 "Pension and international assets will be growth areas: Leo Puri")
Within two weeks of his appointment as managing director of UTI Mutual Fund, the Reserve Bank of India announced tightening of the liquidity adjustment facility, turning the net asset values of short-term debt funds, considered the safest, negative. However, Leo Puri is happy thee NAVs of UTI’s short-term funds turned positive in a week’s time. He tells Joydeep Ghosh & Clifford Alvares they aren’t averse to acquisitions but he is not interested in acquiring ‘just for the sake’. Edited excerpts:
What are the three things that need to be addressed on a war footing?
The distribution pattern changed in the past 10 years. It coincided with the time UTI was dealing with some of its own issues. Due to this distraction, our competitors were able to take advantage of it. We, of course, have recognised that and are making up some of the lost ground, both with the banks and national distributors. The signs are quite encouraging. There has also been the growth of some new markets, such as the pension market (National Pension System. I think we have been reasonably quick to address that. But that market is going to grow a lot. It might not be very profitable initially but it’s going to provide a lot of growth and we certainly want to provide early leadership there.
Assets under management in the equity segment are stagnant, with high redemption. What is the way out?
In part, it is a function of the economic cycles and then, it’s a function of investors’ experience and poor timing. Anywhere in the world, you actually do see risk appetite wax and wane during weak economic cycles. The timing went wrong, as most people entered when the market was clustered around the peak. They then suffered the pain and eventually found themselves caving in when close to the trough. Maybe the industry should bear some responsibility for it and discourage this lemming-like behavior.
Does the industry need more simple rather than complex products?
You do need both. Some segments require clarity, simplicity and security. It’s certainly our view that we are going to create a bedrock of products that will meet those needs with high credit-quality bond products and conservatively managed large-cap blue-chip equity products.
But it’s also a financial planning and asset allocation issue, that for some segments it is appropriate to try and search for alpha in their portfolios. It’s our job to offer different products that can offer alpha. I would stand by that and at the same time, absolutely acknowledge there are segments in which the conservatively-managed portfolio would do wonders.
In recent times, there has been a real push from the advisors on closed-end products for large commissions. Is it the right approach?
It would be unfortunate that the primary reason for selling it is because of large commission. And, it’s a bit unfortunate that the only flows coming into equities are through these products.
There’s an investment rationale for offering the product that essentially says we will not only time the market but will ride through the market and enforce discipline. In theory, an investor can do it on his own. He could just buy a performing large-cap fund and hold it for three years and, frankly, he would have the benefit of flexibility. If you believe you are going to be disciplined enough, the value for the closed-end proposition falls away.
Is there a case for merging some of the schemes?
We do that. There was a period of product proliferation and I think it’s a healthy cycle to just draw a line under some of those funds and merge these, so we go through that process. It’s also a regulatory process and we are doing that.
Till recently, debt mutual funds were considered a safe haven but since July, when RBI announced tightening of liquidity, even these schemes have not been spared. Where can investors find solace?
Debt does carry market risk as well. For a culture which has grown up on some sense of assured returns, guaranteed returns, it would be clearly risky and unhealthy to keep perpetuating that expectation. So, in a way, it’s a sign of maturing of the markets that the entire industry was willing to take the adjustments on net asset value (NAV).
The fact is the risks of investing in debt are that you are still exposed to market risk, if there’s going to be a big dislocation in rates. The belief that there’s a free lunch is what gets investors into trouble. NSEL being the most vivid example, where that product was offered as a risk-free product and gullible investors bought it as a risk-free return. I think we have to communicate that what we are offering is market-based risk products. Our products have done well; we reduced the maturity and we recovered faster.
But in high periods of volatility in rates, with 10-year yields shooting over nine per cent, there is going to be a hit in NAVs.
There has been considerable talk of consolidation in the industry. Is UTI looking for acquisitions?
We are not looking for acquisitions but we are open to it. We don’t need acquisitions in the sense we have a lot of opportunity for organic growth. You don’t get a lot when you acquire a small AMC (asset management company) because you might have a liability with more people than you need, and even the portfolio you acquire could go out.
From that perspective, the raising of capital norms is a good thing. I think 44 players are too many and many of them will not last. But there are a lot of funds that have got stuck at certain AUMs and I obviously don’t see how they will sustain. I believe in Darwin’s theory. There are several nudges coming that will soon decide there is survival of the fittest.
Do you see a recovery in the economy in the near future?
The recovery has to be investment-led. Some efforts have been made but some truly last-mile bottlenecks have to be put in place. That will generate enough confidence that the next wave of investments will come in. It will help other sectors of the economy that have been less affected. But if you ask me where the most delta is likely to be felt, it will obviously be in the more capital-intensive parts of the economy.
What are the three things that need to be addressed on a war footing?
The distribution pattern changed in the past 10 years. It coincided with the time UTI was dealing with some of its own issues. Due to this distraction, our competitors were able to take advantage of it. We, of course, have recognised that and are making up some of the lost ground, both with the banks and national distributors. The signs are quite encouraging. There has also been the growth of some new markets, such as the pension market (National Pension System. I think we have been reasonably quick to address that. But that market is going to grow a lot. It might not be very profitable initially but it’s going to provide a lot of growth and we certainly want to provide early leadership there.
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The last area where we do see growth is in the international arena, where the government is encouraging foreign participation in the bond market, where step by step will bring a lot of interest into the Indian debt market.
Assets under management in the equity segment are stagnant, with high redemption. What is the way out?
In part, it is a function of the economic cycles and then, it’s a function of investors’ experience and poor timing. Anywhere in the world, you actually do see risk appetite wax and wane during weak economic cycles. The timing went wrong, as most people entered when the market was clustered around the peak. They then suffered the pain and eventually found themselves caving in when close to the trough. Maybe the industry should bear some responsibility for it and discourage this lemming-like behavior.
Does the industry need more simple rather than complex products?
You do need both. Some segments require clarity, simplicity and security. It’s certainly our view that we are going to create a bedrock of products that will meet those needs with high credit-quality bond products and conservatively managed large-cap blue-chip equity products.
But it’s also a financial planning and asset allocation issue, that for some segments it is appropriate to try and search for alpha in their portfolios. It’s our job to offer different products that can offer alpha. I would stand by that and at the same time, absolutely acknowledge there are segments in which the conservatively-managed portfolio would do wonders.
In recent times, there has been a real push from the advisors on closed-end products for large commissions. Is it the right approach?
It would be unfortunate that the primary reason for selling it is because of large commission. And, it’s a bit unfortunate that the only flows coming into equities are through these products.
There’s an investment rationale for offering the product that essentially says we will not only time the market but will ride through the market and enforce discipline. In theory, an investor can do it on his own. He could just buy a performing large-cap fund and hold it for three years and, frankly, he would have the benefit of flexibility. If you believe you are going to be disciplined enough, the value for the closed-end proposition falls away.
Is there a case for merging some of the schemes?
We do that. There was a period of product proliferation and I think it’s a healthy cycle to just draw a line under some of those funds and merge these, so we go through that process. It’s also a regulatory process and we are doing that.
Till recently, debt mutual funds were considered a safe haven but since July, when RBI announced tightening of liquidity, even these schemes have not been spared. Where can investors find solace?
Debt does carry market risk as well. For a culture which has grown up on some sense of assured returns, guaranteed returns, it would be clearly risky and unhealthy to keep perpetuating that expectation. So, in a way, it’s a sign of maturing of the markets that the entire industry was willing to take the adjustments on net asset value (NAV).
The fact is the risks of investing in debt are that you are still exposed to market risk, if there’s going to be a big dislocation in rates. The belief that there’s a free lunch is what gets investors into trouble. NSEL being the most vivid example, where that product was offered as a risk-free product and gullible investors bought it as a risk-free return. I think we have to communicate that what we are offering is market-based risk products. Our products have done well; we reduced the maturity and we recovered faster.
But in high periods of volatility in rates, with 10-year yields shooting over nine per cent, there is going to be a hit in NAVs.
There has been considerable talk of consolidation in the industry. Is UTI looking for acquisitions?
We are not looking for acquisitions but we are open to it. We don’t need acquisitions in the sense we have a lot of opportunity for organic growth. You don’t get a lot when you acquire a small AMC (asset management company) because you might have a liability with more people than you need, and even the portfolio you acquire could go out.
From that perspective, the raising of capital norms is a good thing. I think 44 players are too many and many of them will not last. But there are a lot of funds that have got stuck at certain AUMs and I obviously don’t see how they will sustain. I believe in Darwin’s theory. There are several nudges coming that will soon decide there is survival of the fittest.
Do you see a recovery in the economy in the near future?
The recovery has to be investment-led. Some efforts have been made but some truly last-mile bottlenecks have to be put in place. That will generate enough confidence that the next wave of investments will come in. It will help other sectors of the economy that have been less affected. But if you ask me where the most delta is likely to be felt, it will obviously be in the more capital-intensive parts of the economy.