EFFECTS OF MANAGEMENT STRUCTURE, OWNERSHIP STUCTURE AND ORGANIZATIONAL GOVERNANCE ON FINANCIAL PERFORMANCE OF UNIT TRUSTS IN KENYA

ABSTRACT 
In the Kenyan, unit trusts have played a pivotal role in the growth and development of the economy. Unit trusts have grown in acceptance and popularity as evidenced by the growth in the number of approved unit trust funds from virtually zero in 2001 to 11 in 2008. However, performance of unit trusts has elicited a lot of questions, there has been an average growth of Sh1.9 billion annually to Sh17.6 billion in a span of nine years much slower than other financial sector investments such as pension funds that have more than doubled within a span of five years. The purpose of this study thus was to examine some of the factors affecting financial performance of unit trusts in Kenya. The specific objectives were to establish the effect of management structure on financial performance; to establish the effect of ownership structure on financial performance and to find out the effect of organizational governance on financial performance the Unit Trusts in Kenya. The study employed correlational research design involving 30 Portfolio managers and 9 Fund Managers from 11 unit trusts. The study used structured questionnaires in the collection of primary data whereas financial performance data was gathered from secondary sources. Data collected was analyzed using descriptive statistics including frequencies, percentages, mean and standard deviation. Further Pearson Product Moment Correlation (r) was used to test the hypothesis. The key study findings were as follows: the constitution of management structure compliant to the requirements of the capital markets authority played a significant role in enhancing the financial performance of unit trusts. A significant proportion of the unit trusts were non-bank owned with participatory approach as the most popular management style. Diversity of ownership in the hands of different holders did not have a significant effect on the financial performance of unit trusts. Governance was fairly practiced in unit trusts and it significantly affected the financial performance of unit trusts. This study recommends the need for capital market authority to enhance monitoring of the activities of unit trusts and regular evaluations to establish their level of compliance with the requirements.

CHAPTER ONE 
INTRODUCTION 
Background of the Study 
Unit Trusts belong to the class of institutional investors. A Unit Trust Fund is an investment scheme that pools money together from many investors who share the same financial objective to be managed by a group of professional managers who invest the pooled money in a portfolio of securities such as shares, bonds and money market instruments or other authorized securities to achieve the objectives of the fund (Harman, 1987). The funds are collectively invested in a portfolio of assets such as shares, bonds, money market instruments and other authorized securities, in line with the common objective and needs of the group of investors. 

Unit trusts are the small investor’s answer to achieving wide investment diversification without the need of prohibitive sums of money. For investors with modest means to participate in the stock market and with relatively low risk tolerance, unit trusts represent a natural investment consideration. Depending on the type of fund, Unit Trust funds earn income in the form of dividends, interest received and capital gains realized from the appreciation of the assets invested in. In exchange of the money received from the investors, the fund issues units to investors who are known as unit holders. The underlying value of the assets of a Unit trust is always directly represented by the total number of units issued multiplied by the unit price less the transaction or management fee charged and any other associated costs (Capital Markets Authority, 2010). 

The Kenyan capital markets offer an array of investment products in the form of shares, bonds and unit trusts. The recognition of the increasing dominance and importance of unit trusts as an investment instrument has spurred researchers to devise appropriate techniques to track and assess portfolio performance. The earlier works by Sharpe (1966) and Jensen (1968) represent significant contributions to the evaluation of portfolio performance. Kagunga (2010) defines performance as a measure of the level of achievement in terms of target goals of the unit trusts. 

Performance evaluation of unit helps to determine whether fund managers do add value to the fund pooled together by unit holders. Fund managers can either be passive or active. Passive fund managers do ensure investments are done in accordance with a pre-determined strategy that doesn't entail any forecasting. The idea is to minimize investing fees (Schoenfeld, 2004) and to avoid the adverse consequences of failing to correctly anticipate the future. 

In the Kenyan, unit trusts have played a pivotal role in the growth and development of the economy with an average annual growth of 1.9 billion. Unit trusts have grown in acceptance and popularity and this is evidenced by the growth in the number of approved unit trust funds from virtually zero in 2001 to 11 in 2008 (Capital Markets Authority, 2010). The value of assets under management by unit trust firms increased by 68 per cent in the year 2010 attributed by gains in share price at the stock market and increased purchase of treasury bonds, (Maiyo, 2001). Unit trust managers' total assets increased by Sh11 billion to Sh28 billion in 2010 from Sh16.8 billion in 2009 CMA (2011). The total revenue of the fund managers, which includes unrealized gains on securities, increased more than four times to Sh3.8 billion compared to the 2009 level of Sh868 million. The industry reported profits after tax of Sh3.3 billion from Sh446 million with British American Asset Managers (BAAM) being the market leader in the industry measured by assets under management. 

However, the performance of unit trusts has elicited a lot of questions performance alike. There has been an average growth of Sh1.9 billion annually to Sh17.6 billion in the past nine years, which is much slower than other financial sector investments such as pension funds that have more than doubled over the past five years from Sh176 billion in 2005 to Sh420 billion CMA (2010). Most Unit trust managers concentrate their investments in quoted equities and bank deposits, which are less risky and more liquid. According to CMA (2010) the risk aversion by Kenya's unit trusts managers has led to limited growth of this investment opportunity as most put the bulk of the funds in banks and the stock market. To ensure prudent management of financial assets, in 2001, the Capital Markets (Collective Investment Schemes) Regulations were enacted to provide a framework for the regulation of Collective Investment Schemes. Investors’ contributions are pooled to purchase financial securities.

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Item Type: Kenyan Topic  |  Size: 82 pages  |  Chapters: 1-5
Format: MS Word  |  Delivery: Within 30Mins.
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