The effect of portfolio characteristics on financial performance of unit trusts in Kenya

Abstract

This study sought to fill the existing research gap in the evaluation of financial performance of unit trusts in Kenya as most studies apply the traditional methods of evaluation while trying to establish whether the unit trusts outperform the market. The study applied the multi-factor model and focused on evaluating the equity based unit trusts performance. This multi-factor model is as envisioned by Fama and French and later Cahart. The model provided a platform to investigate into the impact of certain characteristics of a fund to performance in this case focusing on size, value versus growth and momentum factors. This study utilized descriptive analysis and a multi-factor model. The target population was 14 unit trusts that consisted of equity-based funds in Kenya for the period 2008 to 2012 with complete set of data for 24 months. This restriction limited provided a well focused comparison of funds that were popular among investors. This paper utilized secondary data. Data on financial performance of unit trusts including net asset value and dividend paid by unit trusts was collected from offices of respective unit trusts schemes. Data on estimate of dividend received on the market portfolio and the 20 share index was collected from the Nairobi Stock Exchange. Data on market interest rates and the average 91 day treasury bill was collected from the CBK. Data for estimating the size factor was estimated from the value of market capitalization/ size of the fund. Data for estimating the momentum factor was extracted from the historical returns of the selected funds available at the unit trusts firms. Data for estimating the value factor was obtained from the market prices posted daily by NSE for the market factor while the book factor was obtained from the respective growth fund balance sheet. From the findings, the study established that there is a strong relationship between all the four factors under study and funds‟ return hence all the factors had a significant effect on performance. The study also found out that the beta values of the model showed that the sampled funds were more exposed to small stocks, value rather than growth stocks and consistent positive future performing funds. The study further established that there was a strong positive relationship between portfolio characteristics and unit trusts financial performance further supporting the robustness of the multi-factor model. This study therefore recommends that the managers of equity based funds should consider specific portfolio characteristics as all factors have a positive impact on overall financial performance.