The Relationship Between Portfolio Diversification and Financial Performance of Centum Limited: a Case Study of Centum Limited

Abstract

Diversification of portfolios has become a modern concern with the aim of investors trying to minimize their risks and at the same time increase their returns. The main aim of the study was to assess the relationship between portfolio diversification and financial performance of Centum Limited. Centum ltd has been portraying a very clearer need and importance of the asset diversification over the years. The company has various Strategic Business Unites created for the purpose of diversifying its portfolios and making the investors grow over the years. This choice allowed the researcher to have a better insight on the relationship between portfolio diversification of a give company and it’s financial performance over a given period. The researcher purposively came with the choice of Centum limited since it has different asset classes of portfolios which make a good mix in that when one is not performing well in one particular financial period, another one may perform better to offset the loss. The study will be a time series so as to have a quick glance on the results. The study collected secondary data from the audited financial and published statements covering 2007 to 2016, a period of 10 years from Centum Limited. The study used multiple regression model which had one dependent variable (Yt) – financial performance/profitability (ROAt) of Centum and three independents variables including asset portfolios, inflation rate, and Gross Domestic Product represented by X1, X2, and X3 respectively. The study established that Centum portfolio diversification had a positive and significant relationship with performance in Real Estate and Infrastructure and marketable securities portfolio but had no significant relationship with financial services, Fast Moving Consumer Goods and unquoted equity portfolios. On the area of Real Estate and infrastructure, the Company is focusing on being part of the rising opportunities from the high demand in the Sector of housing in Kenya.The study recommends that Centum Limited should be consistent in its financial reporting so that the performance is tracked based on the portfolio where they come from. This would be the first step in achieving close monitoring of portfolio performance. The study also found the need for Centum Limited to train its Strategic Business Units (SBU) on portfolio diversification strategy so that the whole strategic functions of the firm are abreast to portfolio diversification strategies