Relationship between asset allocation and financial performance of Mutual funds in Kenya
The mutual funds industry in Kenya has been in process of significant transformation. The force behind this transformation of the mutual fund industry is how these funds allocate assets which impact their overall financial performance. Mutual Funds including Pension funds are the principal sources of retirement income for millions of people in the world. They are also important contributors to the GDPs of countries and a significant source of capital in financial markets. The objective of this study is to investigate whether unit trusts in Kenya have better performance compared to that of market portfolio, given their systematic risk. The study found out that there was a difference between the performance of unit trusts and the market. This is illustrated especially in the year 2011, where the stock market slumped in its performance while that of the unit trusts improved in its returns by 18% as compared to the previous years. However, in the year 2010 and 2011 both returns from the stock market and the unit trust recorded an upward trend while in 2010, both were affected by external factors namely the post-election violence to record a downward trend in performance. Given the desire of investors to seek out diversification in their asset portfolios and considering the performance of the stock markets, many investors have sought to diversify their holdings further by investing in unit trusts. Unit trusts are attractive mainly because of the minimum risk involved as well as mutual funds are professionally managed. These funds are invested in shares, bonds and real estates. The findings show that unit trusts have performed well over the period of study. In most of the instances, the market trail behind the performance of unit trusts. The fact that unit trust outperformed the market can be attributed to the fact that fund managers could be in a position to predict stock prices based on several fundamental variables such as initial dividend yields, market capitalization, price earnings ratios, and price to book value ratios. This implies that fund managers may have access to enough private information to offset their expenses. These results are consistent with the notion that mutual funds are efficient.