The Effect of Macroeconomic Variables on Portfolio Returns of the Pension Industry in Kenya

Abstract

Pension funds in Kenya have contributed significantly to the growth of financial markets since they form one of the largest institutional investors. A stable economic environment characterized by stable currency, inflation, and low interest rates has contributed to the growth of pension fund portfolios and hence high returns. The research objective was to establish the effect of selected macroeconomic variables on the performance of the Pension fund industry in Kenya. The selected variables were those perceived by the researcher and supported by previous empirical studies, to have the highest effect perceived effects on industry returns. These were inflation rate, interest rates, exchange rate of dollar versus KES and GDP growth rate. Industry return was taken to be the dependent variable while inflation rate, interest rates, exchange rate and GDP growth rate were taken to be the independent or predictor variables. The study also considered an error term as a representative of other non key variables which had not been included in the model. The study period ranged from 2005 to 2013 within every quarter of a year, therefore consisting of 36 observations. The data was analyzed using IBM SPSS version 20.Multivariate regression model was employed in the study. To further ensure the model’s significance and goodness of fit, an F test and Analysis of Variance (ANOVA) were used. The study established that pension funds’ industry return was heavily influenced by the selected macroeconomic variables with exchange rate having the largest influence and interest rates having the least impact. The computed R2 was established to be of 0.533 which shows there is a positive and strong correlation between the selected variables and industry returns. When expressed as a percentage, 53.3% of industry returns is influenced by the variables while 46.7% or (100% - 53.3%) shows industry returns affected by other variables not included in the regression, more specifically the error term. The study findings established exchange rates, inflation rates and interest rates to be the macroeconomic factors that have an inverse relationship with pension funds’ returns, with GDP growth having a direct relationship. Therefore the findings of the study lends credence and confirms the researcher’s theory that the performance of the pension fund industry is affected by fundamental macroeconomic factors such as GDP growth, inflation, currency exchange rate and interest rates. The aforementioned macroeconomic variables should be closely monitored and taken into account by pension funds’ stakeholders and fund managers while drawing up the investment policy statement and making investment decisions since they have an effect on the overall performance of industry returns.