The relationship between portfolio composition and risk and return among fund management firms in Kenya

Abstract

The Fund management industry is a key sector that invests funds under their control for both the private and public sectors in Kenya. Investors and financial researchers have paid considerable attention during the last few years to the new equity markets that have emerged around the world. Fund portfolio composition forms a critical component of a fund manager’s income which analyses return, profit and risk components. In Kenya, fund management firms are relatively new and limited information has been published on their performance. The recent increase in the number of players and type of funds that are available to individual investors makes a lot of theoretical and practical significance. The objective of this study was to determine the relationship between portfolio composition and risk and return among fund management firms in Kenya. This research problem was studied through the use of a descriptive survey. There are 18 registered fund managers currently operating in Kenya and this formed the study population. Both secondary data and primary data was used to carry out this study. The secondary data was collected from the registered fund managers’ financial statements, other published sources and annual returns to regulatory authorities like Capital Markets Authority and Retirement Benefits Authority. Primary data was collected by a drop and pick questionnaire. The data was analyzed using a model developed specifically for the study. The study concludes that the fund management firms determine the percentage return of the investment portfolio. The method used by the firms in determining percentage rate of return was geometric or time weighted returns. The study shows that the relationship between portfolio composition, risk and return was strong as the R square value was 0.89. The model was significant for prediction as the f significance was 0.33. The study concludes that the benchmark compared with the performance of an investment portfolio was interest rate of Treasury Bills. The study recommends the Fund Managers to calculate the percentage return of the investment portfolio using geometric or time weighted returns method. The study recommends the firms to compare performance of an investment portfolio with interest rate of Treasury Bills benchmark.