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The Genesis of the Crisis at UTI

Investors must realise that US-64 is no longer a "SUPER" fund, head and shoulders above the market but very much comparable to other in its ilk

US-64 may be a relic tomorrow but it would still make an interesting case study in management schools with some valuable lessons. One, what happens when you pay more than your earnings and two, why is it important to rein in investor expectations. That, in a nutshell, sums up the US-64 saga. Sadly, the monolith of the Indian fund industry miserably failed on both the counts and is now fiercely attempting to redeem itself. The downfall has only been hastened by an attempt to uphold returns with a higher equity allocation, pushing the fund deeper into a quagmire.


The Genesis of the Crisis

It was a smooth ride for US-64 in early 1990s when the fund had a relatively low unit capital coupled with steady income, mostly accruing from high-coupon debt instruments. This also meant a steady accretion to reserves even as dividend was hiked from 18% in 1990 to 26%, each in 1993 and 1994. However, the high dividend yield attracted investors in hordes with the unit capital galloping to Rs 12,020 crore (up 62%) in 1993-94. That year was also the pinnacle for US-64 with the dividend outflow at an all time high of Rs 3125 crore.

Swept off by the huge investor response, UTI attempted to beat the rising expectations rather than explaining investors that such liberal dole outs were a function of the markets and simply not sustainable - in the long term. UTI continued to persist with its image of a "socially responsible institution", without realigning dividends and underplaying the perils of the market.

Even as unit capital surged to over Rs 15,000 crore in 1994-95, yet another dividend of 26% created a hole for the first time as dividend distribution exceeded profits. While the payout was slashed to 20% next year, the net income of Rs 1576 crore fell woefully short of the dividend outflow of Rs 2700 crore. By now, the higher allocation to volatile equities had started to drag down US-64's returns and impact its performance. And, this finally culminated in negative reserves in 1998. Thus, the extravagance of those four years now threatens a 37-year existence.

The Melting of Unit Scheme '64
Year  Unit Capital  Dividend   Dividend  Net Income  Difference
  (Rs Cr)  (%)  (Rs Cr)  (Rs Cr)  (Rs Cr)
1989-90 7025.00 18.00 1264.00 1289.00 25.00
1990-91 7264.00 19.50 1416.00 1640.00 224.00
1991-92 6331.00 25.00 1583.00 2403.00 820.00
1992-93 7410.00 26.00 1927.00 2694.00 767.00
1993-94 12020.00 26.00 3125.00 3486.00 361.00
1994-95 15282.00 26.00 3973.00 3158.00 -815.00
1995-96 13514.00 20.00 2703.00 1576.00 -1127.00
1996-97 14028.00 20.00 2806.00 2449.00 -357.00
1997-98 15869.00 20.00 3174.00 1061.00 -2113.00
1998-99 13544.19 13.50 1828.44 2266.02 437.58
1999-00 15146.26 13.75 2082.61 2597.00 514.39
2000-01 12778.00 10.00 1277.80 1524.00 246.20


The Dead-End?

The family silver of 37 years is sinking and could disappear in no time if US-64 fund managers do not correct the paradox - paying an annual obligatory dividend with investments in equities. Two, instead of suspending sales and repurchase, UTI should come clean on the health of the fund, link it to NAV and allow not partial but full withdrawals. Let investors be the best judge - if they want to stick or move out with sharp losses once pricing is linked to NAV. These steps will help investors realise that US-64 is no longer a "SUPER" fund, head and shoulders above the market with princely payouts but very much comparable to other in its ilk!