Joseph Mariathasan looks at Unit Trust of India and its challenges and opportunities beyond the Indian market.
The Unit Trust of India (UTI) opened its first international office in London 16 years ago to begin an international expansion that, at its height, employed 29 staff across offices in London, Dubai, Bahrain and Singapore. However, the financial year ending March 2012 was the first year that UTI’s international operations made a significant profit. As Praveen Jagwani, MD of UTI International, explains the strategy behind the turnaround, it holds lessons for all Indian fund managers on both the challenges and also the opportunities of international expansion outside the domestic marketplace.
UTI was India’s sole fund management entity for two decades from its incorporation in 1964. Even after liberalisation of the mutual fund marketplace in India, UTI remained the pre-eminent player until 2001, when the failure of its flagship fund US-64 required government intervention in a bailout that split the company into two.
The new UTI Asset Management Co. was one step away removed from government with four initial shareholders in the form of the state owned entities, State Bank of India, Life Insurance Corp., Bank of Baroda and Punjab National Bank (PNB). However, they each owned competing mutual fund companies and such an arrangement was clearly unsustainable.
After UTI’s attempts to undertake an IPO fell through following the 2007 crash, then Chairman U.K. Sinha convinced the Finance Ministry that it was imperative for the company to find a strategic partner to help bring UTI to the next level. In January 2010, leading US fund manager T. Rowe Price invested $140m into UTI to take a 26% stake and a position as UTI’s long term strategic partner. In the short term, the decision has been painful, with T. Rowe Price losing 30% of the investment value within a year — around 20-22% on the rupee depreciation and the rest in the valuation of the company. However, longer term, it may be a good bet for T. Rowe Price with the possibility of even increasing their stake to 50% or more.
For T. Rowe Price, the UTI link offers a long term opportunity to distribute global investment products into India. For UTI, the link offers an additional channel for distribution of Indian investment products to a global investor base. However, India is just one of many investment opportunities for T. Rowe Price’s salesforce and UTI’s own international offices are still seen as the primary conduit to raise international funds for investment in India.
The problem that UTI faces, like all its domestic competitors in India, is that very few, if any, institutional investors are interested in an India-only equity fund, preferring global emerging market mandates or Asian regional equity mandates. That may change in the future as India becomes a critical component of the global economy alongside China, but that day has still to arrive.
Retail investors do invest in India funds and thematic products such as India IT or healthcare funds, but invariably, they look to a well-known brand name such as Aberdeen or Fidelity. But where does that leave the many Indian fund management firms that may have well developed skills for the Indian market, but have not expanded their investment capabilities much beyond it? Not surprisingly, it is an issue all Indian fund managers are still struggling with after getting on to two decades trying to sell India specific equity products to institutional investors in Europe with very little to show for it.
The problem that often afflicts Indian fund managers is the view in their Mumbai head offices of how the world perceives the opportunities in India is very different from the reality. Indian equities in particular, are generally seen as a component of a global or at most a regional or BRIC emerging market portfolio. Indian domiciled fund managers generally do not have the investment capabilities as yet to manage any of these. Yet the draw of attracting international investment as well as the prestige of pointing to international offices dotted around the globe has often been too alluring to resist.
Establishing overseas offices, then developing relationships with a range of distributors in each region, appears to be a straightforward strategy requiring just a mixture of hard work and charm from seasoned finance professionals. But developing a strategy for gathering international assets has not been easy.
UTI launched the Mauritius domiciled India
Access fund in conjunction with Commercial Union Investment Management (now part of Aviva Global Investors) in 1996 and opened a London office at about the same time to act as a client servicing arm for what was hoped would be a large European institutional client base. The first London head was an energetic rising star (and now MD of another Indian fund manager) who managed to launch an IT fund at the height of the tech boom. But despite his efforts, there was never sufficient interest in India only product in Europe to make the London office a profitable entity in it own right.
The Middle East, with a large non-resident Indian population as well as wealthy local institutions was seen as a potential source of both retail and institutional investment into Indian funds, leading to offices being opened in both Dubai and then Bahrain. Closer to home, in 2008 UTI set up a joint venture, UTI International (Singapore) with Japan’s Shinsei Bank who owned 49%.
Jagwani explains: “The idea was to build an asset management capability in Asia using the Japanese Bank’s marketing strength and UTI’s fund management capabilities. But they could not have picked a worse time! Shinsei Bank grappled with its own set of challenges in the aftermath of the global financial crisis which saw their balance sheet shrink considerably…. In 2010, UTI bought them out but continue to partner with Shinsei for fund launches in Japan.”
Jagwani, an ex-investment banker, was brought in by the Chairman in 2009, initially to run the then joint venture with Shinsei Bank in Singapore: “I was fresh from the world of hedge funds at Merrill Lynch. I set up a few products for Japan just to create traction for the office.”
His first initiatives had little to do directly with India and instead, exploited the link with Shinsei and their distribution network in Japan.
The products included an optimised basket of CTA funds as well as a South African Rand denominated money market fund for Japan, which was managed by Investec: “The typical Japanese retail investor is usually a senior citizen and often female, whom we affectionately refer to as Mrs Watanabe. She chases high yielding currencies irrespective of currency risk. Having bought Rand denominated bonds, she needed a vehicle to roll-over the maturity process instead of crystallizing the capital loss on account of the strong yen.”
Jagwani did manage to launch a $300m Indian equity fund for Japan that was sold to Japanese retail investors and managed in Mauritius. Another opportunity came through setting up a partnership with United Overseas Bank (UOB) in Singapore: “We set up a China-India fund together in December 2009. This was sold in Thailand, Malaysia, Japan and Singapore and raised $140m. 40% was allocated each to India and China to be managed in an unconstrained manner and the remaining 20% could be allocated to either depending on market conditions. The Chinese equities were H shares mainly although as UOB had a QFII license with a quota, it could also invest directly in A shares.”
Jagwani trimmed staff in London and Dubai and closed the Bahrain office.
In 2011, Jagwani was given responsibility for all of UTI’s international activities: “The London office had not raised any investment for a number of years and there was a need to streamline the business and contain costs.”
Jagwani trimmed the staff strength at the London and Dubai offices, and shut down the Bahrain office, reducing the total staff complement of UTI International from 29 to 18: “Singapore is the headquarter of our entire international business. We have our fund management team in Singapore along with middle office, back office, compliance, business development and product. We only need sales staff for the other offices.”
In London, UTI faced a dilemma. “Having a European presence without a UCITS compliant product made us a non-starter. We made considerable progress in the past 12 months and despite the risk-off environment, we now have plans for two UCITS compliant Indian products to be launched in Q3 2012. One will be a Fixed Income fund while the other will be an Equity long biased fund. While the former would be a UTI branded fund managed from Singapore the latter would be launched on the Milltrust managed account platform. In 2013 we hope to launch an Indian equity fund for the US markets that is SEC regulated etc.”
Emerging market debt of all types is gaining increasing attention, but gaining access to Indian debt is not straightforward. A foreign investor has to be either registered with the Securities and Exchange Board of India (SEBI) as a Foreign Institutional Investor (FII), or have a sub-account of an FII.
Post 2008, the Government of India instituted a system whereby FIIs had to purchase limits prior to investing in Indian debt securities with debt limits auctioned on a periodic basis by the Government of India. Jagwani raised $1bn in an “India Debt Opportunities Fund” in 2011 by an unusual route: “When I took over the London office, I found an old fund that had been neglected. It had a legacy 2004 approval from SEBI to invest directly in an onshore Indian debt scheme, without going through the auction bidding process. We needed to find at least 20 investors to meet the ‘Broad Based’ regulatory requirement and eventually raised the billion from 22 institutional clients. Most of them do have a FII license so could invest directly but this legacy approval opened up the possibility of investing in banks CDs, an area beyond the reach of FIIs. Bank CDs are highly liquid and can be structured to mature on a specific date.” While the fund has been attractive for foreign investors, it matures in September 2012 and the legacy approval has now been withdrawn for raising further investment of this type: “That billion came at a time when India sorely needed an inflow of foreign capital to prop the rupee. However given the amended regulations, we are unlikely to roll-over the entire corpus of the product. Yet that product put UTI on the map and we are now in almost all consideration sets for any Indian transaction.”
Jagwani’s approach of identifying unusual “off-the-wall” opportunities to create income generating activities for the overseas offices, requires considerable lateral thinking and some of the ideas may have no direct link to India at all. For example, a recent transaction involved introducing one of the largest financial institutions in Thailand to banks and institutional investors in the Middle East, where Jagwani had been based for many years. “We generated a 5 basis points fee on $800m with the Thai company undertaking all the management”. But while having no direct Indian connection, the Thai institution gave UTI a $25m Indian equity mandate on the back of the transaction.
As of June 2012, UTI International had $2.6bn under management. $2bn of this is in fixed income although $1bn is in the one-off India Debt Opportunities fund. The other $1bn is in multiple transactions of around $50-60m each, of leveraged deposits which again is a somewhat quirky product as Jagwani explains: “These work by say a private bank calling 25 investors who each invest $1m. The bank then leverages these four times to get a corpus of $100m. This is then invested in a UTI fund in Cayman which invests with 4 Indian banks at rates of something like 3% in US$ for 1 year deposits. We do this for almost all the major global private banks.”
“The trouble is that it is a bit like holding a tiger by its tail. You need to keep on doing more as each transaction expires in a year. My objective is to gradually transition the business to regular open ended funds which provide an annuity income.”
To this end, the fixed income fund in Dublin, will invest in both rupee denominated debt and dollar denominated Indian debt and is due to trade in September 2012. This is a relatively niche category and there are hardly any other funds in this space. With global interest rates likely to remain subdued, the search for yield is likely to take investors to the few remaining investment grade countries that still offer attractive yield.
Jagwani’s approach may be unusual, but it does appear to be paying dividends, both metaphorically and physically. It certainly does appear that looking at overseas offices with an investment banker’s eye may be a way for Indian fund managers to create an asset out of a liability.
IPA INVESTMENT&PENSIONS ASIA