The nature and determinants of the wealth portfolios of salaried middle and upper income employees in Kenya

Abstract

Personal wealth as denoted by accumulated net assets is a key ingredient of a people's standards of living. This is because wealth facilitates consumption, especially in old age, cushions people against adversities such as illness and unemployment as well as, enables further wealth creation through access to bank credit. The assets that comprise wealth include cash and bank balances, properties, shares in cooperatives and listed companies, life assurance policies, accrued pension benefits, corporate bonds, and treasury bills and bonds. Whereas modern portfolio theory (MPT) suggests that investors should aim to maximize their wealth and hold diversified portfolios, life-cycle hypothesis (LCH) maintains that people should target a smooth consumption path in their lifespan, respectively. Yet, empirical evidence from developed countries shows that personal wealth portfolios consist of few assets, are inadequate to support retirement consumption and are very dissimilar with respect to holders' personal attributes. The lack of knowledge on the diversification, adequacy and determinants of personal wealth portfolios in developing countries makes it difficult to appreciate, and formulate appropriate policies for enhancing the wealth holdings of the citizens for improved standards of living. This study is designed to address this research gap. The study examines the sizes and composition of the wealth portfolios of employees in order to: a) establish whether they are diversified; b) ascertain the wealth adequacy; c) find out which personal attributes are key determinants of the portfolios; and d) develop descriptive wealth holding models. A composite conceptual framework integrating the theoretical models of LCH, MPT and Sociological Approach was developed and used in this study. The above informed the use of a deductive research design that guided the development of suitable research hypotheses which were tested using empirical data to realize the study objectives. The target population for the study comprised all the salaried middle and upper income employees in Kenya. In this survey, questionnaires were administered on a random sample of 1,067 salaried middle and upper income employees drawn from a stratified random sample of large institutions. A response rate of 75% was achieved. Data collected on personal wealth levels and personal attributes was analysed and tested for independence and correlation using statistical tests such as Analysis of Variance, Pearson product-moment coefficient, and Multiple regression analysis, among others.

The study establishes that the sampled employees hold under-diversified wealth portfolios. Firstly, they do not hold equal proportions of all the asset types in the market as stipulated under naive diversification (Carnner, Mankiw & Weil, 1997; DeMiguel, Garlappi & Uppa, 2009). The wealth portfolios are dominated by cash and property with mean proportions of 57 % and 36 %, respectively. They are also simple; the mean number of assets held is three with the top three assets accounting for 87% of the wealth values. Secondly, the mean shareholding of equity investors is three listed companies against a recommended minimum of 11 listed firms. These findings contradict theory but are in line with empirical evidence from documented personal wealth studies in developed countries. In common with other studies, this research finds that the sampled employees may not have adequate wealth to meet their consumption needs while in retirement. This is based on the findings that the mean proportion of the employees' estimated retirement income to current employment income, also referred to as the replacement rate, is 43 %. This rate is significantly lower than the recommended minimum of 70 %. The study establishes that the quantitative personal attributes that are the main determinants of wealth size are employees' income, age, proportion of risky assets held, inherited wealth and savings rate. Also, the main categorical determinants are income classification, job seniority, cultural background and education. Other findings are that the quantitative attributes that are the main determinants of wealth composition as measured by the proportion of risky assets held are: wealth size and employees' income. The main categorical determinants of wealth composition are similar tee-those for wealth size. Whereas the commonality of the determinants noted above implies that the concepts of wealth size and composition are closely related, the results further show that wealth determinants have a closer relationship with wealth size than its composition. Overall, these findings largely conform to theory and corroborate evidence from prior studies. Multiple regression analysis and multiple discriminant analysis are used to develop descriptive models to depict the relationships between various personal attributes on the one hand, and the monetary size, as well as the level of employees' wealth holdings, on the other. Further analysis shows that life cycle factors have a closer relationship with wealth portfolios when compared to MPT and Sociological factors.

It is recommended that employees should target high wealth and diversified portfolios. In this pursuit, employees can rely on the descriptive predictive models to plan their investments. Professional advisors, who are consulted by most employees, can play a key role in this. Also, the government can help by formulating and implementing policies to widen the scope of available investment choices, avail more data on asset returns, simplify and improve the investment process as well as cultivate a culture of objective investments among employees. With respect to the wealth portfolios of employees in a developing country, the study has contributed to net knowledge by demonstrating the challenge of diversification, showing quantitatively the inadequacy of wealth, and isolating the key personal attributes that policy makers should target to improve employees' welfare. The findings also suggest that personal wealth portfolios in developing countries can be studied scientifically and objectively, thus calling for wealth surveys and researches. Majority of the research gaps are thus addressed. Conflicting evidence to the prescription of MPT that wealth maximizing investors should hold diversified portfolios suggests the need for further work to establish what informs the composition of wealth portfolios, especially noting that simple portfolios are associated with little wealth and that over 87% of the employees indicated that they aim to maximize returns when investing. On account of simple and undiversified portfolios, employees may be unable to accumulate adequate wealth to support them in retirement, thus worsening the dependency burden. Further studies could also examine the role of investment advisors in influencing employees' risk-taking behaviour, their Investment plans and hence their wealth holdings. Also, a similar study can be designed to examine the wealth portfolios of informal sector employees, who comprise about 68 per cent of total employees in Kenya (GoK, 2009b).