Factors Affecting the Equity Allocation Decisions Made by Trustees and Fund Managers of Pension Scheme Portfolios in Kenya

Abstract

This study sought to investigate factors influencing investments in equities by pension schemes in Kenya, from the perspective of trustees and fund managers, these being the two main groups responsible for the formulation and implementation of pension scheme investment policies. A survey of trustees and CEOs in fund management organizations was carried out with a view to determining, in the first place, their general attitudes towards equities as an asset category. Specifically, the survey sought the cognitive, emotional and behavioural reactions of the said respondents, as the three main attitudinal elements in psychology. Secondly, the study sought the main factor considerations shaping the attitudes of the trustees and fund managers in Kenya towards equity. A third objective was the determination of the past performance of pension scheme equity investments, in terms of risks and returns, as a likely determinant of current equity investment policies of pension schemes. For this objective, the returns and risks on selected stocks quoted on the Nairobi Stock Exchange for a period of seven years (1996 - 2002) were analyzed as a proxy. The respondents were overly concerned with the perceived excessive risks in equity relative to other alternative investments including Government securities, corporate bonds and real estate. The most important corporate considerations made in contemplating equity investments were given as company profitability and the historical dividend payout ratio. The least important factors were found to be the level of industrial maturity and the size of the industry in which the investee company operates. The annual average gains on the individual selected stocks over the period studied were actually -2.03%.The average risk per stock (computed as the standard deviation of returns) was quite high, 44.89% .This finding was consistent with the respondents' belief that equity investments are highly risky relative to their returns. This is an area on which there are few studies, making this a further contribution to studies on pension scheme portfolios in Kenya.