Socially responsible investment, portfolio management, institutional characteristics and performance of mutual funds in Kenya
Abstract
This study aimed at establishing the relationship among Socially Responsible Investments (SRI),
portfolio management, institutional characteristics and performance of mutual funds in Kenya so as to
address the four main gaps identified in literature namely: lack of consensus on why SRI occurs
especially in a developing economy like Kenya even when empirical evidence on the impact of SRI
on performance is inconclusive; the use of traditional financial analysis methods that have been
formulated to measure financial risk and return but which are unable to asses non-financial risk and
return created by social, ethical, governance, moral and environmental issues; lack of control for any
intervening or moderating variable when analyzing the relationship between SRI and performance;
and lastly limited studies on the combined effects of SRI, institutional characteristics and portfolio
management on performance.
In order to address these gaps six hypotheses were formulated and tested on a population of one
hundred and fourteen (114) mutual funds in Kenya that were either licensed by CMA or were
members of Aspen Network of Development Entrepreneurs. A positivistic research philosophy and
correlation descriptive research designs were adopted in the study. Preliminary statistical tests were
undertaken. These included Cronbatch alpha; descriptive statistics such as the mean, standard
deviation, coefficient of variation, kurtosis and skewness; Sharpe ratio, ethical coefficient and DEA
technical efficiency coefficient; and correlation analysis. Hierarchical multiple regression analysis
was then used to test the hypotheses. The response rate was 60.5%.
The findings are as follows: there is a statistically significant relationship between SRI and
performance (Adjusted R2 = 0.694, F= 52.528, p< 0.05); there is a statistically significant relationship
between SRI and portfolio management (Adjusted R2 = 0.092, F = 7.873, p< 0.05); there is a
significant relationship between portfolio management and performance (Adjusted R2 = 0.190, F =
4.341, p< 0.05); the relationship between SRI and portfolio management is not moderated by
institutional characteristics (∆R2 = 0.026, p > 0.05); portfolio management has an intervening effect
on the relationship between SRI and performance (Adjusted R2 = 0.469, F = 30.975, p< 0.05); and
there is a statistically significant combined effect of SRI, institutional characteristics and portfolio
management on performance of mutual funds in Kenya (Adjusted R2 = 0.826, F = 25.604, p< 0.05).
The results of this study add to existing knowledge in the area of SRI, portfolio management,
institutional characteristics and performance by showing that the relationship between SRI and
performance of mutual funds is not direct but rather is intervened by portfolio management. This has
helped in reduction of the controversy existing in literature. Since the findings of this study indicate
that there is a positive relationship between SRI and performance, fund managers can justify
including SRI in their portfolio. This study helps corporate managers to understand the impact of
their corporate social responsibility on the value of the firm which is important because many
companies spend part of the shareholders’ wealth on social responsibility with the hope of creating
social value and attracting socially responsible investors to the firm. The government and investment
regulators in the country such as the Capital Market Authority (CMA) and the Retirement Benefit
Authority (RBA) can use the findings in guiding the regulation process especially when setting limits
on the type of investments fund managers can include in their portfolio and thereby establishing the
fund managers’ fiduciary responsibility towards their clients