MACROECONOMIC FACTORS AND FINANCIAL PERFORMANCE OF EQUITY FUNDS IN KENYA

Abstract

Investment in mutual funds is becoming increasingly popular and plays a significant role in the financial sector. Over the past few years, diversified equities mutual funds in Kenya have grown in both quantity and size at an astounding rate. On a risk-adjusted basis, however, employing many performance metrics including the Sharpe ratio, they were no better than the market. Individual and corporate investors are discouraged by the weak performance trends of Kenyan mutual funds, which also impedes the implementation of vision 2030. In the eyes of investors, it is possible to foretell an investment's future success by studying its historical performance. It is not apparent how mutual funds are related to macroeconomic issues. The variables are correlated in some empirical works in a positive way and in others in a negative way. Additional variables that have an impact on the overall economic environment, such as the COVID-19 epidemic, the conflict in Ukraine, and the political unpredictability in Kenya following its general elections, have only served to heighten the situation's inherent unpredictability.The purpose of this study was to examine the impact of selected macro-economic factors on performance of equity mutual funds in Kenya. The macro-economic variables that were studied are inflation rate, national income and exchange rate. The study adopted a longitudinal research design. The target population consisted of 23 mutual funds with equity portfolios that were licensed by the Capital Market Authority. Of these, eleven were selected through a census. The study utilized secondary data from the Kenya National Bureau of Statistics, Capital Markets Authority, and Central Bank of Kenya between 2018 and 2022. Panel data analysis was implemented due to its capacity to integrate cross-sectional and time series data. The mean and standard deviation were the descriptive statistics that were conducted. Panel regression was employed in the course of inferential statistics. The static linear panel model was developed to ascertain the correlation between the financial performance of the dependent variable and the independent variables. Tables were employed to illustrate the data. The results indicated that the financial performance was significantly, negatively impacted by the exchange rate and inflation rate. Conversely, the financial performance of equity funds was significantly positively impacted by the Gross Domestic Product. In summary, the performance of equity funds is influenced by macroeconomic factors in both positive and negative ways. The results of this research are of significant importance to the scholarly community, equity fund managers, and policy makers. The research suggested that equity fund managers should diversify the risk associated with inflation and exchange rates by investing in both domestic and foreign portfolios. It will be of importance to researchers and future academicians who may need to refer to and expand upon it for additional research.