In January the US-listed investment firm, T. Rowe Price, closed the deal that gave it 26% of India’s most venerable fund management company, the Unit Trust of India. UTI’s history is unusual. From 1964 until the liberalisation of fund management in 1987, UTI had a monopoly on selling mutual funds in India. Lots has happened since that ended — including a government rescue. But what lay behind the transaction and what does the future hold in store for UTI and its partnership with T. Rowe Price?
As with many fund managers, a key issue for T. Rowe Price had been finding the best strategy to enter China and India. “China came first because we started operating with China AMC and we became sub-advisor to their Qualified Domestic Institutional Investor fund in 2007,” says Flemming Madsen, T Rowe Price’s head of Asia Pacific.
For India, the easiest thing would have been to do nothing — but that meant missing an opportunity to establish a presence while the Indian market was growing quickly.
There were many options open to T Rowe Price to get into this fragmented market, but many of the possible entry strategies were unappealing.
T. Rowe Price already had some experience in the country. The big financial group Kotak Mahindra hired T. Rowe Price to sub-advise a global emerging markets fund in 2007. Kotak also set up a global infrastructure fund in India with
T. Rowe Price managing the external part.
It could have continued acting as sub-advisers for local players bringing out overseas investment funds. But that would have limited opportunities to tap into India’s growth, as Indian investors focus on investments at home, and not abroad.
India has around 40 fund management firms. Many are small and lose money. T. Rowe Price could have bought a stake in one of the minor players but that meant no brand, no distribution capability, and probably no profits too.
Other global players such as Franklin Templeton and Fidelity built their Indian operations from scratch — an option not open in China. But T. Rowe Price thought this was unattractive, even though in the past it favoured organic growth. It worried that setting up an Indian company required too many resources and too much management time.
The frustrations were short-lived as an opportunity appeared for a what looked like a transformational deal. In 2008, UTI’s chairman, U.K. Sinha, together with the investment bank, ICICI Securities, approached T. Rowe Price with a proposal.
It was welcomed. “With UTI, we saw that we had the opportunity to get into the market quickly with a strong brand, huge domestic footprint and a credible organisation,” Madsen says. “A lot of the core values they had mirrored ours.”
UTI’s history as a government-owned monopoly meant the company suffered from some of the failings associated with the public sector in India. In addition, there was a crisis centred on its flagship fund, US-64. UTI sold guaranteed-return products that were backed by highly volatile equity investments. In June 2001, UTI suspended the sale and repurchase of US-64 units and revealed their net asset value for the first time: just Rs5.81, which was way below the par value of Rs10.
Subsequently, UTI split. A government-owned entity kept the insolvent business on its balance sheet, and a new UTI that was free to move forward with the healthy part of the operations.
The environment has become increasingly competitive for the former monopoly. Many new companies — some successful, some not — have grown up following the liberalisation of fund management in 1987. Ex-UTI staff run some of them — ironic, given UTI’s old slogan, “We taught India the language of investing.”
The reconstituted UTI also faced another unusual challenge — its shareholders were also its rivals. The State Bank of India, Life Insurance Corporation, Bank of Baroda and Punjab National Bank (PNB) each had their own competing mutual fund companies.
Such an arrangement was clearly unsustain-able. UTI’s chairman Sinha started down the road of an initial public offering to create a base of shareholders that was wider and made more sense. But when the global financial crisis hit in 2007, the listing was abandoned.
Sinha then convinced the finance ministry (where he had previously been the joint secretary looking after capital markets) that UTI needed a strategic partner to help it to the next level. Madsen says negotiations started in August 2008, and continued throughout 2009. In that time, the two organisations got to know one another in depth, and started exchanging expertise and ideas. They closed the deal early this year.
UTI is a powerful brand. It has 10% of the Indian market. Cynics might say by buying a 26%stake in UTI, T. Rowe Price in effect bought a 2.6% share of the market. But Madsen insists it was much more than that.
“By our very nature, T. Rowe Price is not an acquisitive firm,” he says. “We have grown organically. That said, there are situations where working with a well-established partner makes better sense, as is the case in India where a deep local distribution platform like UTI’s is critical in order to be successful.”
T. Rowe Price also got access to UTI’s powerful platform for future sales of its overseas products to Indian investors.
Most investors in stocks and mutual funds live in India’s eight-to-ten biggest cities. But UTI has expanded beyond big urban centres and has 200 offices around the country. It says this is the largest distribution network of any fund management organisation.
“It gives a lot of stability to UTI and better retention of client assets, and it will become more useful as these areas grow wealthier and look to start investing more. UTI’s big footprint will benefit from that,” explains Madsen.
UTI also has global ambitions. There are plenty of expatriate Indians abroad who know its name and are potential customers. There are UTI offices in London, Singapore and the Middle East. With T. Rowe Price’s brand and global reach, the two organisations together hope to be able to guide more international money to UTI in India.
“Of course over time, we want to introduce our global capabilities to Indian investors, but that was not the first priority for us in this deal,” Madsen says. “Today, there are a limited number of international funds sold in India. Only half
of what the government has allowed has been taken up.”
That quota has been increasing over the past few years, but no new funds have been launched. As Madsen admits, in the short term, the question is whether there is real interest from investors. India might be like China, where QDII funds are mainly investing back into China through Chinese companies listed in Hong Kong and elsewhere.
In the meantime, Madsen says the two firms are working with each other very well on multiple fronts. “There is good alignment, positive dialogueand much progress,” he says. “In fact, dozens of people within T. Rowe Price are interacting already with counterparts at UTI.”
All of UTI’s equity fund managers and analysts have already visited T. Rowe Price’s offices in Baltimore for training. Both organisations’ fixed income teams keep each other abreast of developments on the markets they cover.
“In addition to the investment side we are working with them in areas like distribution, technology, human resources, finance and marketing - all areas where UTI is able to draw on T. Rowe Price’s considerable expertise.”
Madsen himself and Jim Riepe, the retired vice-chairman of T. Rowe Price, have seats on the UTI board. UTI’s origins as a government body and history as a monopoly make it unique among Indian fund managers. T. Rowe Price has certainly completed a deal that will help to transform UTI, and its own presence in the Indian marketplace. But UTI’s competitors face an invigorated beast. They too may need foreign support to compete long-term.