Portfolio Management and Profitability of Unit Trust Companies in Kenya

Abstract

The choice of portfolio and the ideal allotment of funds under various options for investment is a subject of interest in economics. Investment is guided by three basic needs: income, capital preservation and capital appreciation. A unit trust company is a financial service organization that gets money from shareholders, invests it, earns returns, tries to increase its value and agrees to pay shareholders cash when they need it and the current value of investment. Unit trusts advantages include diversification, high liquidity, and professional management. In Kenya unit trusts companies contribute immensely to the countries’ gross domestic product and currently the sector has mobilized funds amounting to billions of Kenya shillings. Portfolio management are of great importance when it comes to profitability of unit trusts companies. In Africa, unit trust companies are used for investing. Unit trusts are designed to enable even individual and institutional investors to invest. However, unit trust companies have profitability challenges and portfolio management affects profitability of unit trust companies in Kenya. This study focuses to probe effects of portfolio management and profitability of unit trust companies in Kenya. Specific objectives of this study are:, to establish the effect of expected rate of return on profitability of unit trust companies in Kenya, to establish the effect of risk on profitability of unit trust companies in Kenya and to establish the effect of liquidity on the profitability of unit trust companies in Kenya. Theories assessed are Modern Portfolio Theory, Expected Utility Theory, Capital Asset Pricing Model and Financial Intermediation Theory. The research design applied is descriptive research design. Target populations are portfolio managers in the 24 unit trust companies and a census study was adopted as sampling procedure. The researcher used structured questionnaires to collect data. Pilot testing was done to determine validity of research instrument. Content analysis was conducted to analyze the respondents’ views concerning portfolio management and profitability of unit trust companies in Kenya. Fieldwork was done later. Completed questionnaires were checked to ensure completeness and consistency. Content analysis and descriptive analysis was conducted. Data was analyzed using mean score, mean weighted averages, percentages, standard deviations, and regression analysis. Tables and other graphical presentations were used for data collected exhibition for easier understanding and analysis. The study found out that expected rate of returns has a positive and significant effect on profitability of unit trust companies. Risk has a positive and significant effect on profitability of unit trust companies. Liquidity has a positive and significant effect on profitability of unit trust companies in Kenya. The study established Portfolio management has a positive and significant effect on profitability of unit trust companies in Kenya. The study recommends Units trusts in the country to adopt portfolio management, expected rate of returns, risk and liquidity to be considered in making investment decision to increase the profitability. The study will provide insight to the investors by providing a more modern approach in evaluating unit trusts profitability and help portfolio managers hold profit generating portfolio for their company and investors. The findings will also benefit regulators to come with new policies and regulations to favor growth and profitability in the unit trust industry and finally aid researchers to form basis for their studies.