Effect of Portfolio Diversification on Financial Performance of Pension Funds in Kenya

Abstract

The ability of pension funds to earn adequate revenues to meet their costs and benefit commitments in the medium and long term is reflected in their financial performance. Over the last few decades, the financial performance of pension funds has received a lot of attention in many jurisdictions, particularly among policymakers. This has been ascribed to the fact that pension funds are a worldwide concern since people in both the formal and informal sectors around the world will retire or leave employment at some point in their life. The main intention of this research was to examine portfolio diversification influence on performance of pension funds in Kenya. Modern portfolio theory, arbitrage pricing theory and the capital asset pricing model were adopted to anchor the study. A descriptive research design was used in this research. The target population was the 1340 pension funds in Kenya. Secondary data was obtained from Retirement Benefits Authority and individual pension funds annual reports for a 5 year period (2017 to 2021). Upon collection of the data, inferential as well as descriptive statistics generated included frequencies and percentages and simple and multiple linear regression respectively. The regression results produced an R square of 0.4739 which implies that 47.39% of the changes in performance among pension funds in Kenya can be explained by the four selected variables for this study. The overall model was found to be statistically significant as exhibited by a p value of 0.000 which was less than 0.05. The study further revealed that portfolio diversification had a positive and significant effect on performance of pension funds in Kenya. Fund liquidity and fund size also had positive and significant effect on performance of pension funds in Kenya. This study concluded that portfolio diversification, fund liquidity and fund size are essential for pension funds‟ performance. The study recommends that pension funds‟ policy makers should come up with policies that increase portfolio diversification as this will lead to an increase in financial performance. The study further recommends that management and directors of pension funds should develop strategies aimed at increasing their fund liquidity and fund size as this leads to a rise in financial performance. Future researchers should focus on other determinants of financial performance among pension funds in Kenya.