental changes happening in the industry. “One of the foremost (challenges) being the development of a robust and scalable business model in new paradigm of the no-entry-load regime. If anything, given its strengths, UTI mutual fund should be better positioned than its peers to face up to these challenges,” says Krishnan Sitaraman, director of fund services and fixed income research at Crisil.

But not everyone is convinced UTI is yet on its way to become a financial powerhouse. “It is not that easy,” says the head of a consulting firm that rates AMCs on a qualitative basis. “It still has a legacy of a PSU asset management company. On a qualitative basis, UTI has a long way to go in terms of processes and other aspects of the business. Right now it is just in the middle,” he says.

Critics point out that UTI’s turnaround owes a lot of the three or four lieutenants that Sinha entrusted specific tasks with. If Sinha is called by the government for another assignment or his team leaves, UTI could slip back rapidly. But Sinha doesn’t think leadership succession will be an issue to worry about.
He says the organisation can move on from here, with or without him. And he still looks forward to those two spoonfuls of milk in his tea to give him the energy to tackle any new problem.

­( Edited by S. Srinivasan)