A survey of the applicability of Markowitz portfolio optimization model in overall asset allocation decisions by pension fund managers in Kenya

Abstract

This study sought to explain whether pension fund managers in Kenya apply Markowitz portfolio optimization model in asset allocation. The study found out that over 60% of the managers applied the model. However the applicability was implicit due to various investments constrains key of which was stated as client constraints and the lack of a well developed and reliable database to provide the required inputs into the model. Other constraint cited were macro-economic forces such as inflation, interest rates and general market trends. The study further established that over the period 2004 - 2005 fund managers maintained consistent allocation of funds across the various asset categories implying that there was no change of asset allocation model I strategy. The study further sought to identify the various factors that influence the adoptability of this model in Kenya. The key factor cited by the managers applying the model was that the model ensured a balance between risk and return and that it had proved successful overtime. Other factors cited were the fact that the model ensured a match between the funds assets and liabilities, that the model could be applied across the various assets and that the model was compatible with scheme investment policy. Contrary to arguments that the main limitation of the model was that it is a single period model and complex to apply none of the managers cited these factors as being limiting I inhibiting it applicability.