Effects of Exchange Rate on Performance of Equity Funds in Kenya

Abstract

In recent years, Kenya has witnessed significant growth in both the quantity and scale of diversified equity mutual funds. Despite this expansion, their performance has not surpassed that of their benchmark, specifically the market return on a risk-adjusted basis. This assessment is based on various performance measures, including the Sharpe ratio. Poor performance of mutual funds in Kenya discourages 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 extent to which macro-economic variables affect the performance of mutual funds is unclear. Some scholars show a positive correlation, while others show a negative correlation between the variables. Other factors that had an impact on the overall economic climate, such as the COVID-19 pandemic, the war in Ukraine, and the uncertainty in Kenya's political environment as a result of its general elections, made the situation even more unpredictable. The purpose of this study was to examine the impact of the exchange rate on the performance of equity mutual funds in Kenya. 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 a census. The study relied on secondary data from the Central Bank of Kenya, the Capital Markets Authority, and the Kenya National Bureau of Statistics between 2018 and 2022. Panel data analysis was used. Descriptive statistics, encompassing measures such as mean and standard deviation, were employed in the analysis. Additionally, inferential statistics, specifically panel regression, were conducted. A static linear panel model was constructed to elucidate the relationship between independent variables and the dependent variable, which in this context is financial performance. The data was organized and presented in tables. Notably, the results indicated a noteworthy negative relationship between the exchange rate and the financial performance of equity funds. The findings of this research are of great importance to policymakers, managers of equity funds, and the scholarly community at large. It will be of significance to researchers and future scholars who might need to refer to it and build on it for further research. The study recommended that equity fund managers should invest in both domestic and foreign portfolios to diversify the risk associated with exchange rates.