Effect of Investment Strategies on Investment Returns: Evidence From Kenyan Pension Funds

Abstract

This study was aimed at determining the impact of investment strategies on investment returns. The strategies in this case were categorized based on the extent of asset allocation in risky assets; the categories of investment strategies were therefore conservative, moderate and aggressive. The study focused on pension funds in Kenya over the five year period of 2013 to 2017. One of the objectives was to determine which of the three investment strategies result in the highest risk adjusted returns. To determine this, Sharpe ratios of investment returns for each strategy were computed. It was found that a conservative strategy resulted in the highest risk adjusted returns due to the lower volatility of returns compared to both moderate and aggressive returns. We also carried out a regression analysis of investment returns versus various macroeconomic variables (GDP growth, inflation, interest rates and currency movements). The results showed that the regression equation was statistically significant for each of the investment strategies implying that the macroeconomic variables explained a significant portion of the variability of investment returns for all the three strategies. It was also found that investment returns of an aggressive strategy were the most impacted by changes in interest rates and inflation. Key recommendations were to investment managers to conduct thorough due diligence when adopting an aggressive investment strategy by also considering the volatility of returns when pursuing higher returns. We also recommend that the monetary policy committee ensures stability of interest rates and inflation since they have a significant impact on investment returns of pension funds.