Effect of Macroeconomic Variables on Financial Performance of Unit Trusts in Kenya

Abstract

One of the biggest problems in finance and especially risky assets management has tentatively been that of determining the returns of a collection of risky assets. Financial return evaluation of unit trusts is a crucial determinant of fund managers’ ability to add value to the resources under their stewardship. Every investor on the other hand is concerned with the issue of how well various portfolios have performed. After all, the objective of investing is to increase or at least protect financial wealth. In the long run, the fund manager capabilities and skills in value addition to wealth managed must be measured using results as the yardstick for performance. Conceptually, fund managers of unit trusts can invest in real assets or in financial assets. For the fund managers to achieve their investment objectives, selection of the investment is by undertaking fundamental analysis on macro-economic and micro-economic factors. This notwithstanding, serious difficulties and problems arise due to uncertainty in choosing the appropriate investment benchmarks and models. The unit trust industry in Kenya is very young having started with the passage of the Capital Markets Amendment Act (2000), which recognizes specific investment vehicles and microfinance institutions especially unit trusts. Unit trusts pool savings from investors and inject them in a portfolio of assets according to the funds stated objectives. Unit trusts offer the small investor an opportunity to achieve high investment diversification without with small manageable sums of money from his savings. Extensive research on unit trust financial performance has been done over the years by comparatively analyzing the unit trusts returns with those of the securities market or selected indices market in the developed countries. The findings confirm the unit trusts returns inability to earn higher returns than the selected market benchmarks. The motivation for the study was the poor performance of unit trusts in Kenya. According to the CMA report (2010), unit trusts returns trail below the profitability of bonds and equities traded in the NSE though the CMA projects that their growth will be higher in future. This poor performance of unit trusts and lack of popularity in Kenya against the presence of increased investments in intellectual assets raises questions on the effect of macroeconomic variables in solving the difficulties facing unit trusts in Kenya. The effect of macroeconomic variables on assets under management tops the list of financial concerns for long term investors. The study evaluated the effect of selected macroeconomic variables of financial performance of unit trusts listed and licensed in Kenya by the CMA. The study took a correlation research design approach. The study used quarterly secondary data from KNBS, CBK and CMA. The period covered by this study was January 2011 to December 2015.The study used data analysis software such as Microsoft Excel and SPSS to analyze the data. The multiple linear regression equation and Karl Pearson’s coefficient of correlation were applied in order to relate the selected macroeconomic variables to financial performance of unit trusts in Kenya. The selected macroeconomic variables consisted of interest rate measured by the commercial bank lending rate, Inflation rate measured by the CPI, Money Supply-M3 and Real GDP. The analysis entailed calculation of coefficients of the selected macroeconomic variables which were related to the NAV. The coefficients of macroeconomic variables were be represented by “β” in the multiple regression equation. The  Findings from regression analysis indicated that the adjusted R square for the selected macroeconomic variables under study explained 90.3% of the financial performance of unit trusts(NAV) in Kenya  and financial performance of unit trusts (NAV) reacts; positively to inflation-CPI, negatively to interest rate and money supply-M3 and its not affected by real GDP. The study’s intercept was 155.86.

Keywords: macroeconomic variables, financial performance,unit trusts,correlation,interest rate,inflation,money supply , Real gdp