The effect of asset allocation on the financial performance of pension funds in Kenya

Abstract

Much of the previous research into the effect of asset allocation on the financial performance of pension funds has concentrated generally on developed countries with few studies being carried out in emerging markets. Not much local study has focused on establishing this critical relationship. This study therefore sought to fill the existing research gap by carrying out a survey study on the effect of asset allocation on the financial performance of pension funds in Kenya. The main objective of pension funds is the provision of retirement and other benefits to the employees and their respective dependants as provided in the Trust Deed and Rules of the pension fund. The impact of portfolio asset allocation on the financial performance of pension funds in Kenya is critical in determining whether asset allocation as selected by Fund managers who are mandated by Trustees of Pension funds to carry out the investment function has an impact of either reducing or increasing the overall financial performance of the Fund assets. The study adopted a descriptive survey and utilized a sample of 40 schemes drawn from a population of 1232 schemes in Kenya.The findings of the study showed that asset allocation explained 58% of the variability of fund performance and that 42% was due to other factors such as the manager’s selection, timing of investments and securities selection within as asset class and the management style adopted by the fund managers of the fund. Further the study established that of all the asset classes permitted by the Retirement Benefits Authority (RBA), investments in Government securities, property, cash deposits and quoted shares was relatively more important in determining the overall performance of the pension funds.