Effect of Agency Costs on the Portfolio Returns of Mutual Funds in Kenya

Abstract

The objective of this study was to determine the effect of agency costs on portfolio returns of mutual funds in Kenya. The study applied descriptive research design on a target population of 86 mutual funds in Kenya within the period from 2012 to 2016 both years inclusive. A sample size of 30 mutual funds was used and analyzed. The study used secondary data gathered from annual reports of mutual funds approved by CMA. Regression model was used to determine the effect of agency costs on portfolio returns of mutual funds in Kenya. Descriptive statistics on portfolio returns show that there was a mean of 3% in 2012, 3.6% in 2013, 4.5% in 2014, 5.8% in 2015 and 6.5% in 2016. The maximum returns were 24% in 2012, 24% in 2013, 27% in 2014, 36% in 2015 and 37% in 2016. It was established that, there is a positive association on portfolio return (Y) and audit cost since r = 0.414 and also a positive association between portfolio return and managerial incentives with r = 0.364. There was however, a negative association between portfolio returns and free cash flow with value of r = -0.132. The predictor variables influenced variation in Portfolio return as indicated by the adjusted R square statistics of 0.921 implying that 92.1% of the variation in the response variable was explained by the agency costs variables considered in the study. Since the p-value of the F test of 68.607 is less than alpha, which is 0.000 < 0.05 it therefore, implies that the effect of agency costs on portfolio returns in the study model is significant. This study results imply that agency cost statistically influenced the portfolio return of mutual funds listed in CMA in Kenya. The study therefore concludes that agency costs affect portfolio return of mutual funds in Kenya at 5% significant level. Based on this relationship, the study recommends that investor’s decision should take into account implications of the agency costs information for the mutual funds listed in CMA in Kenya. A study can be done to establish the effect of agency costs on portfolio returns of mutual funds in Kenya but covering a period of over 10 years and varying the measurement of variables and sampling method. A study is recommended to be carried out to determine the factors that affect the trends of portfolio returns of mutual funds in Kenya.