US-64: Facts UTI won't tell you

S. Vaidya Nathan

HAVING put together a deferred bail-out package for US-64 investors with holdings of up to 3,000 units, the UTI has taken out a big promotional campaign highlighting facts about US-64.

If the content (also put on its Web site, www.unittrustofindia.com) is anything to go by, one thing is clear. The UTI has not changed one bit. Economy with truth and material information, and expansiveness with falsehood characterise its campaign that ``the long-term investor has many reasons to trust US-64''. The least one would have expected of the UTI is for it to come clean and say a few things that reflect the true state of affairs affecting investors.

* The UTI now says US-64 would be made a well-diversified and balanced fund. It has been one all these years. The only difference is that the UTI sold investors the apple (of a balanced fund) as an orange (an income fund).

* The manner in which the fund was sold was based on total falsehood. ``Security, safety, regular income, trust of two crore investors'' was the plank. It was positioned as an income scheme with sketchy disclosures and this went right up to a few months back.

* The UTI never told its investors that the portfolio composition and its investment strategy could not lead to stable regular dividends (which was expected by the retired and the pensioners who had invested in as also the retail investors). No fund in India pays regular dividend with a portfolio a la US-64. It was an unsustainable approach.

* The steady decline in the dividend yield was never highlighted. The yield on July price for 2000-01 of 7.4 per cent was close to the levels that prevailed 30 years ago.

* The UTI talks of how the dividend has been consistent and reasonable. But it never has ever mentioned that total returns in case of sale on repurchase price has been less than what can be obtained in a plain debt paper or deposit in bank.

* The fact that adjusted for risk of the 65 per cent exposure to equities, the returns are much lower and, in the process, unsuspecting investors have been put to great peril is, of course, something the UTI would never say.

* In asking investors to repose faith in US-64, there is no mention of the fact that the UTI has received a massive bail-out of Rs 3,300 crore at tax-payers expense just two years ago in 1999.

* In July 1998, later part of 1998, early 1999 and now, liquidity was never a problem. But one would never know the extent of it and the adverse implications it has for long-term investors. Even now, the UTI talks of borrowing anywhere up to Rs 4,500 crore. But no facts on who would foot the bill or how the monies would be repaid.

* Through three years of official tumult, not a word has been said on how the portfolio of US-64 has done in terms of returns generated. On portfolio management, the UTI has never told investors why it sells two or three stocks only in nominal quantities and holds them as if they were GoI paper.

* UTI has never told its US-64 investors why, after stating that the scheme would be oriented towards them, and US-95 would target big ticket investors, it has unabashedly raked in corporate flows.

* The ballooning of scheme size was largely on account of corporate flows which various UTI chairmen have coveted in their pursuit of self-set targets. Never has the UTI revealed the composition of inflows and corpus as between retail and corporate investors. Nor has it ever told long-term investors whom it is now urging to stay on as to the kind of impact that these hot money flows had on the value of assets.

* UTI's view that it has found it difficult to re-balance the portfolio with more debt paper as suggested by the Deepak Parekh Committee due to illiquid debt market, is another falsehood. One just needs to look at the quantum of debt investments made by private sector funds and UTI's open end debt funds in the last three years. These flows outstrip what UTI needs to rebalance its US-64 portfolio by a fairly long chalk.

* The Deepak Parekh Committee had recommended an NAV-based pricing system within three years. The UTI is to now move to that mode from January 2002. Though it has played up the ``higher than anything else return'' in the package for up to 3000 units, not a word has been said on the implications of the NAV switch. The fact that long-term investors could be staring at a 20 per cent erosion to face value and at least 5 per cent drop over May 2001 prices have been quietly brushed under the carpet. There would have been no harm admitting that things have gone wrong and what the gap now is so that investors can prepare themselves for the quantum of loss.

* No word has ever been said on how some parts of the US-64 portfolio are irrecoverable, and whether these have been provided for.

* The UTI has all along claimed that the US-64 had the trust of two crore investors. But, now, with problems breaking out, this number has been scaled down by 75 per cent to just 45 lakhs -- a sizeable scale-down by any yardstick.

Possible insider information on closing of the repurchase window lead to big outflows in April-May 2001, especially by corporates; strange investment decisions in the tech sector recently and, among others, in Reliance Industries in the mid-1990s; archaic pricing structure and its overall poor performance, have all hit long-term investors hard. Quite clearly, it is the long-term investor who now has little reason to trust US-64. Exit the scheme on the lines suggested in the articles on pages six and 12.

Widen probe reference

THE terms of reference announced for probe into US-64 is fairly wide-ranging but two areas need to be added to get a complete picture:

* The impact of inter-scheme transfers for US-64 investors.

* The post-investment behaviour of the UTI in various cases such as the Reliance share switch, open offers and its passive role in watching vast sections of the corporate sector, play havoc with shareholder funds. There may be a tale here too.