Effect of Asset Allocation Decisions on Portfolio Performance of Unit Trusts in Kenya

Abstract

The financial landscape of Kenya, like many emerging economies, is characterized by a diverse array of investment instruments, with unit trusts becoming increasingly significant. Understanding how asset allocation decisions impact the performance of these trusts is critical for both investors and policymakers. This need has been underscored by the growing prominence of unit trusts in the investment portfolios of many Kenyans. The tprimary tobjective tof tthis tstudy twas tto tascertain how asset allocation decisions influence the portfolio performance of unit trusts in Kenya, measured by riskadjusted ROI. The tstudy twas tbased ton tmodern tportfolio ttheory, tarbitrate tpricing ttheory tand tcapital tasset tpricing ttheory. The study assessed portfolio performance (Y) using risk-adjusted ROI. The independent variables under consideration were: Investment in real estate (X1), measured by the natural logarithm of investments held in real testate; tInvestment tin tgovernment tsecurities t(X2); tInvestment tin tfixed tdeposits t(X3); tInvestment tin tshares t(X4); and Fund size (X5), all measured using the natural logarithm of their respective values. Secondary data was collected from various unit trusts spanning a period of five years (2018 to 2022). This data was subjected to rigorous descriptive statistics, correlation analyses, and regression analyses to discern patterns and relationships. Regression results underscored several noteworthy insights. Investments in real estate had a coefficient of 0.093 (p=0.001), while government securities recorded 0.044 (p=0.008). Notably, fund size emerged as a prominent determinant with a coefficient of 0.114 (p=0.001). Conversely, investments in fixed deposits and shares did not demonstrate a statistically significant impact on ROI. The regression model accounted for about 22.46% of the variability in ROI (R-squared =0.2246), indicating the existence of other influential factors not captured in the study. The study concludes that asset allocation decisions, particularly in real estate, government securities, and the overall fund size, play a pronounced role in influencing the portfolio performance of unit trusts in Kenya. Regulatory bodies and financial institutions in Kenya should emphasize financial literacy to help investors make informed decisions. Enhanced reporting and transparency in asset allocations, especially in impactful sectors like real estate and government securities, should be mandated. Future research endeavors should explore other potential determinants of portfolio performance, given the substantial unexplained variability observed in this study.