Close-end funds: The Indian investor suffers

Aabhas Pandya

Blame it on the underdeveloped Indian market or the inability to recognise the rights and might of an investor. Even as UTI's harried officials brace for support against an investor in its offshore fund, millions of investors in UTI's domestic equity funds may well raise the same question - How about the heavy discount on our closed-end investments like Mastershare, which has prevailed for years now?

UTI officials may argue that their family of closed-end equity funds is now close to being extinct, with most of the funds made open-end on the eve of their redemption. However, a hefty discount to the NAV has been a perennial problem with all listed funds of UTI and the mutual fund giant never bothered to address the issue for domestic investors. While returns from UTI's equity funds have been, at best, average, the hefty discounts have only compounded the problem for scores of investors. No wonder, the assets of these funds have rapidly shrunk after they have gone open-ended.

Take UTI Mastergrowth for instance, which went open-ended in December 1999. Since 1993, the fund traded at an average discount of 31 per cent to its NAV on the bourses. Thus, an investor was forced to sell his units in the market at around Rs 11 when the actual worth (NAV) was well over Rs 16. In fact, the discount to NAV was as high as 48 per cent in 1994. It was only when the fund was to go open-ended that, bargain hunters pushed up the listed price and brought down the discount to less than 15 per cent.

Or take Mastershare, which has an excellent dividend paying track record and is due for redemption in 2003. Barring a few months in 1992 and 1993, the fund has traded at a steep discount to the NAV. Since 1993, the fund has traded at an average discount of 30 per cent with the discount stretching to as high as 48 per cent in 1996.

On the other hand, with the Rs 8.5 billion, NYSE listed India Growth Fund trading at a 40 per cent discount to NAV, UTI now plans to embark on a share buyback programme to reduce the discount to the NAV. But, what has prompted UTI to initiate such a move for its offshore fund while it never bothered to buyback units of its domestic funds? The reason - an investor in the fund has sent a proposal to induct himself on the board of the fund against the hefty discount and is mobilising proxy vote just before the annual meeting of shareholders.

It is indeed a difficult task to fix the responsibility for the plight of the Indian investors - is UTI to be blamed or is it the investor, who has never voiced concern over the languishing market prices of his investments?

However, one issue that clearly stands out is the level of transparency, which an organisation like UTI adheres to, when it comes to offshore funds and foreign investors. While annual investor meet is a serious business with offshore investors, it is no more than a sham when it comes to domestic funds and millions of investors.

Like Morgan Stanley, UTI can also buyback units from the market and reduce the discount to NAV. However, it has never done it so far. Meanwhile, it is to be seen whether the Indian investor can shake a sleeping giant like UTI out of its slumber!

Source: Value Research

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