MACROECONOMIC FACTORS AND PERFORMANCE OF EQUITY FUNDS IN KENYA

Abstract

Investment in mutual fund plays an important role in the financial market and its popularity has increased at a very fast rate. Kenya has seen a phenomenal growth in both number and size of diversified equity mutual funds in recent years. However, they performed no better than the market on a risk- adjusted basis using various performance measures such as Sharpe ratio. Weak performance trends of mutual funds in Kenya are a discouragement to individual and corporate investors in addition to hindering the realization of vision 2030. Investors believe that information on past performance can be used to predict future performance. The relationship between macro-economic variables and mutual funds is unclear. Some scholars show a positive correlation while others show a negative correlation between the variables. The situation is made even more unpredictable by other factors that affected the general economic environment e.g., Covid 19 pandemic, war in Ukraine and uncertainty in the political environment in Kenya occasioned by its general elections. 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 be studied are inflation rate, national income and exchange rate. The study adopted a descriptive and correlational research design. The target population was 23 equity funds licensed by the Capital Market Authority of which eleven were sampled through census. The study relied on secondary data from Central bank of Kenya, Capital Markets Authority and Kenya National Bureau of Statistics between 2018 and 2022. Panel data analysis was used since it is a combination of both time series and cross-sectional data. Descriptive statistics done included mean and standard deviation. Inferential statistics which included panel regression were performed. Static linear panel model was established to shed light on the independent variables’ relationship with the dependent variable which is the financial performance. Data was presented in the form of tables. The findings revealed that exchange rate and inflation rate had a significant negative relationship influence on financial performance. On the other hand, the Gross Domestic Product had a significant positive influence on financial performance of equity funds. The findings of this research are of much importance to policy makers, mangers of equity funds and scholarly community at large. It will be of significance to researchers and future scholars who might need to refer to such and build on it for further research. The study recommended that equity fund managers should invest in both domestic and foreign portfolios to diversify risk associated with inflation and exchange rates.