Effect of Fund Specific Factors on Returns of Unit Trust Funds licensed by Capital Market Authority of Kenya

Abstract

Globally, researchers are preoccupied with determining the effect of fund factors on returns of unit trust funds. The study sought to establish the effect of fund specific characteristics on returns of unit trusts licensed by Capital Market Authority of Kenya. The study was under pinned by three theories including modern portfolio, efficient market hypothesis and capital asset pricing model. Descriptive research design was adopted. The study targeted 24 unit trusts licensed by CMA as at 31st December 2018. Publicly available information including audited financial statements and other published data by specific fund managers and Capital Market authority. The study examined various assumptions of classical least squares. Data extracted and recorded on data collection sheet were entered into excel sheet to generate variables. The excel sheet was then exported to STATA 14. Standard deviation, Minimum, means, scatter plots and maximum were used as descriptive statistics. The study adopted panels corrected standard errors model due to violation of a number of OLS assumptions. The research established a direct significant causal effect link between fund size and returns of unit trust. The research also established a direct and weak causal effect link existing between fund age and returns of unit trusts. In addition, the inverse causal effect link existing between fund risk and returns of unit trusts was major. The effect of fund cost on returns of unit trusts was statistically significant hence; the research concluded that cost of fund management is central in explaining returns of unit trust funds. Finally, the research revealed an inverse and weaker link existing between stock market performance and returns of unit trusts. Given the direct and stronger causal effect link existing between fund size and returns of unit trust, the study recommends to fund manager to collect more funds under their management. Based on the direct and weaker causal effect link existing between fund age and returns of unit trust funds, the research suggest to fund managers not be worried much about the returns at the beginning since fund performance increases with age. Given an inverse and stronger causal effect association between fund risk and returns of unit trust funds, the study suggest to management of unit trust funds licensed by capital market authority of Kenya to find ways of handling portfolio risk. The effect of fund cost on unit trust fund returns was statistically significant, hence the study recommends to management of Unit trust funds to find ways of cutting down on costs. The cost of fund being a major determinant of returns of unit trust funds, the fund managers should practice continuous cost reduction strategies. The management should identify cost drivers and then cut down on unnecessary cost in a bit to reduce the cost of fund management. Finally, given that, the study established an inverse and weaker association existing between common stock market performance and returns of unit trusts, the study suggest that management of unit trust fund managers should index their funds on performance of share market. The study also recommends that future studies should focus on other determinants of returns of unit trust funds including management factors, economic factors and industry factors. The study also recommends that other study to be carried out with more fund specific factors including fund diversification.