Determinants of financial performance of unit Trusts in Kenya

Abstract

This study was aimed at identifying the determinants of financial performance of unit trusts in Kenya. A unit trust is an arrangement whereby property (shares, bonds and real estate) is held on trust for a large number of investors. This makes unit trust funds the ideal alternative, providing cost effective access to a wide variety of local and international shares or equities (companies listed on a stock exchange), bonds, and money market instruments such as fixed deposits, treasury bills and call accounts. This study utilized secondary data; which was from the annual reports of the unit trusts studied for the period between years 2008 to 2012. The NSE 20 share index was used in estimating the performance of unit trusts where by each unit trust performance was indicated in a percentage of the market Rate of Return. NSE provided rates of returns over the five year period to show performance distribution of the unit trusts. The study focused on registered unit trusts in Kenya from January 2008 to December 2012 with money markets, equity, fixed income, bond, growth, and balanced funds categories. In the analysis of determinants of financial performance of unit trusts in Kenya; fund size, expense ratio, equity fund allocation ratio, fund type, diversification of funds and the minimum investment amount were taken into account. Both dependent and independent variables were analyzed using Jensen’s Alpha model where by the alphas and betas computed from various rates of return; market rate of return, rates of return for funds taken into consideration and Risk Free Rate of Return for the various periods were used as constants. The findings of the study showed that size of fund is a critical determinant of performance of unit trusts. As funds grow in size, they tend to become more efficient in their operations. The study also found out that expense ratio an equity fund allocation ratio have no influence on fund performance of unit trusts. Diversification of funds and minimum investment amount were found to be having an impact on overall fund performance of unit trusts in Kenya. As per the study findings, the coefficient of determination value was 0.6534 significant. This indicates that 65.34% variation in determinants of financial performance of unit trusts in Kenya that is explained by variation of independent variables. Therefore, the other factors, which are not studied, contribute to the remaining 34.66%. The researcher therefore recommends more studies to be carried on unit trusts. Since the study was limited to internal factors, other studies should be done targeting economic factors such as general availability of credit, national disposable income, prosperity of people to spend, interest rates, inflation rates and trends in growth of Gross National product (GNP).