AN INVESTIGATION INTO THE STATE

OF REGULATION, TRANSPARENCE
AND COMPETITIVENESS OF MUTUAL
FUNDS IN KENYA

BY

MAINA MIHARI

UNITED STATES INTERNATIONAL

UNIVERSITY - AFRICA

SUMMER 2014
 STUDENT’S DECLARATION

I, the undersigned, declare that this is my original work and has not been submitted to any
other college, institution or university other than the United States International University in
Nairobi for academic credit.

Signed: ________________________ Date: _____________________

Maina Mihari (ID 637869)

This project has been presented for examination with my approval as the appointed
supervisor.

Signed: ________________________ Date: _____________________

F. Gatumo

Signed: _______________________ Date: ____________________

Dean, Chandaria School of Business

ii
 COPYRIGHT

© Maina Mihari, 2014

All rights reserved. No part of this project report may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical, photocopy,
recording or otherwise without the prior written permission of the author

iii
ABSTRACT
The main purpose of this study was to determine the current state of regulation, transparency,
and competitiveness of mutual funds in Kenya. Specific research questions were tackled in
this study in order to evaluate the gains which have been recorded in this sector. Due to the
newness of this sector, there is a relative paucity of literature on the Kenyan market which
this study aspired to address.

The research methodology explains different methods and procedures that were used to carry
out this study. The researcher explains the research design of the study which comprised
mixed methodology that is both quantitative and qualitative research design. The population
in this study was 36 managers drawn from mutual fund companies, authorized stock brokers,
Nairobi Securities Exchange and the Capital Markets Authority. Stratified random sampling
was used in this study which gives the researcher the ability to use other techniques after
forming the strata on the population. The sample frame was obtained from the human
resource divisions of the various institutions, with the sample size having been calculated to
be 27 with the confidence level of 90%. A minimum sample size of 30 was used in the study
in order to adhere to best practice. The data collection instruments were structured
questionnaires with both open and closed questions. Experts on financial markets, finance
lecturers and colleagues pre-tested the questionnaire. The data has been presented in various
forms including tables, charts, graphs and frequency distribution tables after being coded,
cleaned and analyzed using Statistical Package for Social Sciences (SPSS).

The study found that the regulator of mutual funds in Kenya requires to adopt a more
consultative and proactive approach with regard to stakeholders. The study discovered that
stakeholders generally find the laws and regulations unduly bureaucratic and not enabling of
innovation and progress. The study unearthed a large amount and extent of information
asymmetry between stock broker respondents and their mutual fund counterparts. This is a
theme that was underscored by the study, which found mutual fund companies in Kenya with
high conservatism in the area of information release, particularly of the voluntary,
unregulated, nature. The absence of adequate user-friendly, publicly available data makes the
noble task of identifying, through neutral and independent analysis, Kenya’s best performing

iv
mutual funds difficult. Such quantitative research enables more objective measurement,
rewards performers, directs investors, and enables public scholarly comparison with regional,
continental, or global trends.

The study concludes that regulation of mutual funds in Kenya suffers from poor adaptation of
rules and laws to foster technological/financial innovations. Further, mutual fund regulation
is not conducted in a sufficiently robust and consultative manner. The study establishes that
there are low levels of transparency in Kenya’s mutual funds which significantly impede
greater success of mutual funds uptake by the investing public. The study determines that
investors in Kenya are not convinced that mutual fund companies offer superior returns when
compared to other financial assets nor that shareholder costs are properly itemized and
disclosed. The study concludes that the competitiveness of mutual funds will be enhanced
through increased advertisement/publicity to the investing public, allowing more players/fund
types into the market, and increasing mutual fund yields.

The study makes a number of recommendations, including compulsory and standardized

reporting, central collation and public dissemination of information, heightened investor
education/awareness, increased competition through allowing additional players/products,
and increased capacity and effectiveness of regulator. This research argues that Kenyan
mutual fund companies may in fact be cost effective and worthy of much greater shareholder
numbers, but are selling themselves short through poor publicity and awareness strategies.

The importance of this study was in finding current gaps in both policy and practice in the
mutual funds market in Kenya. There is a wealth of data and research from the developed
nations, particularly the United States which is the global leader in mutual funds in volumes
and, pertinently, various best practices. Kenya can benefit immensely from the experiences,
research and infrastructure of developed nations such as the United States and Britain in order
to unlock its own potential. The study will benefit the Nairobi Securities Exchange, the
Capital Market Authority, mutual fund companies, policy makers, financial institutions, other
emerging capital markets, existing and potential investors, learning institutions and
academicians.

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 ACKNOWLEDGEMENT

I wish to acknowledge my supervisor, Mr. Francis Gatumo, for his timely and wise guidance
through this project report. I similarly thank Professor Buyu for his support and
understanding in the course of my studies. I also salute my MBA colleagues with whom we
shared the learning experience. I am indebted to the respondents at the various institutions
who took time and effort to fill in the questionnaires, thereby making this research possible.
Above all, I thank Almighty God.

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 DEDICATION

To My Dear Wife Tabitha

vii
 TABLE OF CONTENTS

STUDENT’S DECLARATION ..............................................................................................ii

COPYRIGHT ......................................................................................................................... iii

ABSTRACT ............................................................................................................................. iv

ACKNOWLEDGEMENT ...................................................................................................... vi

DEDICATION........................................................................................................................vii

LIST OF FIGURES ...............................................................................................................xii

LIST OF ABBREVIATIONS .............................................................................................. xiv

CHAPTER ONE ...................................................................................................................... 1

1.0 INTRODUCTION.............................................................................................................. 1

1.1 Background of the Study ..................................................................................................... 1

1.2 Statement of the Problem ..................................................................................................... 5

1.3 Purpose of the Study ............................................................................................................ 7

1.4 Research Questions .............................................................................................................. 7

1.5 Importance of the Study ....................................................................................................... 7

1.6 Scope of the Study ............................................................................................................... 9

1.7 Definition of Terms.............................................................................................................. 9

1.8 Chapter Summary .............................................................................................................. 11

CHAPTER TWO ................................................................................................................... 12

2.0 LITERATURE REVIEW ............................................................................................... 12

2.1 Introduction ........................................................................................................................ 12

2.2 The Regulation of Mutual Funds ....................................................................................... 12

2.3 Mutal Fund Transparence .................................................................................................. 17

2.4 Competitiveness of Mutual Funds ..................................................................................... 26

2.5 Chapter Summary .............................................................................................................. 31

CHAPTER THREE ............................................................................................................... 32

3.0 RESEARCH METHODOLOGY ................................................................................... 32

viii
3.1 INTRODUCTION ............................................................................................................. 32

3.2 Research Design................................................................................................................. 32

3.3 Population and Sampling Design ....................................................................................... 33

3.4 Data Collection Methods ................................................................................................... 35

3.5 Research Procedures .......................................................................................................... 36

3.6 Data Analysis Methods ...................................................................................................... 36

3.7 Chapter Summary .............................................................................................................. 37

CHAPTER FOUR.................................................................................................................. 38

4.0 RESULTS AND FINDINGS ........................................................................................... 38

4.1 Introduction ........................................................................................................................ 38

4.2 General Information ........................................................................................................... 38

4.3 Regulation of Mutual Funds in Kenya ............................................................................... 42

4.4 Transparency of Mutual Funds in Kenya........................................................................... 50

4.5 Competitiveness of Mutual Funds in Kenya ...................................................................... 54

4.6 Comparison of Responses .................................................................................................. 60

4.7 Chapter Summary .............................................................................................................. 69

CHAPTER FIVE ................................................................................................................... 70

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS .............................. 70

5.1 Introduction ........................................................................................................................ 70

5.2 Summary ............................................................................................................................ 70

5.3 Discussion .......................................................................................................................... 71

5.4 Conclusions ........................................................................................................................ 73

5.5 Recommendations .............................................................................................................. 75

REFERENCES....................................................................................................................... 78

APPENDICES ........................................................................................................................ 84

Appendix I: Cover Letter ...................................................................................................... 84

Appendix II: Questionnaire .................................................................................................. 85

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Appendix III: Mutual Fund Companies In Kenya ............................................................. 91

Appendix IV: List of Member Firms - Nairobi Securities Exchange .............................. 93

x
LIST OF TABLES

Table 2.1: Stock Exchange Listings .................................................................................... 16

Table 2.2: Stock Exchanges - Comparative Growth ........................................................... 17
Table 2.3: Summary of Information Availability on Mutual Fund Company Website ...... 21
Table 3.1: Population Size Distribution4 ............................................................................ 33
Table 3.2: Sample Size Distribution5 ................................................................................. 35
Table 4.1: Gender Distribution of Respondents6 ................................................................ 39
Table 4.2: Respondents by Sector of employment7............................................................ 39
Table 4.3: Length of Time Served with Organization8 ...................................................... 40
Table 4.4: Education Levels of Respondents 9 ................................................................... 40
Table 4.5: Profile of Respondents by Years of Participation in Capital Market 10............ 41
Table 4.6: Profile of Respondents Showing Extent of Investment Responsibility 11 ........ 41
Table 4.7: Regarding the Promotion of Ethical Conduct in Mutual Funds 12 ................... 42
Table 4.8: Regarding Fairness and Effectiveness 13 .......................................................... 43
Table 4.9: Regulations with Respect to Technological and Financial Innovations 14 ....... 43
Table 4.10: Are Mutual Funds keen on All Classes of Investors? 15 ................................... 44
Table 4.11: Do Mutual funds Promote a Culture of Savings? 16 ......................................... 44
Table 4.12: Are Mutual Funds Doing a Good Job in Market Awareness? 17 ...................... 45
Table 4.13: Impact of Political and Economic Environment 18 ........................................... 45
Table 4.14: Effect of the Number and Variety of Participating Securities at NSE 19 .......... 46
Table 4.15: Opinions on Challenges Hindering Efficient Regulation of Mutual Funds 20 .. 47
Table 4.16: How To Deal with Efficient regulation of Mutual Funds Challenges 21 .......... 49
Table 4.17: Shareholders are Continuously Informed of Their Right to Information 22 ..... 51
Table 4.18: Availability of Policy Change Correspondence 23 ............................................ 51
Table 4.19: Regarding Hidden Charges in Mutual Funds 24................................................ 52
Table 4.20: Regarding Conflicts of Interest 25 ..................................................................... 52
Table 4.21: All Information on Prices and Returns is Available on Website 26 .................. 53
Table 4.22: Other Variables to Determine/Promote Transparency of Mutual Funds 27 ...... 53
Table 4.23: Profitability for Mutual funds at the NSE 28 ..................................................... 55
Table 4.24: Yields for mutual funds 29 ................................................................................ 55
Table 4.25: Operational Costs of Mutual Funds 30 .............................................................. 56
Table 4.26: Mutual Fund Portfolio Management Strategy 31 .............................................. 56
Table 4.27: Measures in Place to Mitigate Losses at the Stock Market 32 .......................... 57
Table 4.28: Mutual Fund Staff Bonuses and Commissions 33 ............................................. 57
Table 4.29: Itemization and Disclosure of Costs 34 ............................................................. 58
Table 4.30: Other Measures Which Can Be Used to Promote Competitiveness 35 ........... 59
Table 4.31: Analysis of Closed Questionnaire Questions – Sections B, C, & D 36 ............. 67

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LIST OF FIGURES
Figure 4.1: Respondents’ View of Major Challenges Hindering Efficient Regulation ....... 48
Figure 4.2: Proposals to Enhance Efficient Regulation of Mutual Funds ............................ 50
Figure 4.3: Variables That Can Be Used to Determine/Promote Transparency .................. 54
Figure 4.4: Measures That Can Be used to Promote Competitiveness of Mutual Funds ..... 60
Figure 4.5: Kenyan Laws Promote Ethical Conduct in Mutual Fund Operations................ 61
Figure 4.6: Laws and Regulations are Regularly Updated to Meet Innovations .................. 61
Figure 4.7: Individual and Institutional Investors are Aware of Mutual Fund Benefits ...... 62
Figure 4.8: Mutual Companies in Kenya Have Invested in Modern Trading Systems ........ 63
Figure 4.9: There are No Hidden Charges in Mutual Funds ................................................ 63
Figure 4.10: All Relevant Investor Information Available at All Times on Website ......... 64
Figure 4.11: Mutual Funds in Kenya Keep Low Operational Costs .................................. 64
Figure 4.12: Mutual Funds in Kenya Use the Active Strategy in Managing Portfolios ..... 65
Figure 4.13: Mutual Funds have Adequate Strategies to Mitigate Stock Market Losses ... 65
Figure 4.14: All Costs Borne by the Shareholder are Properly Itemized and Disclosed .... 66

xii
List of Equations

Equation 2.1: Return on Fund .............................................................................................. 27

Equation 3.1: Sample Size Computation 2 .......................................................................... 35

xiii
 LIST OF ABBREVIATIONS

CMA Capital Market Authority

NSE Nairobi Securities Exchange

SPSS Statistical Package for Social Science

xiv
 CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

Financial markets are integral to the functioning of modern economies. These markets are the
link between those with surplus financial resources to those with a deficit of financial
resources. Financial markets subsectors include the interbank market, the stock exchange
market, the money market, the bond market, the foreign exchange market, the insurance
market, and the derivative market. Financial intermediaries include deposit-taking
commercial banks, insurance companies, pension funds, mutual funds, and investment
bankers (Aduda, Masila, & Onsongo, 2012).

Lenders, or those with financial resource surplus, include individuals and cash-rich
companies. Borrowers, also referred to as those with a deficit of financial resources, consist
of a wide range of persons including individuals, cash-deficient companies, the Central
Government, Municipal/County Government, and Public corporations. Markets exist to
provide an efficient mechanism through which the needs of lenders and those of borrowers
can be met (Barnes, 2009).

Financial markets are usually categorized based either on level of trading, or on the basis of
security types. Based on level, financial markets are classified as either primary markets or
secondary markets. Based on security types, a financial market is dichotomized into money
market, capital market (equities and debt), derivative market, deposit taking banks, non-
deposit taking banks, and the financial services market (Stewart, Piros, & Heisler, 2011).

Financial markets, through their framework and impact, have a critical role in mobilizing
savings. They do so by fostering a climate conducive to investments. They have additional
benefits such as giving impetus to national economic growth, nurturing entrepreneurial
growth, and catalyzing industrial development (Stewart, Piros, & Heisler, 2011).

1
The functions of financial markets are wide-ranging. Among the intermediate functions are
information provision, capital formulation, income enhancement, resource transfer, sale
mechanism, price discovery, value storage, risk management, risk transfer and increased
productivity. Among the financial functions performed by financial markets are assisting
balanced economic growth, credit creation, asset securitization, facilitating lenders with
earning assets, and liquidity provision (Aduda, Masila, & Onsongo, 2012).

Financial markets in addition have been shown to enhance efficiency in the corporate sector
by monitoring management and exerting corporate controls. The markets assist in rewarding
good corporate performance and sanctioning non-performance through price changes which
reflect in the market as information is provided to market players and investors (Barnes,
2009). Theories have been advanced to explain the workings of the capital market. The most
dominant of these is the Efficient Market Hypothesis (EMH). EMH postulates that an
efficient capital is one in which security prices adjust swiftly to the arrival of new
information and therefore, the current prices of securities reflect all information about the
security (Fredman & Wiles, 1993).

The assumptions made with respect to the requirements of an efficient market include that
new information about a security comes to the market in a random manner, a large number of
profit-driven players independently analyze and value securities, and that securities prices
rapidly adjust to the new information. The speed is driven by competition among investors
who each aspire to make profit by exploiting the new information (Nelson, Wells, Perry, &
Hanson, 2005).

EMH has been criticized on several grounds. How quickly does information in reality
percolate the consciousness of investors up to the decision making point? How much of this
information is considered relevant by some and irrelevant by others? Also, since risk appetite
and profiles differ among investors, the same piece of information will not have an identical
effect on each investor (Capocci & Zhang, 2000).

2
The Capital asset Pricing Model (CAPM) is a popular model developed in 1964 which is
used to calculate the required rate of return of an asset given its relative riskiness. The model
assumes all investors are price takers and trade without transaction costs. The model in
addition assumes investors have homogeneous expectations, are rational and risk averse, and
can access unlimited funds at the risk free interest rate (Stewart, Piros, & Heisler, 2011).

CAPM remains popular and in application despite the subsequent development of other more
robust, realistic, practical models showing portfolio performance in the real world. Criticisms
of CAPM include assumptions of homogeneity of access to information, its inability to
explain stock returns volatility, and investor unevenness of risk appetite (Barnes, 2009).
Owners of surplus financial resources channel them to earning assets through lending them
out to borrowers, either directly or indirectly. Stock market crashes in the past, sector under-
performance, bankruptcies, liquidations, development of portfolio theories, and enhanced
investor awareness have all contributed to the need for investors to diversify their investment
holdings and therefore reduce catastrophic risk. Yet discerning what investments to hold in a
large menu in a vast market is increasingly a specialized task. The growth of mutual funds to
give expert guidance has been fuelled by this need as well the twin attribute of enabling
relatively less endowed investors to obtain shareholding in a range of blue chip concerns
(Aduda, Masila, & Onsongo, 2012).

Optimal growth of assets and preservation of value through prudent portfolio building is the
raison maitre of mutual fund companies. The value of assets held by the mutual fund business
at the end of 2012 amounted to over 26.8 trillion United States dollars, with the United States
of America contributing about half of that amount(Investment Company Institute, 2013). The
spectacular growth of mutual funds globally since their creation about a century ago attests to
the effectiveness and popularity of mutual funds as investment vehicles (McWhinney, 2009).

Mutual funds are still not understood widely, especially in emerging markets. A recent study
in the Delhi area of India (Batra, Laxmi, & Gupta, 2012) showed that variation and muddled
behavior on the part of investors leading to the preference for fixed deposit investing was
driven by unfounded fear and lack of awareness about investing in mutual funds. Uncertainty

3
on the part of the would-be investor may be caused due to a lack of a robust disclosure
regimen which enables the investor to make decisions from a position of knowledge

The Kenya Vision 2030 is a national long-term development blue print that seeks to
transform Kenya into a newly industrializing, middle income country by the year 2030. The
vision moreover pursues providing a high quality of life to all its citizens in the same time
frame in a clean and secure environment. The vision is anchored on three pillars, economic,
social and political and envisages the fast-tracking of the economic growth rate to 10 per cent
per annum and sustaining the same until 2030. The vision is built on several premises, among
them infrastructural development, human resource development, and public sector reforms.
Deepening Kenya’s capital markets is a declared Vision 2030 flagship project, under the
economic pillar, whose objective is to create access to capital markets, raise savings, enhance
investment rates, and increase stock market capitalization (Kenya Vision 2030, 2013).

Kenya’s financial sector is regulated by five regulatory agencies, namely the Capital Markets
Authority, the Insurance Regulatory Authority, the Retirement Benefits Authority, the Sacco
Societies Regulatory Authority, and the Central bank of Kenya (Joint Regulators Board,
2013).The Capital Markets Authority licensed 10 investment banks, 11 stock brokers, 23
fund managers, 18 investment advisors, 15 authorized depositories and 16 collective
investment schemes in 2013 to conduct business (Capital Markets Authority, 2013). The
Retirement Benefits Authority had 1,216 (Retirement Benefits Authority, 2013)registered
pension/provident/retirement schemes in 2013 in addition to approving/registering 31
administrators, 7 actuaries, and 11 registered custodians for business the same year
(Retirement Benefits Authority, 2013). The websites of the regulators are considerable mines
of information regarding operations and performance metrics of various players and spheres
of Kenya’s financial sector.

Kenya’s capital markets have been identified as key in meeting the nation’s Vision 2030
objectives. This includes enabling affordable housing, providing avenues for pension secured
mortgages, and the investing of funds in more productive sectors of the economy, as opposed
to investing in government paper (Retirement Benefits Authority, 2013). For the markets to

4
efficiently mobilize and allocate resources, the framework should therefore, inter alia,
provide robust disclosure and dissemination provisions to increase competitiveness,
transparency, market information, and investor confidence.

Aduda, Masila and Onsongo (2012) noted that constant liquidity is an important and
attractive feature attracting savers and investors to the stock exchange. Maintenance of this
liquidity requires that there be sufficient volume and size of transactions in the bourse.
Aduda, et al. (2012) found that stock market liquidity, income per capita, domestic savings,
and bank development are important factors in the development of the stock exchange market
in Kenya. Kenya is counted among the emerging markets, where profit and risk potential are
both considered high.

Aduda, et al. (2012) established that Foreign Direct Investment (FDI) in host countries are a
significant source of capital, and is associated with enhanced technology and skills transfer.
Moreover, foreign capital is positively linked to institutional and regulatory reform, equitable
trading practices, and heightened investor protection.

1.2 Statement of the Problem

Adviser compensation is the fees paid by a mutual fund to its investment adviser. Although a
fund’s board has a fiduciary duty to the fund, the usually close relationship between the board
and its adviser may inhibit vigorous negotiation for lower fees (Alterbaum, 2011).The issues
of trust and credibility lie at the heart of perceptions of investors with regard to mutual funds.
Unethical or illegal deals which can damage the standing of the framework of mutual funds
include insider trading, late trading, rapid trading, and other acts, which though not out
rightly illegal, work against the best interests of the fund, and the fund’s shareholders (Smith
& Golberg, Can you TRUST your fund?, 2003).

Among reasons cited for exiting or dumping a fund are asset bloat, loss of key manager(s),
change in strategy, and consistent underperformance at the fund (Tan, 2013). This implies

5
that investors need to keep themselves in the know with respect to strategic direction of the
fund, investment criteria, asset funding levels, and comparisons with other funds in order to
gauge inferior/superior performance.

Morningstar (2013) identified the United States as the best market for mutual fund investors.
The United States earned an “A” grade for investment distribution, taxation, fees and
transparency. Among twenty four countries surveyed in the report, the United States had the
world’s best disclosure and lowest expenses.In addition the media in the United States is
lauded for doing a fine job in emphasizing a long term perspective and low costs. Korea is
one of the few jurisdictions worldwide where funds are required to disclose the name of
portfolio manager, along with the manager’s three years prior experience. South Africa
scored the worst among the twenty four countries surveyed, mainly on account of its poor
disclosure practices(Alpert, Rekenthaler, & Suh, 2013).

Best practices proposals for strengthening and clarifying the role of independent investment
companies have been made to improve oversight and corporate governance in mutual fund
companies. These proposals include periodic evaluation of board’s effectiveness by fund
directors, all fund directors keeping abreast of industry and regulatory developments, and
adoption of policies on retirement of trustees, among a slew of others (Nelson, Wells, Perry,
& Hanson, 2005).

The Capital markets Authority (CMA) in its 2012 Annual Report and Financial statements
outlines progress in various areas such as the setting up of Real Estate Investment Trusts
(REITS) and demutualization (Capital Markets Authority, 2012, p. 5). The report also
contains breaches by named entities of certain rules/regulations/laws and the sanctions
imposed by the authority (Capital Markets Authority, 2012, pp. 24-27). The breaches
outlined include unauthorized sale of client shares, failure to issue profit warnings, and
issuing public announcements without CMA approval. The report is however mute on insider
trading or uncompetitive trading behaviour which press reports in September 2013
(Anyanzwa, 2013) revealed as a serious issue that the authority wishes to take action on.

6
How well are Kenya’s mutual funds regulated? How far from international best practice are
Kenya’s practices, and what is the subsequent impact on the performance, perception, and
health of Kenya’s mutual funds? Few researches have been published on mutual funds in
Kenya. Karau (1996) concluded that Kenya’s financial sector was ready for the
establishment of mutual funds. Ng’ang’a (2001) found that lack of understanding of the
mutual fund concept among the investing public, inadequate legislation, and lack of interest
among potential promoters were the three biggest factors impeding development of mutual
funds in Kenya. With the establishment of mutual funds in Kenya, it is appropriate to
examine Kenya’s mutual funds with respect to the aspects of transparency, regulation and
competitiveness. This study therefore sought to shed light on this area.

1.3 Purpose of the Study

The purpose of this study was to determine the practice and gaps in Kenya’s mutual funds in
the areas of regulation, transparence, and competition when compared with worldwide best
practice.

1.4 Research Questions

The study sought answers to the following questions;

1.4.1. What is the state of regulation in Kenya’s mutual funds?

1.4.2. What is the state of transparency of mutual funds in Kenya?

1.4.3. What is the state of competitiveness of mutual funds in Kenya?

1.5 Importance of the Study

1.5.1 Investors, stock brokers and Underwriters

The research assists investors to clarify the pros and cons in investments in Mutual funds. It
clarifies the perceived and actual advantages of investing in mutual funds, including
unexplained variances in mutual fund earnings in Kenya. The study is important also to

7
underwriters as they are important in uptake of securities, including increasing investor
awareness.

1.5.2 Mutual Fund Managers

The study assists mutual fund managers in understanding investor perspective as well as
illuminating how mutual funds can position themselves better for competitive advantage
against other investment vehicles. Other areas of concern which emerge in study are how
investors working in areas outside mutual funds perceive mutual funds.

1.5.3 Capital Market Authority

The study identifies and highlights knowledge, policy, or practice gaps in Kenya’s mutual
funds industry for possible action by the authority. Such gaps include regulatory oversights
which may contribute to making mutual funds less transparent or less appealing to investors.

1.5.4 Policy Makers

The research reveals patterns, anomalies and gaps for planners and policy makers to consider.
For instance, factors hindering Kenya’s ongoing march towards a middle income country by
2030 should be addressed by evaluation and monitoring arms of Vision 2030, among other
planners.

1.5.5 Lawmakers
Law makers give teeth to desired regulation, and provide incentives and sanctions to achieve
those ends. Kenya’s lawmakers will therefore benefit from the study by seeing what existing
laws accomplish or fail to accomplish with respect to mutual funds growth in Kenya.

1.5.6 Researchers & Academicians

The research builds toward the body of information and knowledge of institution and
capacity building with reference to Mutual funds in Kenya.

8
1.6 Scope of the Study
The subject of the study is the mutual funds industry in Kenya. The scope of study was
confined, geographically, to Nairobi Kenya. Since all mutual funds and regulatory bodies are
headquartered in Nairobi and are relatively few, a comprehensive survey was considered
feasible. The limitation of the study was that frequently there was no scope to query why a
respondent made a particular opinion on a question. This was overcome through collating
respondents’ opinions on various questions with their views and suggestions for improvement
made in other parts of the questionnaire. Other limitations are a necessary guardedness on the
part of some or all respondents due to perceived risks of frankness. The guardedness was
overcome through written guarantees of confidentiality.

1.7 Definition of Terms

1.7.1 Financial Markets

Financial markets are the places financial instruments are bought and sold, and are an
economy’s central nervous system. Financial markets relay and react to information quickly,
allocating resources, and determining prices (Cecchetti, 2008). Financial markets facilitate the
flow of funds and thus enable financing and investing by households, firms, and government
agencies (Madura, 2003).

1.7.2 Financial Instruments

A financial instrument is the written, legal obligation of one party to transfer something of
value, usually money, to another party at some future date, under certain conditions
(Cecchetti, 2008). Financial instruments, also called securities, are claims on the issuer’s
future income or assets. Financial instruments are the operational devices through which
funds from lender-saver participants (also called surplus units) to borrower-spenders (also
referred to as deficit units) are channeled (Mishkin & Eakins, 2009).

9
1.7.3 Mutual Funds
Mutual funds are companies or institutions that sell shares to surplus units and use the pooled
funds received to purchase a portfolio of securities (Madura, 2003). Mutual funds are
investment vehicles which sell shares to investors and savers (surplus units) and which,
through pooling of these funds, are able to offer liquidity intermediation, denomination
intermediation, diversification, cost and managerial advantages to those surplus units
(Mishkin & Eakins, 2009).

1.7.4 Financial Sector Regulatory Framework

Okioga (2007) describes the financial sector regulatory framework as one that performs the
role of supporting, safeguarding, monitoring, and ensuring financial stability through
providing an enabling, fair financial services sector environment.

1.7.5 Transparency of Mutual Funds

The transparency of mutual funds is defined as the increased flow of timely, reliable,
economic, social and political information which is accessible to all relevant shareholders
(Haslem, 2007). Transparency involves, but is not confined to, increased disclosure of
operating practices to the public, clear revelation of any relationships between fund managers
and other advisors, greater clarity on how fees are charged, compensation arrangements
between mutual funds and stock brokers, and all managerial remuneration and bonuses
(Mishkin & Eakins, 2009)

1.7.6 Competition
Competition is the interaction between companies in buying and selling goods and services
that establishes prices, levels of sales, and, as a consequence, market share, profitability and
continuity (Wyburd, 1998).

1.7.6 Ethics
Corporate ethics relates to the application of ethical values to business behavior. It
encompasses board strategies to tactical tasks, goes beyond legal requirements and is

10
therefore to some extent discretionary. Companies increasingly have a formal, detailed
ethical framework and policy to guide employee and corporate action (Rowan & Zinaich,
2003).

1.8 Chapter Summary

This chapter has provided an overview of the background of the study, statement of problem,
purpose of the study, and has set out the research questions. The study seeks to establish the
current state of mutual funds within Kenya’s financial sector, and the general economy. The
study is relevant to the areas of financial inclusiveness, financial innovation, empathy with
the needs of investors, as well as the prospects and threats to the mutual fund industry in
Kenya. Chapter two of the study, which is literature review, undertakes a critical analysis of
the literature and research material already available within and outside Kenya in order to
provide a sound theoretical and practical framework to this study. Chapter three describes the
research methodology applied, while chapter four presents the analysis of study findings.
Lastly, chapter five presents the discussion, conclusions and recommendations based on the
findings.

11
 CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction
This chapter presents a review of the literature of various practitioners, writers and scholars
on mutual funds. A literature review examines recent, or historically significant, research
studies, company data, or industry reports that provide a background and basis for the
proposed study. The review offers perspective on critical points of current knowledge,
theoretical framework, as well as highlighting trends and gaps in the area of interest or study
(Cooper & Schindler, 2001). It further gives details on the workings of mutual funds, the
concept of efficient markets, as well as trends and challenges in financial markets with
specific reference to mutual funds in Kenya. The literature reviewed is in the context and
areas of mutual fund regulation, transparency and competitiveness.

2.2 The Regulation of Mutual Funds

Mutual funds are among the financial products which require regulatory oversight in order to
ensure fairness and efficiency (Barnes, 2009). Regulation in the financial market sector is
necessary in order to ensure market integrity, protect investors, prevent infiltration by
criminal entities, and guard against harmful activities by market players such as market
rigging, misinformation, and overpricing (Mishkin & Eakins, 2009).

2.2.1 Regulatory Framework

In the narrow and legal sense, Unit Trusts and Mutual Trusts may be deemed to be two
different investment vehicles because they are established under different laws. Unit Trusts
are established through trust law, while mutual funds are established under company law. The
fund manager of a unit trust is supervised by a board of trustees, while the fund manager
under a mutual fund is supervised by a board of directors. In each case, however, investors
pool their money in the investment vehicle after considering and subscribing to the
prospectus outlining investment strategy. In either case, individuals and companies pool

12
funds to achieve diversification, lower unit costs, and expertise in investment of that money
into various market securities. Some authors have noted the insignificant differences between
the two and have consciously interchanged the terms. Unit trust is “the term used to identify a
mutual fund in the UK and some other countries” (Mobius, 2007, p. 182).

Due to the similarities/overlaps in the purpose, structure, management and oversight of unit
trusts and mutual funds, this study uses the term mutual funds to encapsulate the various
similar open end collective public investment vehicles (variously called unit trusts and mutual
funds) whose prime purpose is to achieve for investors professional management,
diversification, lower costs, convenience and liquidity (Mobius, 2007).

Mutual funds in Kenya come under the regulatory ambit of the Capital Market Authority. The
authority is an independent public agency which was constituted in 1990 as a regulatory body
charged with the prime responsibility of licensing, supervising, and monitoring the activities
of market intermediaries. The authority was established by an Act of Parliament, Cap 485A,
and its mandate includes ensuring proper conduct of all licensed persons and market
institutions, promoting market development through research on new products and
institutions, promoting investor education and public awareness, and protecting investors’
interests (Capital Markets Authority, 2013).

The detailed regulations setting out operational requirements for collectives Investment
vehicles in Kenya, among them mutual funds and unit trusts, were released in December
2001 and are known as the Capital Markets (Collective Investment Schemes) Regulations,
2001 (Capital Markets Authority, 2001). “Collective Investment Scheme” includes an
investment company, a unit trust, a mutual fund, or other scheme which is incorporated or
organized under the laws of Kenya which is managed by or on behalf of the scheme by the
promoter of the scheme, and collects/pools funds from the public for the purpose of
investment. Cooperative societies, retirement benefit schemes, building societies and credit
unions are excluded from the definition and scope of Collective Investment Schemes (Capital
Markets Authority, 2001).

13
Most nations in the world use either two models in supervising the financial sector, the single
regulator or approach of the multiple regulators. The financial sector is broadly divided into
three segments: Banking, Insurance and the securities markets(Silvia, 2008). Some countries
such as Singapore, Japan, Korea and Germany use a single regulator model. Others such as
Kenya and the United States use the multiple regulatory models.

Proponents of single regulatory model argue that old distinctions between banking, insurance
and securities have increasingly become less clear due to increasing overlap of products and
services (Silvia, 2008). Supporters of the multiple regulator model argue that more than ever
because of complexities and sophistication in individual sectors makes a single regulator
unwieldy inefficient and not suited to oversee the wide breadth of financial services.

2.2.2 Technical and Financial requirements

Trust funds are formed under trust law or precedent. Trusts are essentially an arrangement
recognized under law under which one person (the trustee) holds property for the benefit of
another. Funds formed as trusts are often known as “unit trusts” and holdings in them are
known as “units”. They are created by a trust deed, to which the signatories are the
management company and the trustee. The investor becomes a beneficiary of the trust upon
subscription of money to the fund, in return for which he receives a holding of units. The
beneficiary has rights to the returns earned by the fund in proportion to his contribution to the
total value of the fund (St. Giles, Alexeeva, & Buxton, 2003, p. 33).

Voting rights of unit holders in unit trusts are more limited than those of shareholders in
corporate funds. Unit trusts, in contrast to corporate funds, do not have annual general
meetings. Extraordinary general meetings may be called however to debate and vote on
specified issues, such as an increase in fees or a change in investment objective (St. Giles,
Alexeeva, & Buxton, 2003, p. 33). This is not unique, however. Most mutual funds require
the approval of a majority of the fund’s shareholders to change the fund’s major objectives or
policies (Mobius, 2007, p. 11)

In the US, a new fund must have a seed capital of at least $100,000. Investment advisors have
overall responsibility for performance of the fund and handle the business affairs. In order to

14
safeguard investors, a Fund’s investment adviser and employees of the advisor are subject to
numerous restrictive covenants including being barred from transactions that may occasion a
conflict of interest. A mutual fund in the United States is an open end management company
registered with the Securities and Exchange Commission with the Investment Company Act
(Howat & Reid, 2007).

In Kenya, a mutual fund requires a minimum issued share capital of ten million in order to
commence operations. In addition, the mutual fund must appoint fund managers and trustees
all who must be professionally suited to their duties. The requirement for mutual trust are set
out in the capital markets act (Cap 485A) and the Capital markets collective investment
schemes regulation 2001.

2.2.3 Disclosure Requirements

In all circumstances and prior to the engagement the law and regulations in the US requires
certified financial planners to disclose in writing conflict(s) of interest and sources of
compensation (compensation practices for retail scale)

Kenya’s stock exchange has a reputation of being one of the world’s best in terms of returns
in the last few years. A look however at the bourse shows a stark lack of growth in number of
listed companies in the last quarter century. This is in great contrast to countries like
Indonesia, Turkey, Kuwait and Oman. These countries were at par with, or behind, Kenya in
1989 but by 2012 had numbers of listed companies on their bourses far in excess of Kenyan
numbers (World Bank, 2013) as shown in Table 2.1.

15
Table 2.1: Stock Exchange Listings
1989 2000 2012

Number of Number of Number of

Participating Market Participating Market Participating Market
Country Companies Capitalization Companies Capitalization Companies Capitalization

US Dollars US Dollars US Dollars

(Billions) (Billions) (Billions)
Kenya 57 0.499 57 1.3 57 14.8
Indonesia 57 2.2 290 26.8 459 396.8
Oman 52 0 131 3.5 124 20.1
Turkey 50 6.8 315 69.7 405 308.8
UAE 0 0 54 5.7 102 68
Saudi Arabia 0 0 75 67.2 158 373.4
Kuwait 52 9.9 77 20.8 189 97.1
Ghana 0 0 22 0.5024 34 3.5
Botswana 0 0 16 0.9777 24 4.6
Nigeria 111 1 195 4.2 192 56.4
Namibia 0 0 13 311.2 7 1.3
Mauritius 0 0 40 1.3 87 7.1
Bulgaria 0 0 387 0.6172 503 6.7
Source: World Bank (2013)

Mutual funds are popular with many investors because of their features of diversification,
continuous professional management, low operating costs, shareholder services, liquidity and
safety from loss due to unethical practices (Fredman & Wiles, 1993).

Although Kenya’s listed companies in numbers for 2012 remain unchanged from 1989
figures, the Kenyan bourse has recorded a market capitalization growth rate of 2,865.9%.
This figure, while reflecting individual growth of listed companies, also incorporates
changing values of money over time. It may also be that demand has outstripped supply as
the relatively small available stock is chased by an ever increasing number of investors,
leading to higher stock prices. This lack of growth of listed securities at the Nairobi bourse
also severely constricts and restricts choices available to investors. The number and market
capitalization of the Kenyan stock exchange compared with selected other exchanges is
shown in Table 2.2.

16
Table 2.2: Stock Exchanges - Comparative Growth

Growth Rate - 2012 over 1989

1989 2012 Figures
Number of Number of Number of
Participating Market Participating Market Participating Market
Country Companies Capitalization Companies Capitalization Companies Capitalization
In Billions of US In Billions of US
Dollars Dollars % %
Kenya 57 0.499 57 14.8 0.0 2,865.9
Indonesia 57 2.2 459 396.8 705.3 17,936.4
Oman 52 1 124 20.1 138.5 1,910.0
Turkey 50 6.8 405 308.8 710.0 4,441.2
Kuwait 52 9.9 189 97.1 263.5 880.8
Nigeria 111 1 192 56.4 73.0 5,540.0
Source: World Bank (2013)

The mutual funds industry is larger in countries with stronger regulations, laws, rules, and
particularly where mutual fund investor rights are better protected. Mutual funds also tend to
do well where the population is comparatively wealthy and educated. The industry is smaller
in countries where entry barriers are higher, the industry comparatively younger, trading costs
higher, and defined contribution pension funds less prevalent (Khorana, Servaes, & Tufano,
2005).

Some companies in Kenya have expanded product range in order to exploit the strong growth
of mobile phone use in the country. In 2012, Old Mutual launched a product called i-INVEST
which allows investors to register, invest, update static information, withdraw, and switch
between selected funds using their registered mobile phones. At launch, the minimum initial
investment amount was fixed at Kshs. 4,800 (US $57), with minimum subsequent top up of
Kshs. 480 (US $ 5.7) per investor (Technology Banker, 2012).

2.3 Mutal Fund Transparence

The strength of financial markets depends on the level of confidence that investors and other
participants have in the integrity of the market (Mishkin & Eakins, 2009). This confidence is
based on several factors, chief among them being market transparency. Transparency is the
disclosure of all information that will ensure the proper accountability of institutions to their

17
boards, investors, shareholders, regulators, and other stakeholders, goes a long way in
boosting (Transparency International, 2011).

2.3.1 Why Transparency is Vital

It is explicit in most legislation that allow the formation of mutual fund companies that the
public interest requires that mutual funds be managed in the interests of Fund shareholders
not Fund advisers.This is for instance clearly set out under the USA’s investment Company
Act of 1940. The general concept of transparency in disclosure that applies to domestic,
international, private and public institutions also applies to Mutual Funds.

Transparency is defined as “the increased flow of timely and reliable economic, social and
political information, which is accessible to all relevant stakeholders (Haslem, 2007). It is
further characterized as necessarily being accessible, relevant, and reliable and of good
quality. Transparency is therefore the standard for institutional openness without which then
enables shareholders to monitor and evaluate the actors of fund investment advisers.

The benefits of transparency include lower financing costs, lower risk profile, and positive
effects on banking stability. Opacity in the financial markets results in the build-up of hidden
risk, and evolution of “shadow” banking systems. Policies to enhance transparency should
incorporate whistle blower protection, remuneration policies, and integrated risk management
(Transparency International, 2011).

The transparency concept obtains its primacy due to the endemic principal agent problem.
Principals cannot be sure that delegated tasks are being carried out by the agents with the
required effort, skill and honesty. It is costly to monitor the actions of the agent, whose
interests and objectives may differ from those of the principal.

18
Client groups have unique goals, but they all seek strong investment performance. Assets will
quickly flow out from fund managers who deliver subpar performance or handle their clients
poorly. Corrupt sales tactics, unrealistic claims, and wrong use of client assets will speedily
destroy client’s trust in a manager, and with it, the manager’s business. A well-defined
transparent business ethics policy, and business practice will be useful in saving a fund
business from such pitfalls (Stewart, Piros, & Heisler, 2011).

Kerr and Cohen (2010) introduce the concept of Trunits, which are units of trust, in business
relationships. The authors demonstrate that market players rationally choose honesty as the
best policy under conditions where trustworthy and transparent dealings are explicitly
recognized and objectively valued. The authors argue for business models that actively factor
in, and reward transparency in business transactions. The additional benefit to be obtained is
to provide pressure for disreputable players to either shape up or exit the market.

Fund managers are sometimes apprehensive about sharing poor results with fund
shareholders and may end up using reporting models that are systematically biased toward
showing minimized risk or volatility. This is obviously unfair and opaque to customers who
may want to exit the portfolio rather than endure further risk to value (Kochman, Badarinathi,
& Goodwin, 2001)

2.3.2 Differing Levels and Aspects of Transparency

Since mutual funds do not target a select number of private investors but the investing public,
the transparency level should be at least of the same level as publicly traded corporations
(Haslem, 2007). Competitive markets, individual choice and transparency have been
identified as the major dimension of mutual fund public policy.

“Positive transparency” evaluates a particular fund transparency within framework and

contest of current laws, regulations and fund priorities. This approval is often inadequate
against the backdrop of laws and regulations that have not kept abreast of industry
development and requirements (Haslem, 2007).

19
Normative transparency is the “should be” approach and a particular fund’s transparency is
evaluated within the context of the laws, regulations and fund best practice that should be in
place. Mutual fund normative transparency is that fund proactive, voluntary disclosure, as
well as legal and regulatory disclosure required for investors to be able to make information
efficient for fund investment decisions (Haslem, 2007).

Haslem (2007) argues that the superior and investor focused normative transparency can be
achieved is there is willingness by Fund Managers. He recommends absolute candor
including disclosure of all soft dollar costs and revenues. He further advocates the disclosure
of transaction costs, pay to play agreements, actual fund costs (in dollars or reporting
currency) on shareholder statements, and elimination of directed brokerage. Howat and Reid
(2007) concur with Haslem (2007) that soft dollar commissions should be outlawed.

Transparency is critical to informational efficiency of the markets (Barnes, 2009). Decisions

which could have created wealth, or prevented wealth destruction, will not be made with the
information deficiency caused by lack of transparency. By the same token, potential investors
should have the same information for resource allocation efficiencies to be realized in the
economy.

The websites of US mutual fund companies are rich mines of information. From the largest
mutual fund entities such as Vanguard to the smaller ones such as Hancock Horizon
Burkenroad Small Cap, the websites are repositories of diverse information such as expense
ratio, the names of the individual managers actually in charge of various portfolios, and the
most up to date financial statements to mutual fund shareholders. There is further a Statement
of Additional Information (SAI) outlining fund turnover rates, diversification risk and
geographic risk (Hancock Horizon Funds, 2014).

20
 Kenya’s mutual funds companies, as may be seen in the Table 2.3 below, have not yet
harnessed the power of their websites as powerful marketing and communication mediums
which can store large amounts of data which would otherwise be unwieldy or onerous to
communicate.

Table 2.3: Summary of Information Availability on Mutual Fund Company

Website

MUTUAL Shows Shows Unit Historic Fund Benchmark Performance Information

FUND Objectives Management Figures Index Against Current on
COMPANY and Risk Costs Available Shown Benchmark website
Profile Since Index Shown
inception
1 British 
× × × × ×
American
2 Old Mutual   ×   Updated to
31.12.2013
3 Stanbic × × × × × ×
4 African
    Updated to
Alliance ×
30.09.2013
Kenya
5 CIC asset     Updated to
×
31.12.2012
6 ICEA Lion 
× × × × ×

7 Commercial Website Website Website Website Website Website

Bank of Africa inaccessible inaccessible inaccessible inaccessible inaccessible inaccessible
8 Zimele Asset Financial
statements for
 
× × × Y/E
31.12.2013
available
9 Amana   Updated to
× × ×
Capital May 2013
10 Genghis   ×
× × ×
Capital
11 Madison Asset  
× × × ×

12 Dyer & Blair × × × × × ×

13 Standard
 
Investment × × × ×
Bank
 - Indicated/available on mutual fund company website
× - Not indicated/not available on mutual fund company website
(Websites Information Content checked as at March 20th 2014)

21
Mutual funds in the United States on average have a 1.3% - 1.5% annual expense charge on
the shareholders’ funds (Investopedia, 2012). Kenya’s mutual funds, from information
available from their web sites, charge at almost double more. The lowest annual fees are
charged by African Alliance and ICEA Lion at 2%. The highest is Old Mutual, charging
3.37%. In addition, Kenya’s mutual funds are all “front-end” loads where an investor pays an
initial fee based on amount to be invested. The lowest initial or front-end fees is charged by
Zimele at 3% with most of the others such as African Alliance Kenya, and ICEA LION
charging 5%.

Kenya has weak whistle-blower and witness protection mechanisms. Further, Kenya’s police
is not adequately trained, motivated and compensated, making it both an easy magnet and
breeding ground for corruption (Aronson, 2010). Indeed, the Kenya police force, now
renamed Kenya Police Service, has been rated over the past few years as the most corrupt
institution in Kenya. This has serious implications when it comes to investigating,
prosecuting, and deterring economic crimes in Kenya. The low confidence ratings of the
police and the judiciary contribute to the apathy by the public in reporting corruption, bribery,
and other economic misdeeds (Transparency International, Kenya, 2013).

It is important for law, order, and crime deterrence that there is transparency in dealing with
economic crimes. Kenya’s laws are relatively lenient on white collar crimes, with fines not
exceeding Kshs. 1,000,000 and prison terms not exceeding 10 years. There has been no
notable or high profile economic crimes conviction in Kenya, despite a slew of legislation
including the Anti-corruption and Economic Crimes Act (2003), the Proceeds of Crime and
Anti-Money Laundering Act, Ethics and Anticorruption Commission Act, and Public officer
ethics Act (Aronson, 2010).

The poor conviction rate in Kenya and weak deterrent laws can be contrasted with the record
in the United States, a country with a far better corruption perception score. In the year 2000,
Sholam Weiss was sentenced to 845 years in prison for his role in looting and bankrupting a
life insurance company. In 2009, Bernie Madoff was sentenced to 150 years in jail, with
mandatory restitution and fines, for running an elaborate ponzi scheme. Thomas Petters was

22
in 2010 sentenced to 50 years in prison for money laundering. Other high profile convictions
include that of Martha Stewart, an American celebrity and former fashion model, who was in
2004 convicted and jailed for insider trading, obstruction of justice, and lying to the
government (Haury, 2012).

Kenya passed a new constitution in 2010 with a stronger bill of rights and freedom to
information. Nevertheless, the practice and culture of transparency and disclosure has not
permeated the society. An effective and corruption free police and judiciary are essential in
supporting competitive markets devoid of vice, which is a challenge given the two
institutions low public confidence scores (Transparency International, Kenya,
2013).Transparency in the areas of environmental impact and environmental audit reporting
are still fringe areas in Kenya. Scope in this area includes lending to or investing in high risk
sectors, poor risk management processes, and the absence of independent qualified board
members (Anti-Corruption Resource Centre, 2012).

2.3.3 Current and Evolving Challenges to Transparency

Five types of economic crimes that were reported consistently around the globe were asset
misappropriation, procurement fraud, bribery and corruption, cybercrime and accounting
fraud. Surveys showed that Africa had the worst economic crime rate at 50%, followed by
North America (41%), Eastern Europe (39%), Latin America (35%),Western Europe
(35%),Asia Pacific (32%), with the Middle East with the lowest at 21%
(PriceWaterhouseCoopers, 2014).

Corruption is now accepted to be one of the world’s biggest challenges. Corruption feeds on
the very fabric of society, diverts resources from their proper use, shields criminals, and
further marginalizes the poor in society. The financial costs of corruption and bribery
undermine business performance and engenders reputational risks which grossly enfeebles
financial markets’ role of resource allocation and wealth maximization(United Nations,
2013).

23
Current and evolving challenges to transparency include a lack of political will, inability to
get consensus across the board on what customer focused reporting is. In addition,
regulations take debate and time to institute, and almost always fall behind innovations.
Often, even well thought out regulations turn out to have gaps or deficiencies due to market
developments or because of the wide variety of investments tools in the market(Fredman &
Wiles, 1993).

The mutual funds investment infrastructure has got quite complex and many non-finance
investors will not have the training to understand technical terminologies. Lynch and Musto
(2003) state that some money management strategies are better than others. Funds that
replace algorithms and investment advisors after poor performance have less outflow than
those that retain the advisors. In reporting poor performance, managers may attribute artificial
factors to dismal performance. Shareholders may be unable to independently discern the real
cause of the underperformance (Lynch & Musto, 2003).

New and novice investors, due to lack of transparency, cognitive capacity limits, and to
incomplete information, make choices that are not necessarily in their best interest (Lee, yun,
& Haley, 2012). Information may also be set out or given in an unduly complex or
complicated manner, leading to loss of interest in reading the content.

Having more than one regulator supervising an entity can lead to bureaucratic grey areas, and
increase costs of compliance. For instance, some fund companies in Kenya are supervised by
both Regulatory Benefits Authority (RBA) and the Capital Markets Authority (CMA). Each
regulator may lack the bird’s eye view necessary to uncover and correct lapses in disclosure
and transparence (Okioga, 2013).

Financial services sectors in Africa are exceedingly small by global standards and lack
advanced financial investment products (Okioga, 2013). It is also note-worthy that in the
information age many parts of Kenya lack internet and power access. Kenya is the regional
financial hub but nevertheless has still not developed the army of analysts, financial

24
journalism and industry watchers who elsewhere act as effective disseminators of
information, allowing the swift price adjustment which is the hallmark of an efficient market
(Cecchetti, 2008).

Flowing from the same set of circumstances that result in Kenya’s under-development are an
investing public that is as yet not sophisticated and demanding enough to bring about robust,
sustained shareholder activism. Such activism acts as a bolster and as a spur to regulatory
oversight, and managerial compliance. Shareholder activism helps to address the corporate
stakeholder relations historically marked by power imbalance and mistrust (Marshall &
Brown, 2007).

Although regulatory and legal strides have been made, key among these the passing of the
Capital Markets (Amendment) Act 2013, Kenya still has a long way to go in having a climate
where high standards of ethical practice are a reality. In spite of the country routinely been
ranked as one of the most corrupt in the world, Kenya has yet to successfully convict a
handful of high profile individuals of sophisticated, white collar and costly economic
crimes(Transparency International, 2013).

Kenya has wide income inequalities, and national wealth is concentrated in relatively few
hands. Political patronage plays a role in appointment of individuals to influential positions
such as heads of regulatory bodies. Due to the close links between Kenya’s political and
economic elites, it is possible that regulators may be compromised or otherwise face strong
political resistance in any attempts to introduce broad reform and disclosure measures
(Honohan & Beck, 2007).

Accelerated regional integration at the monetary and financial systems levels within the East
Africa region before the governance issues are addressed may further compound structural
weaknesses and further widen the gap with global best practice (Honohan & Beck, 2007).

25
2.4 Competitiveness of Mutual Funds
Depositors/investors in mutual funds expect, for the management fees that they bear, expert
care and superior performance in the returns of their portfolio. The investment field has
become more sophisticated due to growing complexity of practice and ongoing advancement
of theory. The increased complexity stems from advances in modern portfolio theory, mofe
complex instruments, increased demand for performance, increased client sophistication,
rising retirement costs, and the dramatic growth in assets under management(Stewart, Piros,
& Heisler, 2011).

A mutual fund can make money in three ways, namely, dividends, capital gains distributions
and share price increase. Dividends and interest are the regular income payments received
from investments in both stocks and bonds. These payments go into the portfolio of the
mutual funds that hold these shares or bonds. Mutual funds distribute these dividends in
accordance with its schedule. Such distributions could be monthly, quarterly, half yearly or
annually. Additionally, mutual fund shareholders can often decide whether to receive these
payments in cash, or receive additional units of the fund (Mobius, 2007, p. 66).

Capital gains are the profits a fund makes when the price of its securities rises. This gain is
realized when the fund manager sells a security. A realized capital gain is equal to the
difference between the sale price and the purchase price of the security. The fund has
unrealized gains when the fund manager holds onto securities that have risen in price.

26
Total return over several years is an important measure and is computed as follows;

Total NAV2 - NAV1+ CGD+DIV

= X 100 = % Return
Return NAV1

Where;

NAV2 = the fund's NAV at the end of the measurement period

NAV1 = the fund's NAV at the beginning of the measurement period
CGD = the total capital gains distributed
DIV = the total dividend payments

Equation 2.1: Return on Fund

The above formular assumes no further new issues of funds has been made between the
beginning and the end of the measurement period (Mobius, 2007).

Fund companies frequently provide an annualized return figure to reflect the total return over
several years. This measures the average increase per year during a specific period of time,
and includes the compounded returns made on reinvested dividends and capital gains over the
years. This is useful in comparing the performance of a fund to similar funds for the same
time periods (Mobius, 2007).

Mutual funds compete with commercial banks, savings institutions, credit unions and
insurance companies for funds from surplus units. Commercial banks and savings institutions
offer greater security than mutual funds but lower returns. Credit unions have the advantage
of offering member loans, an advantage counter-balanced by debt default risk. Mutual fund
companies therefore compete to demonstrate in the customer’s mind that their products offer
superior value to that of the competing commercial banks, savings institutions and credit
unions (Madura, 2003).

27
2.4.1 Measures of Competitiveness
Debate continues on whether the active approach delivers returns that are superior to those of
passive funds. The same investor may rationally embrace active strategy for some assets and
passive strategy for another class of assets. Active management assists in keeping markets
efficient, and in rational capital allocation(Jones & Wermers, 2011).

Performance of mutual funds is gauged primarily through rises (or declines) in the value of
the portfolio as well as cash disbursements in the form of dividends paid out. Risk and return
are important concepts in evaluating performance. In general, the higher the return the higher
the expected return. Investors are in general risk averse and therefore seek to maximize
returns while minimizing risks (Basso & Funari, 2005).

It is not an easy task to compare a number of portfolios due to lack of uniformity in the risks
and the expected returns (Basso & Funari, 2005). Performance measures are therefore usually
adjusted for the appropriate risk in order to obtain risk-adjusted performance measures. The
adjustments, depending on individual corporate policy, yield measures such as the Sharpe,
Treynor, and Jensen indices. Benchmarking against indices is done to make performance
evaluation a more objective exercise.

Benchmarking is used to measure under, average, or over-performance of an investment

cluster or portfolio. Because many conditions are outside a manager’s control, performance
measurements seek to find that aspect of fund performance that can be traced to the fund
manager through skillful portfolio management. In order to do this, an index that closely
mirrors the market fundamentals and which also incorporates good performers is sought
(Conversano & Vistocco, 2010). The investment portfolio will subsequently be checked
against the comparison index, called a benchmark index since it will be the measure against
which performance is measured.

The benchmark is a reference parameter for the portfolio manager in the asset allocation
process, a tool for the audit committees to monitor management team activity, and a reference
index for investors to evaluate management performance (Conversano & Vistocco, 2010). An

28
active manager can beat the benchmark index through either stock selection or factor timing.
The mutual fund prospectus gives firm guidelines on the asset allocation methodology of the
fund and gives fund managers discretion to act within those parameters (Petajisto, 2013).
Tracking-error volatility is a measure that describes the volatility, or changes, in a fund that
are not explained by movements in the fund’s benchmark index.

Apart from gains or losses made through trading, a fund’s value is impacted by its costs. It
has been shown that institutional mutual funds tend to outperform retail mutual funds. This is
due to the former’s lower costs caused by scale economies and performance sensitive
fees(Jones & Wermers, 2011). Large cash inflows for successful funds often result in less
lustrous results due to the tipping of balance in the demand/supply matrix of niche
investments that produce superior performance (Petajisto, 2013).

Active managers can be placed in two categories, superior active managers (SAMs) and
inferior active mangers (IAMs). SAMs deliver, through better analysis and predictions,
greater value to fund shareholders than IAMs (Jones & Wermers, 2011).

2.4.2 Competition to Mutual fund companies

In the United States, exchange traded funds (EFTs) and hedge funds have lured investors
from mutual funds due to frequently superior returns. Exchange funds frequently have lower
costs and hence higher returns, while hedge funds are given a greater operational ambit by
the regulators than mutual funds. This greater scope, while riskier, lends itself to greater
returns (Barnes, 2009).

In Kenya, the empirical evidence is that saccos and chamas are significantly more popular
than mutual funds as investment vehicles. This almost certainly is due to the fact that mutual
funds as a reality in Kenya are barely a decade old (Aduda, Masila, & Onsongo, 2012).

29
In America, however, the variety, sophistication and transparency of the mutual funds
ensures that the main competition to mutual fund companies are not other forms of
investment vehicles, but other mutual fund companies. It has been shown that the attrition
rate of firms with higher expenses (and therefore market underperformance) is higher than
those with more favourable expenses (Kinnel, 2007). The under-performing funds are
liquidated or merged away significantly more than their more efficient competitors.

2.4.3 The Disclosure Regime and its Effect on Competitiveness

Costa and Jakob (2010) have shown how the use of a pair-wise F-test can objectively and
statistically show which manager, and therefore which fund, has outperformed or
underperformed relevant bench mark indices. Equivalent results, eliminating good fortune
and coincidences, were achieved by Barras, Scaillet, and Wermers (2010). The latter study
showed a rapidly diminishing of skilled fund managers when taken as a proportion of the
whole. This may be a consequence of greatly increased complexity in financial markets.

2.4.4 Technological and other forms of Innovations to Increase Competitiveness

Kiplinger is an American publisher of business forecasts and personal finance advice based in
Washington, D.C. Its periodicals, The Kiplinger Letter, and Kiplinger’s Personal Finance, are
among the most respected and widely read periodicals in the world. The company maintains
on its website a large and comprehensive set of data on various companies. Among the data it
maintains and analyses is that of mutual funds inside and outside America. It maintains, in a
systematic and tabular format, information showing for each fund the fund name, fund
symbol, Total returns (1 year, 3years, 5 years), geographical bias, style, turnover, net assets,
minimum investment, maximum load, expense ratio, yield, average bond rating, fund
manager, and how long the fund manager has handled the fund. The company’s website, as at
November 2013, showed these data for over 23,500 funds, all available for free at the click of
the mouse (Kiplinger, 2013).

The website is an interactive tool that allows users to compare funds, either singly or in
groups, or to arrange the listing of funds according to returns. The site also indicates to users
which funds are exchange-traded, which funds are open/closed to new investors, and which

30
funds are tax exempt. The website clearly warns users that past performance is no guarantee
of future results (Kiplinger, 2013).

2.5 Chapter Summary

This chapter has highlighted the concepts which apply in mutual fund management, as well
as the operating framework. The chapter reviewed contemporary literature on transparency,
regulation, and competitiveness with respect to mutual funds. Chapter three explains the
research methodology, and the methods and procedures that were adopted in this study.

31
 CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 INTRODUCTION
This chapter discusses the research methodology and procedure that was used for collecting
and analyzing data in the study of the regulation, transparency, and competitiveness of
mutual funds in Kenya. Cooper and Schindler (2008) state that methodology is a set of
systematic techniques or procedures used to gather and analyze data related to research
questions or hypotheses. Accordingly this chapter will discuss the research design,
population, the sampling frame, data collection, data analysis and finally the chapter
summary.

3.2 Research Design

The research design is the blue print for fulfilling objectives and answering questions. It is the
guide to the study for collecting and analyzing data (Cooper & Schindler, 2001). The design
is an activity-and time-based plan, is always based on the research questions, guides the
selection of sources and types of information, and provides outline procedures for every
research activity. There are three basic research designs, namely exploratory, descriptive and
causal research designs.

Descriptive research design was adopted for this study. Descriptive design concentrates on
the descriptions of features or characteristics of a subject population, and enables unearthing
of relationships among various variables and the determination of estimates of proportions of
a population that have these characteristics (Cooper & Schindler, Business Research
Methods, 10th Edition, 2008). Descriptive study at its most basic concerns a question or
supposition in which one asks or states something about the existence, distribution, form, size
of a variable. This study sought to obtain respondents’ views on the state of regulation,
transparency, and competitiveness of mutual funds in Kenya. Descriptive design was adopted

32
for this study in order to enable descriptive metrics to be mined from the respondents’
responses.

3.3 Population and Sampling Design

3.3.1 Population
Cooper and Schindler (2008) define population as the total of the elements upon which
inferences can be made. A sample is concerned with the selection of a subset of individual
from a population in order to estimate characteristic of the whole population. The population
in this study comprised the key players in the stock market industry. These included the
authorized stock brokers in NSE, the Nairobi Securities Exchange, companies offering
mutual fund services, and the Capital Market Authority. The companies listed and the
authorized stock brokers are listed in appendix. The target population size was selected from
the Human Resource (HR) of the targeted institution and is summarized in Table 3.1 below.

Table 3.1: Population Size Distribution4

Category Total Population Percentage (%)

Managers from NSE 1 2.8
Managers from CMA 1 2.8
Managers from 21 Brokerage Firms 21 58.3
Managers from 13 Mutual Fund Companies 13 36.1
TOTAL 36 100
Source: CMA Website (2014), NSE Website (2014)

3.3.2 Sampling Design

3.3.2.1 Sampling Frame

Cooper and Schindler (2008) describe sampling frame as a complete list of all the cases in the
population from which your sample was to be drawn. With probability samples the chances
or probability of each case to be selected is unknown and is usually equal for all cases. In this
study, the criteria for selecting the sampling frame was 1 manager each from each of the
participating entities which are the NSE, 21 investment/ brokerage firms,13 mutual

33
companies, and CMA. This ensured the sampling frame was current, complete and relevant
for the attainment of the study. The sampling frame are all the managers at NSE, CMA,
mutual fund companies, and brokerage firms. The source of this information was the human
resource departments of these entities.

3.3.2.2 Sampling Technique

The purpose of sampling is to enable the researcher draw conclusion about a population from
a sample (Kalton, 1983). A stratified random sampling technique was employed to collect
data in this study. The stratified random sampling is the probability of selection in which
units are randomly samples from a population that has being divided into categories or strata
(Bryman, 2008). Stratified random sampling was appropriate because it increased sample’s
statistical efficiency, it provided adequate data for analyzing sub populations and it further
enabled different research methods and procedures to be used in the different strata (Cooper
& Schindler, Business Research Methods, 10th Edition, 2008). Judgmental sampling was also
used in determining the caliber of staff in a chosen organization best placed to respond to the
questionnaire. In this case, it was thought that managers, through academic qualification,
seniority in organization, exposure to a broad array of issues, and experience would be
uniquely qualified to give the most incisive responses to the research issues brought out in the
questionnaire.

3.3.2.3 Sampling Size

The sample size is a smaller set of the larger population (Cooper and Schindler, 2008).
Cooper and Schindler (2008) argue that the sample size is important for economic reasons.
An under-sized study can be a waste of resources for not having the capability to produce
useful results, while an over-sized one uses more resources than are necessary. Bearing this in
mind, at a confidence level of 90%, the margin of error is 10%. To obtain a sample size that
has an adequate size relative to the goals of the study, the researcher adopted Yamane’s
formula is as follows:

34
 n= N
1 + N (e)2

Equation 3.1: Sample Size Computation 2

Where n is the sample size, N is the population size and e is the margin of error (Yamane,
1967).
n= 36
1 + 36 (0.1)2

n = 27

Although the computation works out to 27, the minimum sample size of 30 respondents was
used to collect, collate, analyze and achieve the specific objectives of the study. This
represents 83% of the population.

Table 3.2: Sample Size Distribution5

Category Total Percentage of sample size to Sample

Population the Total Population Size

Managers from NSE 1 83% 1

Managers from CMA 1 83% 1
Managers from 21 21 83% 16
brokerage firms
Managers from 13 Mutual 13 83% 12
Fund Companies
TOTAL 36 83% 30

3.4 Data Collection Methods

The study used collection of primary data through a questionnaire. The questionnaires were
either e-mailed or hand delivered, according to prior plans made through phone calls. The
questionnaire used in this study had both open ended and closed questions. The closed
questions were designed to provide standardized answers which would lend themselves to
easy analysis and comparison among respondents. The open ended questions were given in

35
order to enable respondents give their individual perspectives in their own words and also
bring out any matter not captured by the questionnaire. The questionnaire was in four
sections namely A, B, C, and D. Section A dealt with background information with respect to
the respondent, while sections B,C, and D examined regulation, transparency, and
competition respectively of Kenya’s mutual funds.

3.5 Research Procedures

Prior to actual fieldwork and data collection, the questionnaire was pre-tested using a sample
of 10 respondents, whose responses were excluded in the final data analysis. The pre-test, or
pilot test, was conducted to adhere to the procedures recommended by Cooper and Schindler
(2008) who define a pilot test as a tool that should be adminstired so as to detect weakness in
the research design and the instruments. The pre-test identified problems of clarity or
ambiguity in the questionnaire, which enabled appropriate amendments of the questionnaire,
and also established the fact that it would take the average respondent about 10 minutes to
fill.

Once corrected and improved after the pre-testing phase, the questionnaire was deployed in
the field through administering to respondents. The researcher arranged the administration of
the questionnaires through prior engagement with the relevant organizations through prior e-
mail and telephone contact. This enabled the process to be undertaken as much as possible at
the convenience of individual respondents. The researcher received positive reception and
responses from the bulk of respondents, thus enabling the collection of accurate, complete
data. A full complement of the required sample size was realized.

3.6 Data Analysis Methods

The collected data was coded prior entering the collected quantitative data in the computer.
Gray (2004) defines a code book as set of rules for assigning numerical values to answers
obtained from the respondents. Thereafter the data was cleansed to ensure completeness of
the information obtained. The study used descriptive statistics. According to Cooper and
Schindler (2008), descriptive analysis involves a process of transforming a mass of raw data

36
into tables, charts, with frequency distribution and percentages, which are a vital part of
making sense of the data. In this study, the descriptive statistics such as percentages and
frequency distribution was used to analyze the demographic profile of the participants. The
demographic data was tabulated using frequency and percentages. The collected data was
statistically analyzed by the Statistical Package for Social Sciences (SPSS).

3.7 Chapter Summary

This chapter has outlined the research design and methodology used to ascertain the current
state of competitiveness, openness and regulation of Kenya’s mutual funds industry in order
to answer the research questions raised in the first chapter. The chapter specifically
highlighted the design which was adopted as well as the target population and sampling
design. Moreover the chapter explained the research instruments that were utilized, as well as
the research procedures and data analysis methods. The next chapter analyzes and presents
the results and findings of the research study.

37
 CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction
This chapter presents the findings of the data collected from the field using the questionnaire
as the data collection instrument. The sample size was 30. A total of 36 institutions were
identified and given the questionnaire. As a result of follow up efforts through e-mails and
telephone calls, 30 questionnaires were received back. As a consequence, 100% of the
required sample size was achieved in the study.

The study had the specific objectives of determining the regulatory environment in Kenya,
the transparency of mutual funds in Kenya, and the competitiveness of mutual funds in
Kenya. The chapter is divided into five sections. The first outlines the demographic nature of
the respondents, the second the regulation of mutual funds in Kenya, the third the
transparency of mutual funds in Kenya, the fourth the competitiveness of mutual funds in
Kenya, and the fifth the link between regulation, transparency and competitiveness.

4.2 General Information

The general information in the study included the gender, work sector, length of service in
organization, level of education, years of participation in capital markets, and extent of
responsibility in investment decisions for respondents.

4.2.1 Gender of Respondents

The findings as set out in Table 4.1 below indicate that 33.3% of the respondents were
female, while males at 66.7% were the majority.

38
Table 4.1: Gender Distribution of Respondents6

Frequency Percent
Male 20 66.7
Female 10 33.3
Total 30 100.0

4.2.2 Respondents per sector of work

As required by the sample, 53.4% of the respondents were drawn from stock brokerage
companies, with 40% drawn from Mutual Fund companies, with the balance of 6.6% drawn
equally from the Capital Markets Authority and the Nairobi Securities Exchange. The
distribution is presented in Table 4.2 below.

Table 4.2: Respondents by Sector of employment7

Frequency Percent
NSE 1 3.3
CMA 1 3.3
MUTUAL FUND 12 40.0
STOCK BROKERAGE 16 53.4
Total 30 100.0

4.2.3 Respondents by Length of Service with Current Employer

The researcher sought information on length of service with current employer for each
respondent. The information summarized in Table 4.3 shows that 46.7%, or slightly under a
half the respondents, had been with their current employers for less than three years. This is
consistent with a youthful, growing and dynamic industry. It also implies that labor turnover
and movement within stock broking and mutual fund companies is significant.

39
Table 4.3: Length of Time Served with Organization8

Frequency Percent
0 years to less than 3 years 14 46.7
3 years to less than 5 years 6 20.0
5 years to less than 10 years 8 26.7
10 years and above 2 6.6
Total 30 100.0

4.2.4 Respondents by levels of education

Of the 30 respondents, only one did not possess at least one university degree. This reflects
the nature of the respondent sample, who were expected to be persons with high skills in their
areas of expertise. The respondent without a degree had professional qualifications, which
also falls within the ambit of what is expected from skilled workers. Table 4.4 shows that 12
of the respondents, reflecting 40%, possessed advanced degrees. 14 of the respondents,
representing 46.7%, possessed professional qualifications. A reasonable inference may
therefore be made that Kenya’s mutual funds, stock broking companies, CMA, and NSE are
manned by highly qualified managers.

Table 4.4: Education Levels of Respondents 9

Frequency Percent
Professional 1 3.3
First Degree 10 33.3
Advanced Degree 6 20.0
Professional and first degree 6 20.0
Professional and advanced degree
5 16.8

Advanced degree, professional and

diploma 1 3.3

First degree, professional, and

diploma 1 3.3

Total 30 100.0

40
4.2.5 Respondents Years of Participation in the Capital Market
At 53.3%, over half the respondents have between 5 and just below 10 years of participation
in Kenya’s capital markets. 20%, or 6 participants, have experience of 10 years and above in
the capital markets. Only 16.7% of the respondents have experience of below three years in
capital markets. This implies that the respondents have the required knowledge in their areas
of operation to make skilled assessment of the area of research. Table 4.5 sets out
participation levels of the respondents.

Table 4.5: Profile of Respondents by Years of Participation in Capital Market 10

Frequency Percent
0 years to less than 3 years 5 16.7
3 years to less than 5 years 3 10.0
5 years to less than 10 years 16 53.3
10 years and above 6 20.0
Total 30 100.0

4.2.6 Respondents by Extent of Responsibility in Investment Matters

Seventeen, or nearly 57%, of the respondents indicated that they were fully responsible for
their organizations’ stock trading/investment matters. Another 26% were partly responsible,
while just a little under 17% affirmed that they held no responsibilities for stock
trading/investment matters at their work places. This information is set out in Table 4.6 and
shows that the respondents, apart from theoretical/academic credentials, are practically
involved in the areas that the research was targeting.

Table 4.6: Profile of Respondents Showing Extent of Investment Responsibility 11

Frequency Percent
No responsibility 5 16.7
Partly responsible 8 26.7
Fully responsible 17 56.6
Total 30 100.0

41
4.3 Regulation of Mutual Funds in Kenya
This section presents the views of the respondents on various regulatory aspects of mutual
funds in Kenya. The researcher sought the opinions of the respondents on diverse features of
the regulatory framework such as the laws and regulations, entry requirements, fairness and
effectiveness, adequacy of enforcement of laws, and how up-to-date Kenya’s laws and
regulations are in light of technological and financial innovations. The researcher also probed
the respondents with respect to public awareness of individual and institutional investors, the
role of mutual funds in promoting a culture of savings in Kenya, and the extent to which
mutual funds have invested in modern trading systems.

4.3.1 Respondents’ Views on the Promotion of Ethical Conduct in Mutual Funds by

Kenyan Laws and Regulations
A large majority of the respondents, 83.4%, were in agreement that Kenya’s laws and
regulations promote ethical conduct of business. The findings are presented in Table 4.7

Table 4.7: Regarding the Promotion of Ethical Conduct in Mutual Funds 12

Kenyan laws and regulations promote ethical

conduct in mutual fund operations Frequency Percent
Disagree 2 6.6
Neutral 3 10.0
Agree 20 66.7
Strongly Agree 5 16.7
Total 30 100.0

4.3.2 Respondents’ Views as to whether Mutual Fund Trading Practice is Fair and
Effective
Over one quarter, or 26.7%, of the correspondents were neutral on whether mutual fund
trading practices are fair and effective. A majority, at 60%, agreed that the trading practices
are fair and effective. The information is set out in Table 4.8.

42
Table 4.8: Regarding Fairness and Effectiveness 13

Mutual fund trading practice is fair and effective Frequency Percent

Disagree 4 13.3
Neutral 8 26.7
Agree 14 46.7
Strongly Agree 4 13.3
Total 30 100.0

4.3.3 Respondents’ Views as to Whether the Laws and Regulations Governing Mutual
Funds in Kenya are Regularly Updated to Stay in Touch with Technological and
Financial innovations
A large proportion, at 40%, of respondents was neutral or unsure on the question of whether
the relevant laws and regulations are regularly updated to stay abreast of technological and
financial innovations. About 37% disagreed that the regulations and laws are appropriately
amended in time, with only 23% of the respondents agreeing. The findings are set out in
Table 4.9

Table 4.9: Regulations with Respect to Technological and Financial Innovations 14

The laws and regulation governing mutual funds

are regularly updated to stay in touch with
technological and financial innovations Frequency Percent
Strongly Disagree 2 6.7
Disagree 9 30.0
Neutral 12 40.0
Agree 7 23.3
Total 30 100.0

4.3.4 Respondents’ views as to whether mutual funds in Kenya are keen on all classes
of investors, small and large
A majority, at 70%, of respondents agreed that mutual funds are keen on all classes of
investors, with 30% holding the converse opinion. The findings are set out in Table 4.10

43
Table 4.10: Are Mutual Funds keen on All Classes of Investors? 15

Mutual funds in Kenya are keen on all classes of

investors, small and large Frequency Percent
Strongly Disagree 2 6.7
Disagree 7 23.3
Agree 17 56.7
Strongly Agree 4 13.3
Total 30 100.0

4.3.5 Respondents’ Views as to Whether Mutual Funds in Kenya promote a Culture of

Savings
Slightly under 67% agreed that mutual funds promote a culture of savings, with the rest of the
respondents split evenly between the disagree and neutral categories. The information on this
question is presented in Table 4.11

Table 4.11: Do Mutual funds Promote a Culture of Savings? 16

Mutual funds in Kenya promote a culture of

savings in Kenya Frequency Percent
Strongly Disagree 1 3.3
Disagree 4 13.3
Neutral 5 16.7
Agree 15 50.0
Strongly Agree 5 16.7
Total 30 100.0

4.3.6 Respondents’ Views as to Whether Mutual Funds are Doing a Good Job in
Market Awareness in Kenya
Only 26.7% of the respondents agreed that mutual funds are doing a good job in creating and
sustaining market awareness. Over 53% of respondents disagreed, with a further 20%
responding in the neutral on the question. The findings are set out in Table 4.12

44
Table 4.12: Are Mutual Funds Doing a Good Job in Market Awareness? 17

Mutual funds are doing a good job in market

awareness in Kenya Frequency Percent
Strongly Disagree 4 13.3
Disagree 12 40.0
Neutral 6 20.0
Agree 8 26.7
Total 30 100.0

4.3.7 Respondents’ Views as to Whether the Political and Economic Environment

affects Investment in the Mutual Funds Market in Kenya

The bulk of respondents, at over 80%, agreed that the political and economic environment
impacts mutual funds investment market in Kenya, as opposed to 10% who were not in
agreement with this statement. The findings are set out in Table 4.13

Table 4.13: Impact of Political and Economic Environment 18

The political and economic environment affects

investment in the mutual funds market Frequency Percent
Disagree 3 10.0
Neutral 3 10.0
Agree 12 40.0
Strongly Agree 12 40.0
Total 30 100.0

4.3.8 Respondents’ Views as to whether the Relatively Small Number of Variety and
Volume of Participating Securities Traded at the Nairobi Securities Exchange
Negatively Impacts Mutual Fund Development in Kenya
Two-thirds of all respondents were in agreement with the statement that the relatively small
number of variety and volume of participating securities traded at the Nairobi Securities
exchange negatively impacts mutual fund development in Kenya. 20% of respondents were
in disagreement, with 13.3% being neutral. The responses to this question are presented in
Table 4.14

45
Table 4.14: Effect of the Number and Variety of Participating Securities at NSE 19

The relatively small number of variety and volume

of participating securities traded at the Nairobi
Securities exchange negatively impacts mutual
funds development in Kenya Frequency Percent
Strongly Disagree 1 3.3
Disagree 5 16.7
Neutral 4 13.3
Agree 12 40.0
Strongly Agree 8 26.7
Total 30 100.0

4.3.9 Respondents’ Enumeration of the Major Challenges Hindering Efficient

Regulation of Mutual Funds in Kenya
Respondents, in response to an open question on major challenges hindering efficient
regulation of mutual funds, cited many contributory problems and underlying issues.
Assessment of the responses, and subsequent classification resulted in the challenges falling
into four main areas; Regulatory weaknesses and gaps; limited awareness; under-developed
markets, low technological and expert base; low transparency and disclosure levels. The
various factors and problems cited are shown below the classifications in Table 4.15.

46
Table 4.15: Opinions on Challenges Hindering Efficient Regulation of Mutual Funds
20

Regulatory Limited Under-developed Low Transparency

Weaknesses and Awareness Markets, Low & Disclosure Levels
Gaps Technological &
Expert Base
- Slow - Limited - Political - Distorted
regulatory awareness interference disclosure
response - Low - Market players - Non-
- Regulations returns not up-to-date disclosure
take long to with compliance - Lack of
be effected and regulatory standard
- Weak framework reporting
regulatory - Under- - Information
framework developed not centrally
- Lack of markets available
proper - Scarcity of - Existence of
guidelines available asset cartels
- Under- classes
capacity of compared with
regulator developed
- Complexity of world,
laws since compromising
investments diversification
cut across - Investment
sectors culture prefers
- Policies and direct market
regulations access
too stringent - Market players
are few and the
numbers should
increase
- Technological
challenges
- Expertise
challenges

Respondents identified regulatory weaknesses and gaps as the largest challenge hindering
efficient regulation of mutual funds in Kenya. Limited awareness was also identified as a
concern, as was under-developed markets and low technological/expert base. Low
transparency made up the fourth challenge.

Figure 4.1 shows the frequency with which a particular classification of challenge was
mentioned by the respondents, at group and at collective level. It shows that low transparency
was perceived as less of a problem by mutual funds respondents than for those from stock

47
broking, who ranked poor transparency as a bigger problem than limited awareness or poor
capacity levels. Every group of respondents except the CMA group cited regulatory
weaknesses.

16

14

12
Regulatory Weaknesses and
10 Gaps

8
Limited Awareness
6

4
Under-developed Markets,
2 Low Technological and Expert
Base
0
Low Transparency & Disclosure
Levels

Figure 4.1: Respondents’ View of Major Challenges Hindering Efficient Regulation

4.3.10 Respondents’ Views of How the Challenges They Perceive as Hindering Efficient
Regulation of Mutual Funds in Kenya May be Overcome
Respondents, in response to an open question on how challenges hindering efficient
regulation of mutual funds may be overcome, offered a range of solutions. Evaluation of the
responses, and subsequent classification led to the remedies sitting in four distinct categories;
Increase capacity and effectiveness of regulator; Increase market competitiveness; Increase
transparency; Enhance investor education and awareness; the various remedies and solutions
proposed by respondents are shown below the classifications in Table 4.16.

48
Table 4.16: How to Deal with Efficient Regulation of Mutual Funds Challenges 21

Increase Capacity and Increase Market Increase Investor

Effectiveness of Competitiveness Transparency Education &
Regulator Awareness
- Increase funding - More products - Enforce - Investor
and capability of with better regulation education
Regulator returns s and
- Have easy-to- - Modernize increasing awareness
implement regulations disclosure - More
regulations - seek ways to - Penalties marketing
- Stricter regulations save time and for all - Regulator
and audits by cost in levels of to be
regulator regulatory non- involved in
- A more proactive, compliance disclosure aggressive
forward looking - Increase marketing
CMA tradability in an
- Integration/merger open exchange
of CMA and NSE for price
- Quick filling of discovery
CMA Board - Adapting
vacancies policies from
- Regulator to already
initiate and established and
maintain round successful
table consultations markets
with stakeholders - easing entry of
new players
- Harmonization
of tax laws
across sectors

Respondents highlighted increased capacity and effectiveness of the regulator as the most
important aspect of overcoming regulatory challenges with respect to mutual funds.
Heightened Investor Education/Awareness was another remedy which was placed at a par
with Increased Market Competitiveness. Increased Transparency rounded up the quartet of
the group of proposed remedial measures.

Figure 4.2 illustrates the frequency with which a particular classification of remedy was
mentioned by the respondents, at group and at collective level. 11 mutual fund respondents
proposed increasing capacity and effectiveness of regulator, with 7 stock broker respondents
making similar proposals. 3 mutual fund respondents proposed increasing investor
education/awareness, with 5 stock market respondents making similar recommendations.
Figure 4.2 shows that Increased Market Competiveness was considered more crucial than

49
Enhanced Capacity by Regulator by stock broker respondents than by their mutual fund
counterparts, who did not consider more Market Competitiveness as a solution. The stock
broker respondents too were unique in advocating increased transparency as a solution to
overcoming regulatory challenges. All respondents except the CMA group advocated
Increased capacity and Effectiveness of Regulator.

20
18
16
14
12
Increase Capacity and
10 Effectiveness of Regulator
8
Increase Market
6
Competitiveness
4
2 Investor Education/Awareness
0
Increase Transparency

Figure 4.2: Proposals to Enhance Efficient Regulation of Mutual Funds

4.4 Transparency of Mutual Funds in Kenya

This section outlines the perceptions of the respondents on several features of transparency of
mutual funds in Kenya. The researcher explored the verdict of the respondents on assorted
characteristics of transparency such as shareholder access to timely information, absence or
otherwise of hidden charges, and conflict of interest reporting by fund managers and trustees.
Respondents’ recommendations on other variables used to determine transparency are further
outlined.

4.4.1 All Shareholders are Made Continuously Aware that they are Entitled to Ask for
Any Information About Mutual Fund Operations

A majority, 63.3%, of all respondents agreed with the proposition that shareholders are
continuously informed of their right to information, with 13.3% in disagreement. A fairly

50
large proportion (23.3%) was neutral on the proposition. The information is presented in
Table 4.17

Table 4.17: Shareholders are Continuously Informed of Their Right to Information 22

All shareholders are made continuously aware that

they are entitled to ask for any information about
the operations of the mutual fund Frequency Percent
Strongly Disagree 1 3.3
Disagree 3 10.0
Neutral 7 23.3
Agree 13 43.3
Strongly Agree 6 20.0
Total 30 100.0

4.4.2 All Correspondence relating to policy changes is available to all stakeholders

Slightly over 46% of respondents were unable to agree with this statement, with the balance
of about 54% concurring with the statement. A high proportion of 30% were uncertain and
accordingly voted under neutral. The findings are presented in Table 4.18

Table 4.18: Availability of Policy Change Correspondence 23

All correspondence relating to policy changes is

available to all stakeholders Frequency Percent
Strongly Disagree 1 3.3
Disagree 4 13.3
Neutral 9 30.0
Agree 8 26.7
Strongly Agree 8 26.7
Total 30 100.0

4.4.3 There are no Hidden Charges in Mutual Funds

Almost two-thirds of respondents, or 63.3%, were unable to agree with the statement that
there are no hidden charges in mutual funds, with the remaining agreeing. A large number of
respondents answered in the neutral, which implies that this is a question on which there is
much uncertainty or lack of information. The responses are presented in Table 4.19

51
Table 4.19: Regarding Hidden Charges in Mutual Funds 24

There are no hidden charges in mutual funds Frequency Percent

Disagree 6 20.0
Neutral 13 43.3
Agree 6 20.0
Strongly Agree 5 16.7
Total 30 100.0

4.4.4 All Conflicts of Interest are Reported in Writing by Fund Managers and
Trustees
A large amount of ambiguity about this question in the minds of respondents can be inferred
by the responses. The uncertainty is reflected at the high percentage of 33.3% of the
respondents who were neutral on this question. 50% of the respondents were in agreement
that conflict of interest matters are reported in writing, with the balance of 16.7% in
disagreement. The responses are presented in Table 4.20

Table 4.20: Regarding Conflicts of Interest 25

All conflicts of interest are reported in writing by

fund managers and trustees Frequency Percent
Strongly Disagree 2 6.7
Disagree 3 10.0
Neutral 10 33.3
Agree 11 36.7
Strongly Agree 4 13.3
Total 30 100.0

4.4.5 All Information Regarding Stock Prices and Returns on Portfolio, From
Inception, are Available at All Times on Website

The majority of respondents, 53.3%, were unable to concur with this statement. 26.7% of
respondents were neutral on the matter. The findings are presented in Table 4.21

52
Table 4.21: All Information on Prices and Returns is Available on Website 26

All information regarding stock prices and returns

on portfolio, from inception, are available at all
times on website Frequency Percent
Strongly Disagree 1 3.3
Disagree 7 23.3
Neutral 8 26.7
Agree 12 40.0
Strongly Agree 2 6.7
Total 30 100.0

4.4.6 Respondents’ Enumeration of Other Variables which can be Used to

Promote/Determine the Transparency of Mutual Funds in Kenya
Respondents, in response to an open question on how transparency in Kenya’s mutual funds
may be determined or promoted, presented a variety of answers. An appraisal of the answers
enabled consequent grouping of the responses into three main areas as follows; Compulsory
and Standardized Reporting; Publishing Actual Investments made by mutual fund; central
Collation and Public dissemination of all information on all funds in electronic form; the
various proposals made by respondents are shown below the classifications in Table 4.22.

Table 4.22: Other Variables to Determine/Promote Transparency of Mutual Funds 27

Compulsory and Standardized Publishing Actual Central Collation

Reporting Investments Made By and Pubic
The Mutual Fund Dissemination of All
Information on All
Funds in Electronic
Form
- Disclosure/amplification of all - Publishing make - Surveys by
terms and conditions up and risk neutral or
- Disclosure of all charges and profiles of independent
yields individual parties
- Harmonization of reporting investments made - Hosting of the
standards and formats to allow by mutual fund particulars of
easy, objective comparisons of - More information those surveys
mutual funds’ performances on return history on website for
- Website easy access and
depository of all information
information retrieval
already in
newspapers or
public domain for
easy retrieval

53
Respondents were emphatic that Compulsory and Standardized Reporting would go a long
way in addressing transparency gaps in Kenya’s mutual funds. Publishing Make up of actual
investments was the second most popular of the three clusters of solutions, with central
collation and public dissemination of information making up the last component of the trio.

Figure 4.3 illustrates that compulsory and standard reporting received support from every
respondent group. Publishing make up of actual investments by each individual mutual fund
was proposed by almost every group. Central collation and public dissemination of
information had its advocacy from respondents from mutual fund and stock broker sectors.
CMA group was again unique in neither advocating publishing make up of actual
investments nor central collation and dissemination of information.

16
14
12
10
8
Compulsory and Standardized
6 Reporting
4
Publishing Make up of Actual
2 Investments
0
Central Collation and Public
Dissemination of Information

Figure 4.3: Variables That Can Be Used to Determine/Promote Transparency

4.5 Competitiveness of Mutual Funds in Kenya

This section offers the judgment of respondents on a number of facets which bear on
competitiveness of mutual funds in Kenya. The researcher examined the opinions of the
respondents on an array of questions such as the average yield of mutual funds, operational
costs of mutual funds, loss minimization strategies, market research, and itemization and

54
disclosure of costs to shareholders. Other measures to promote competitiveness as endorsed
by respondents are also captured.

4.5.1 Ability of Mutual Fund Companies to Engage in Profitable Business at the NSE
None of the respondents disagreed with the proposition that mutual funds are able to engage
in profitable business at the NSE, and only 16.7% were neutral on the matter. 83.3% were
able to concur with the proposition. The findings are laid out in Table 4.23.

Table 4.23: Profitability for Mutual funds at the NSE 28

Mutual funds are able to engage in profitable

business at the Nairobi Securities Exchange Frequency Percent
Neutral 5 16.7
Agree 18 60.0
Strongly Agree 7 23.3
Total 30 100.0

4.5.2 Respondents’ Views as to Whether Mutual Funds on Average Yield a Better

Return for Investors than Other Financial Assets
Over a quarter, 26.7%, of all respondents disagreed that mutual fund average yields were
superior to those of other financial assets. 33.3% were neutral or unsure about this, with 40%
vouching for the superiority of mutual fund returns. This information is presented in Table
4.24

Table 4.24: Yields for mutual funds 29

Mutual funds on average yield a better return for

investors than other financial assets Frequency Percent
Disagree 8 26.7
Neutral 10 33.3
Agree 9 30.0
Strongly Agree 3 10.0
Total 30 100.0

55
4.5.3 Respondents’ Views as to Whether Mutual Funds in Kenya Keep Low
Operational Costs
Sixty percent of all respondents were unable to concur with the statement that mutual funds
in Kenya keep low operational costs, with the remaining 40% agreeing with the statement. A
large proportion of respondents, 36.7%, responded in the neutral, which reflects the lack of
certain knowledge in the minds of respondents on operational cost margins maintained by
mutual funds. The findings on this aspect are presented in Table 4.25

Table 4.25: Operational Costs of Mutual Funds 30

Mutual funds in Kenya keep low operational costs Frequency Percent

Strongly Disagree 1 3.3
Disagree 6 20.0
Neutral 11 36.7
Agree 11 36.7
Strongly Agree 1 3.3
Total 30 100.0

4.5.4 Respondents’ Views as to Whether Mutual Fund Companies in Kenya Use the
Active Strategy in Managing Portfolios
Seventy seven percent of respondents concurred with the premise that mutual fund companies
use the active strategy in managing portfolios. Only one respondent disagreed with the
statement, with 20% of respondents responding in the neutral. Table 4.26 lays out the
findings on this question.

Table 4.26: Mutual Fund Portfolio Management Strategy 31

Mutual fund companies in Kenya use the active

strategy in managing portfolios Frequency Percent
Strongly Disagree 1 3.3
Neutral 6 20.0
Agree 15 50.0
Strongly Agree 8 26.7
Total 30 100.0

56
4.5.5 Respondents’ Views as to Whether Mutual Fund Companies in Kenya Have
Adequate Strategies in Place to Swiftly Mitigate Losses in Case of Stock Market
Upheavals
Fifty percent of respondents were unable to agree with the proposition that mutual fund
companies have measures in place to mitigate losses at the stock market. The findings on the
proposition are presented in table 4.27

Table 4.27: Measures in Place to Mitigate Losses at the Stock Market 32

Mutual fund companies in Kenya have adequate

strategies in place to swiftly mitigate losses in case
of stock market upheavals Frequency Percent
Strongly Disagree 2 6.7
Disagree 5 16.7
Neutral 8 26.7
Agree 11 36.7
Strongly Agree 4 13.3
Total 30 100.0

4.5.6 Respondents’ Views as to Whether Mutual Fund Companies in Kenya Pay

Bonuses and Commissions to Staff who Outperform the Benchmark Index
Sixty percent of respondents were unable to concur with the proposition that mutual fund
companies pay their staff bonuses and commissions. 50% of all respondents were unsure
about this and gave their answers in the neutral. This implies that the remuneration and
motivation structures for staff in mutual funds in Kenya are for the most part an obscure area
to most respondents. The responses to this question are set out in Table 4.28

Table 4.28: Mutual Fund Staff Bonuses and Commissions 33

Mutual fund companies in Kenya pay bonuses and

commissions to staff who outperform the
benchmark index Frequency Percent
Disagree 3 10.0
Neutral 15 50.0
Agree 11 36.7
Strongly Agree 1 3.3
Total 30 100.0

57
4.5.7 Respondents’ Views as to Whether All Costs Borne by the Shareholder are
Properly Itemized and Disclosed to Shareholder
Sixty three percent of respondents were unable to concur with the premise that all costs borne
by shareholders are properly itemized and disclosed to the shareholder. 40% of all
respondents responded in the neutral, a pointer to a large amount of uncertainty in this aspect
of mutual funds in the minds of respondents. The findings are presented in Table 4.29

Table 4.29: Itemization and Disclosure of Costs 34

All costs borne by the shareholders are properly

itemized and disclosed to the shareholder Frequency Percent
Strongly Disagree 1 3.3
Disagree 6 20.0
Neutral 12 40.0
Agree 6 20.0
Strongly Agree 5 16.7
Total 30 100.0

4.5.8 Respondents’ Enumeration of Other Measures Which can be Used to Promote

Competitiveness of Mutual Funds in Kenya
In response to the open question of what measures can be used to promote competitiveness of
Kenya’s mutual funds, respondents offered insights which lent themselves to classification
into four main categories as follows: Advertisement/Publicity to the investing public;
Increasing mutual fund yields; Allowing more players, and types of funds, into the mutual
funds market; Comparison of mutual fund performance over time periods. The make-up of
the various proposals is shown in Table 4.30 under each of the four main headings.

58
Table 4.30: Other Measures Which Can Be Used to Promote Competitiveness 35

Advertisement/Publicity Increasing Mutual Allowing More Comparison of

to the investing Public Fund Yields Players, and Mutual Fund
Types of Funds, Performance
Into the Mutual over Time
Funds market Periods
- Advertisement - Reduce - Allow - Same
/Publicity by mutual operational global period
funds costs brands into funds’
- CMA to adopt - increase yields market contrast
global best practice, - enforce/create - create legal - Funds’
and amplify this fact tax exemptions framework contrast
to garner favourable for mutual that ropes across
publicity for mutual funds in periods
funds securities
- Revision/disclosure with little
of asset class regime or no
by mutual funds regulation
- Publicize academic that
and professional compete
competence of with
managers/investmen mutual
t advisors funds
- Avoid misleading - Allow
packaging foreign
investors
to set up
shop
- Introduce
exchange
traded
funds
Respondents in the responses stressed the need for increased advertisement/publicity to the
investing public as the most effective manner of promoting competitiveness of mutual funds
in Kenya. Respondents also cited increasing mutual fund yields, expanding mutual fund
market through allowing new players and fund types, and comparison of mutual fund
performance over periods as the other appropriate means of boosting competitiveness of
Kenyan mutual funds.

Figure 4.4 illustrates that almost every respondent group advocated allowing more players
and products into the mutual funds sector. For both mutual fund and stock broker
respondents, securing enhanced publicity/advertisement for mutual funds was the most

59
important aspect with respect to competitiveness promotion. For stock broker respondents
however, increasing mutual fund yields was placed at a higher premium than allowing more
players/products into the market, or comparison of mutual fund performance. Mutual fund
respondents equally rated the need to increase yields, allow more products/players, and the
comparison of mutual fund performance over time periods. The findings are set out in Figure
4.4

18
16
14 Advertisement/Publicity to the
12 investing Public
10
8 Increasing Mutual Fund Yields
6
4
2
0 Allowing More Players, and
Types of Funds, Into Mutual
Fund Market
Comparison of Mutual Fund
Performance over Time Periods

Figure 4.4: Measures That Can Be used to Promote Competitiveness of Mutual

Funds

4.6 Comparison of Responses

This section seeks to find differences in the opinions of the two main groups interviewed,
respondents from the mutual fund companies and those from stock broking companies. In this
context, the response “Neutral” has been taken for a proxy for a lack of certainty, knowledge,
awareness or conviction by respondents. Neutral will be used later in the study as a
determinant or indication of information asymmetry between the two groups, and also
generally among all respondents.

4.6.1 Response Comparison – Kenyan Laws and Regulations

Figure 4.5 below shows that all stock broker respondents agreed that Kenyan laws and
regulations promoted mutual fund operations, compared to only 66.6% of mutual fund

60
respondents. 16.7% of the mutual funds were neutral on this, with a further 16.7%
disagreeing.

Strongly Agree 25.0%

12.5%

Agree 41.6%
87.5%

16.7% Mutual Fund Respondents

Neutral 0.0%
Stock Broker Respondents
Disagree 16.7%
0.0%

Strongly Disagree 0.0%

0.0%

0.0% 50.0% 100.0%

Figure 4.5: Kenyan Laws Promote Ethical Conduct in Mutual Fund Operations

4.6.2 Response Comparison – Laws updated for Technological/Financial Innovations

Only 25% of mutual fund respondents were able to concur with the proposition. An even
lower number, 18.8%, of stock broker respondents concurred. One half of all mutual fund
respondents disagreed with the premise, compared with only 25% of stock broker
respondents. The lack of certainty is marked for the stock broker group, with 56.2% marking
neutral for this statement, as opposed to 25% of mutual fund respondents. This information is
set out in Figure 4.6.

Strongly Agree 0.0%

0.0%

Agree 25.0%
18.8%

Neutral 25.0% Mutual Fund Respondents

56.2%
Stock Broker Respondents
Disagree 41.7%
25.0%

Strongly Disagree 8.3%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Figure 4.6: Laws and Regulations are Regularly Updated to Meet Innovations

61
4.6.3 Response Comparison – Individual and Institutional Investors are Aware of the
Benefits of Investing in the Mutual Fund Market
A majority, 58.3%, of the mutual fund respondents refuted this, while only 31.2% of stock
broker respondents did so. A quarter of respondents in each of the two clusters was uncertain
on the question, and responded in the neutral. The information is set out in figure 4.7

Strongly Agree 0.0%

0.0%

Agree 16.7%
43.8%

Neutral 25.0% Mutual Fund Respondents

25.0%
Stock Broker Respondents
Disagree 50.0%
25.0%

Strongly Disagree 8.3%

6.2%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Figure 4.7: Individual and Institutional Investors are Aware of Mutual Fund Benefits

4.6.4 Response Comparison – Mutual Fund Companies Have Invested in Modern

Trading Systems
A large proportion, 62.4%, of all respondents in the stock broker group were uncertain of the
veracity of statement and accordingly responded in the neutral, compared to the 25% who
gave a similar response in the mutual fund group. Only 18.8% of the respondents drawn from
stock broking were able to concur with the statement, as compared to 66.7% who concurred
from among the mutual fund group. The results per group to this question are set out in
Figure 4.8

62
 Strongly Agree 8.3%
0.0%

Agree 58.4%
18.8%

Neutral 25.0% Mutual Fund Respondents

62.4%
Stock Broker Respondents
Disagree 8.3%
18.8%

Strongly Disagree 0.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Figure 4.8: Mutual Companies in Kenya Have Invested in Modern Trading Systems

4.6.5 Response Comparison – There Are No Hidden Charges in Mutual funds

A half of respondents drawn from stock brokerage were uncertain of the accuracy of this
statement and accordingly marked neutral for this statement. 33.3% of respondents from
mutual fund companies were able to strongly agree with this position, contrasting with 6.2%
from the stock broker group. Overall, 50% of mutual funds respondents agreed with the
statement, compared with 31.2% of stock broker respondents. The responses to this question
are set out in figure 4.9.

Strongly Agree 33.3%

6.2%

Agree 16.7%
25.0%

Neutral 25.0% Mutual Fund Respondents

50.0%
Stock Broker Respondents
Disagree 25.0%
18.8%

Strongly Disagree 0.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Figure 4.9: There are No Hidden Charges in Mutual Funds

4.6.6 Response Comparison – Availability of Information on Website

Thirty one percent of respondents from stock broking were unsure about the accuracy of this
statement and marked neutral against it. 58.3% of mutual fund respondents were able to agree

63
with this statement, compared to only 37.5% of stock broker respondents who gave a similar
answer. The responses by the two groups are shown in figure 4.10

Strongly Agree 16.7%

0.0%

Agree 41.6%
37.5%

Neutral 25.0% Mutual Fund Respondents

31.3%
Stock Broker Respondents
Disagree 16.7%
25.0%

Strongly Disagree 0.0%

6.2%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

Figure 4.10: All Relevant Investor Information Available at All Times on Website

4.6.7 Response Comparison – Mutual Funds In Kenya Keep Low Operational Costs
While 58.3% of mutual fund respondents supported this statement, only 25% of stock broker
respondents were able to do so. High levels of uncertainty were expressed by both groups,
with 25% of mutual fund respondents and 43.8% of stock broker respondents giving the
neutral verdict on this statement. The findings are set out in figure 4.11

Strongly Agree 8.3%

0.0%

Agree 50.0%
25.0%

Neutral 25.0% Mutual Fund Respondents

43.8%
Stock Broker Respondents
Disagree 16.7%
25.0%

Strongly Disagree 0.0%

6.2%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Figure 4.11: Mutual Funds in Kenya Keep Low Operational Costs

64
4.6.8 Response Comparison – Mutual Funds Companies In Kenya Keep Low
Operational Costs
Fifty percent of mutual fund respondents strongly agreed with this proposition, with the other
50% agreeing with the statement. 37.5% of all respondents drawn from stock brokerage were
unsure about the accuracy of this statement, and accordingly expressed neutrality on the
matter. The findings are illustrated in Figure 4.12

Strongly Agree 50.0%

6.2%

Agree 50.0%
56.3%

Neutral 0.0% Mutual Fund Respondents

37.5%
Stock Broker Respondents
Disagree 0.0%
0.0%

Strongly Disagree 0.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Figure 4.12: Mutual Funds in Kenya Use the Active Strategy in Managing Portfolios

4.6.9 Response Comparison – Strategies to Swiftly Mitigate Losses

While 75% of mutual fund respondents were able to agree with the statement, only 31.3% of
those in stock brokerage could. 31.2% of all respondents in stock broking disagreed with the
statement with another 37.5% expressing the uncertainty verdict through the neutral choice.
The divergent views are expressed graphically in figure 4.13.

Strongly Agree 8.3%

12.5%

Agree 66.7%
18.8%

Neutral 16.7% Mutual Fund Respondents

37.5%
Stock Broker Respondents
Disagree 8.3%
25.0%

Strongly Disagree 0.0%

6.2%

0.0% 20.0% 40.0% 60.0% 80.0%

Figure 4.13: Mutual Funds have Adequate Strategies to Mitigate Stock Market Losses

65
4.6.10 Response Comparison – Costs Borne by Shareholders Properly Disclosed
Fifty eight percent of all respondents drawn from mutual funds expressed agreement with the
proposition, compared with only 25% of their counterparts from stock broking. 50% of all the
respondents in the latter category expressed doubt about the statement by voting on the
neutral. 25% of each set of respondents disagreed with the statement. The various responses
of the two groups are illustrated in figure 4.14

Strongly Agree 33.3%

6.2%

Agree 25.0%
18.8%

Neutral 16.7% Mutual Fund Respondents

50.0%
Stock Broker Respondents
Disagree 25.0%
18.8%

Strongly Disagree 0.0%

6.2%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Figure 4.14: All Costs Borne by the Shareholder are Properly Itemized and Disclosed

4.6.11 Summary of Analysis of Scores to Various Questionnaire Questions

The responses to the various closed questions in the questionnaire have been analyzed using
SPSS and the results are set out in Table 4.31 below. Strongly disagree took the value 1,
while strongly agree took the value 5, with disagree, neutral, and agree taking the value 2, 3,
and 4 respectively. A mean score of 3.5 from respondents for a particular question therefore
indicates that the aggregate response is in the neutral to agree region. Out of the 31 questions
analyzed in Table 4.31 below, 6 obtain an aggregate score of below 3, 22 obtain a score of 3
and above but below 4, while 3 obtain a score of 4 and above.

66
Table 4.31: Analysis of Closed Questionnaire Questions – Sections B, C, & D 36

Std.
No Statement N Mean Deviation
9 Kenyan laws and regulations promote ethical conduct in mutual fund operations 30 3.93 .740
10 Mutual fund trading practice is fair and effective 30 3.60 .894

11 The rules, regulations, and laws are up to date and in line with modern mutual fund global best practice 30 3.13 .937

12 Entry requirements into the mutual fund business are achievable for an average Kenyan company 30 3.17 1.177
The laws and regulation governing mutual funds are regularly updated to stay in touch with technological and
13 financial innovations 30 2.80 .887

14 The laws and regulations that govern mutual fund operations in Kenya are adequately enforced 30 3.50 1.009

15 Individual and institutional investors are aware of the benefits of investing in the mutual fund market 30 2.80 1.031
16 Mutual funds in Kenya are keen on all classes of investors, small and large 30 3.47 1.196
17 Mutual funds in Kenya promote a culture of savings in Kenya 30 3.63 1.033
18 Mutual funds are doing a good job in market awareness in Kenya 30 2.60 1.037
19 Mutual fund companies in Kenya have invested in modern trading systems 30 3.30 .750
20 The political and economic environment affects investment in the mutual funds market 30 4.10 .960
The relatively small number of variety and volume of participating securities traded at the Nairobi Securities
21 exchange negatively impacts mutual funds development in Kenya 30 3.70 1.149
All shareholders are made continuously aware that they are entitled to ask for any information about the
24 operations of the mutual fund 30 3.67 1.028
25 All correspondence relating to policy changes is available to all stakeholders 30 3.60 1.133
26 There are no hidden charges in mutual funds 30 3.33 .994
27 All conflicts of interest are reported in writing by fund managers and trustees 30 3.40 1.070
All information regarding stock prices and returns on portfolio, from inception, are available at all times on
28 website 30 3.23 1.006
29 Mutual funds are able to engage in profitable business at the Nairobi Securities Exchange 30 4.07 .640
30 Mutual funds on average yield a better return for investors than other financial assets 30 3.23 .971

67
 Std.
No Statement N Mean Deviation
31 Mutual funds in Kenya keep low operational costs 30 3.17 .913
32 Mutual funds in Kenya always give the customer the benefit of bulk purchases 30 4.03 .928
33 Mutual fund companies in Kenya use the active strategy in managing portfolios 30 3.97 .890
34 mutual fund companies in Kenya use the passive strategy 30 2.63 1.066
35 Saccos provide mutual fund companies in Kenya with their strongest competition 30 3.00 1.114
Mutual fund companies in Kenya have adequate strategies in place to swiftly mitigate losses in case of stock
36 market upheavals 30 3.33 1.124
37 Stock broking companies are enthusiastic purveyors of mutual fund stocks 30 2.93 1.230

38 Most mutual fund companies deal with only one or two stock brokers in acquiring and disposing of their stocks 30 2.27 .980
39 Mutual fund companies do their own market research, rather than buying it 30 3.70 .988

40 Mutual fund companies in Kenya pay bonuses and commissions to staff who outperform the benchmark index 30 3.33 .711
41 All costs borne by the shareholders are properly itemized and disclosed to the shareholder 30 3.27 1.081

68
4.7 Chapter Summary

In this chapter, results and findings based on the specific research questions have been
presented in the form of tables and figures. Major findings is that there are key differences in
the perception in the mutual fund sector and that of stock brokers in the areas of target
customers, yield rates, and adequate strategies in place to mitigate losses at the bourse. The
next chapter provides detailed discussion of the results and findings. In addition, conclusions
and recommendations based on research findings will be made.

69
 CHAPTER FIVE

5.0 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction
This chapter provides the summary, discussion, conclusions, and recommendations of the
study. This is done in the context of the research findings as presented in the previous
chapter, as well as the findings of the literature review. The research is finalized on the basis
of conclusions drawn from research findings.

5.2 Summary
The aim of the study was to determine the state of regulation, transparency and
competitiveness of Kenya’s young mutual fund sector. The study sought to obtain insights
into the gains made in these areas, the challenges encountered, and proposed ways of
overcoming any identified weaknesses.

The study adopted a descriptive research design. This guided the identification of the
population and sample design, the data collection methods, and identification of the research
procedure and data analysis methods. The target population comprised mutual funds
companies, stock brokerage companies, CMA, and NSE. The population size was 36 and a
sample population of 30 was used in the study. The researcher used semi-structured
questionnaires as the data collection tool. Analysis of data was undertaken once the
questionnaires were received back from the field. The data was analyzed using SPSS, and
thereafter presented in informative charts, graphs, and tables. Among the key findings is that
the regulation of mutual funds in Kenya needs to embrace a more consultative approach.
Another key finding is that there is a large amount of information asymmetry between mutual
fund insiders and other players in Kenya’s capital markets.

70
5.3 Discussion

5.3.1 The Regulation of Mutual Funds in Kenya

The study found that, as set out in Table 4.31 in Chapter 4, that Kenyan laws and regulations
promote ethical conduct in mutual fund operations (mean=3.93, sd=0.74), and that the
political and economic environment affects investment in mutual funds (mean=4.10,
sd=0.96).

The study found that mutual fund companies are not doing a good job in creating market
awareness in Kenya (mean=2.60, sd=1.04). It found a fairly low score on the question of
whether individual and institutional investors are aware of the benefits of investing in the
mutual fund market (mean=2.80, sd=1.03).

The study found a low score on the issue of whether laws and regulations governing mutual
funds are regularly updated to stay in touch with technological and financial innovations
(mean=2.80, sd=0.89).

The study found that regulatory weaknesses and gaps, limited awareness, under-developed
markets, and low disclosure/transparence levels were the main challenges that required to be
addressed in order to have more effective regulation of mutual funds in Kenya. This study
supports the view by Silvia (2008) that merger of regulators may be onerous and counter-
productive when existing specialized regulators still have gaps in their regulations as is the
case in Kenya.

5.3.2 The Transparency of Mutual Funds in Kenya

The most positive response under transparency was received for the premise that all
shareholders are made continuously aware that they are entitled to ask for any information
about their mutual fund’s operations (mean=3.67, sd=1.03). Also receiving positive replies

71
was the proposition that all correspondence relating to policy changes is available to all
stakeholders (mean=3.60, sd=1.13).

The proposition regarding in-depth availability of stock prices and portfolio returns at all
times from mutual fund websites received a low score (mean=3.23, sd=1.01), as did the one
with respect to absence of hidden charges in mutual funds (mean=3.33, sd=0.99).

The study concurred with Haslem (2007) that investors and markets punish low levels of
transparency through exhibiting low levels of confidence in institutions and market
instruments with low transparency.

5.3.3 The Competitiveness of Mutual Funds in Kenya

The premise that mutual funds are able to engage in profitable business at the NSE received a
high score (mean=4.07, sd=0.64), as did the proposition that mutual funds in Kenya always
give the customer the benefit of the doubt of bulk purchases (mean=4.0, sd=0.93). The study
further established that respondents were of the view that mutual fund companies employ the
active strategy in managing portfolios (mean=3.97, sd=0.89).

The study found that stock broking companies do not as yet engage in enthusiastic
publication and vending of mutual funds in Kenya (mean=2.93, sd=1.23). It further found
that respondents did not consider saccos as the strongest competitor to mutual funds
(mean=3.00, sd=1.11), and that respondents did not think that mutual funds in Kenya kept
low operational costs (mean=3.17, sd=0.91).

The study was unable to concur or refute the findings of Kinnel (2007) regarding the long
term prospects of firms with low expense margins against those with high ones. This is
because of the current dearth of user-friendly, publicly available information on Kenya’s
mutual funds which would be necessary to conduct such an analysis. It however found that
lack of such important information will eventually work against the firms that refuse to avail
it to investors through diminished confidence in the products of such firms.

72
5.4 Conclusions

5.4.1 The State of Regulation of Kenya’s Mutual Funds

Kenya’s mutual funds are well regulated with respect to the human resource managing the
funds, whose caliber and qualifications were found to be high. Mutual fund trading practices
are fair and effective, while the laws and regulations promote ethical conduct in business.

The regulation of mutual funds in Kenya suffers from poor adaptation of rules and laws to
foster technological/financial innovations, and from a relatively small number of participating
securities at the Nairobi Securities Exchange. Effective regulation of mutual funds in Kenya
is hampered by regulatory weaknesses and gaps, limited awareness, underdeveloped markets
(including a low national technological and expert base), and low transparency and disclosure
levels. The study discovered that mutual fund regulation in Kenya is not conducted in an
adequately robust and consultative fashion.

73
5.4.2 The State of Transparency of Mutual Funds in Kenya

The study found low levels of transparency in Kenya’s mutual funds, and notable illustrations
of information asymmetry between mutual fund insiders and outsiders. Although Kenyan
mutual funds publish their prices daily in the national newspapers, this does not seem to
adequately address public/investor disclosure needs/requirements, probably as a result of the
poor repossession and malleability of hard copy, especially in the digital age. The study
concludes that transparency will be appreciably increased in Kenya’s mutual funds through
compulsory and standardized reporting, publishing make up of actual investments, and
central collation and public dissemination of information about mutual fund performance.
Mutual funds in Kenya in general and for the most part avoid giving any data not expressly
required in law. This attitude is reflected in the scant data found on their websites with
respect to current and past performance. The poor transparency translates to weak awareness
levels as reflected by uncertainty levels expressed by stock broking respondents. Over half
the stock broking respondents expressed uncertainty or doubt on important questions such as
whether mutual funds had in place strategies to mitigate stock exchange losses due to market
upheavals, or whether mutual fund companies had hidden costs, or whether mutual fund
companies had invested in modern trading systems. This should trigger alarm, soul-searching,
and positive action among mutual fund companies because it means that many
knowledgeable investors are still unaware of what actual/real benefits mutual funds in Kenya
actually offer to customers. This means that poor transparency and disclosure will work
against mutual funds growth potential in Kenya.

5.4.3 The State of Competitiveness of Mutual Funds in Kenya

This study concludes that mutual fund companies are able to engage in profitable business at
the Nairobi bourse, albeit with difficulties in diversification due to the limited number and
range of investment instruments at the bourse. Using the respondents as a proxy for
knowledgeable investors in Kenya, and in particular stock exchange respondents as proxies
for the knowledgeable outsider, rather than insider, investors, it concludes that mutual funds
in Kenya in general do not enjoy strong positive perception with investors. 60% of all
respondents disagreed or expressed neutrality regarding superiority of mutual fund yields.
The same proportion of respondents disagreed or expressed uncertainty that mutual funds
keep low operational costs. A half (50%) of respondents expressed doubt or disagreed with

74
the notion that mutual fund companies had suitable measures in place to swiftly mitigate
losses occasioned by stock market upheavals. Once again, 50% of respondents were uncertain
whether mutual fund staff who showed superior skill through outperforming the benchmark
indices were rewarded through commissions or bonuses. 63% of all respondents disagreed or
were unsure that all costs borne by the shareholder are properly itemized and disclosed to
shareholder. It is the responsibility of mutual fund companies to ensure that investors and
potential investors in today’s knowledge economy are well equipped with the answers to such
questions through well-structured and deliberate awareness campaigns. It is arguable that
mutual fund companies will lose out to alternative investment vehicles which will have
satisfactorily answered equivalent questions in the would-be investor’s mind. This study also
concludes that the competitiveness of mutual funds in Kenya will increase through
advertisement/publicity to the investing public, increasing mutual fund yields, allowing more
players/funds into the market, and user-friendly publicly available comparisons of mutual
funds’ performances over time periods.

5.5 Recommendations

5.5.1 Recommendations for Improvements

5.5.1.1 The Regulatory Framework

Much has to be done in creating market awareness in Kenya. The lack of market awareness is
reflected in the large margin of uncertainty on key aspects such as the compensation
structures in mutual fund companies, as well as the low scores for the levels of awareness for
benefits in mutual funds by institutional and individual investors.

The laws and regulations need to be regularly updated to stay in touch with technological and
financial innovations. The regulator needs to be more proactive in this, and would require
more intensive engagement with stakeholders in order to conceive and roll out the updated
regulatory framework that support growth and innovation. The regulator should lead from the
front in terms of increasing transparency levels of mutual funds through raising the disclosure
bar. Requiring mutual fund companies to publish all the relevant information on their
websites will help in this respect.

75
5.5.1.2 The Transparency in Mutual Funds
Mutual funds in Kenya have not yet harnessed the power of websites to provide information
and competitive advantage. Since inevitably there are better performers than others in mutual
funds, the good performers should amplify the information that shows their operational
superiority through their website. This would lead to rewards through greater shareholders
numbers and inflows, and lead to better resource allocation.

The lack of transparence in certain aspects of mutual fund operations and performance leads
to poor scores from, and ambiguity among, investors and advisors with respect to hidden
charges, conflict of interest reporting, and whether in fact mutual funds in Kenya on average
yield a better return for investors than other financial assets.

A lot of the information which would be useful to investors and financial advisers on whether
to invest in mutual funds, and if so, which one(s), is available but is held on private or
proprietary basis. Such information may not be publicly used or acknowledged. As a result of
the absence of publicly available data, investors and would-be investors may choose not to
invest in the mutual funds but in other instruments. Addressing transparency gaps, and
hosting/availing the information in an electronic, publicly available manner for comparison
purposes will go a long way in demystifying mutual funds and increasing investor appetite
for the funds.

5.5.1.3 The Competitiveness in Mutual Funds

Mutual funds can make themselves more competitive by making the catchment area for
obtaining customers wider. Most of the mutual funds in Kenya use direct marketing. In
addition to this, efforts and a framework should be developed to enable stock brokers to come
aboard in marketing mutual funds to the public.

Mutual funds in Kenya should strive to keep low operational costs and publicize successful
indicators in this direction. This will address the perception that mutual funds in Kenya do

76
not maintain low operational costs, which fact would depress yields, and which perception
depresses product demand. Increasing demand would lead to lower margin costs, which
would have mutual funds in the virtuous cycle of further increased demand, leading to further
diminished costs.

Mutual funds exist to pool funds, providing economies of scale. They are further expected to
be stewarded by investment experts, leading to good overall yields. Mutual funds in Kenya
should therefore stop being reticent about operating performance by posting as much of their
indicators and performance as possible, including honest/frequent comparison with
benchmark indices. Mutual funds in developed markets follow this route, with
underperforming ones outlining reasons for bad performance and measures taken to improve
performance. This publication, analysis, comparisons, and narratives serve to boost rather
than diminish investor confidence and subsequently demand.

The regulator can enable competitiveness in Kenya’s mutual funds be demanding that
detailed historical/current performances and unit prices be posted by each fund on its website
in a downloadable quantitative format. This will enable independent bodies and analysts
study and disseminate information on mutual funds, in addition to showing publicly available
references.

5.5.2 Recommendations for Further Studies

It would be worth studying the internal mechanisms and processes that guide the regulator.
What are the internal and external triggers that lead to efficient regulatory oversight? What
are the bureaucratic impediments that obstruct a timely response to developments in the
market? Is the regulator sufficiently equipped, technically or otherwise, to oversee the mutual
funds? Is the relationship with the stakeholders in the mutual fund sub-sector robust, and
enabling of the right amount of engagement and cooperation? An intriguing area for further
research is how Kenyan investors reward transparency in mutual funds through increased
subscription, and how lack of transparency is sanctioned through reduced demand.

77
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 APPENDICES

Appendix I: Cover Letter

UNITED STATES INTERNATIONAL UNIVERSITY – AFRICA,
P O BOX 14634, 00800, NAIROBI, KENYA
EMAIL: mainamihari@gmail.com
TELEPHONE: 0722880435

Dear Respondent,

RESEARCH STUDY

I am carrying out a research on the regulation, transparency and competitiveness of mutual

funds in Kenya. In this study, the term “Mutual Funds” is used interchangeably with “Unit
Trusts”. This research is in partial fulfillment of the requirements of the Masters Degree in
Business Administration (MBA) degree at the United States International University, Africa.

This project uses knowledgeable practitioners and other stakeholders in the securities market
for the research. You have been selected as a respondent on this basis. The result of this study
will provide stakeholders required information to develop a more robust and inclusive mutual
fund market in Kenya. This includes the framework and the practices which will lead to
better regulation, enhanced transparency, and increased competitiveness in Kenya’s mutual
funds sector.

This is an academic research and as such confidentiality is strictly observed. Please note that
the information you give will not be used for any other purpose other than for this project.
Your name and that of your organization will not appear anywhere in the report. Kindly spare
some time to complete the questionnaire attached. I will pick up the questionnaire personally,
once completed. Please inform me if you would wish to have a copy of the full report once it
is ready.

Thank you in advance.

Yours sincerely,

Maina Mihari

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Appendix II: Questionnaire
SECTION A: BACKGROUND INFORMATION
1. Company name ……………………………………………………….…………..

2. I work (tick applicable)

At the NSE At a Unit Trust/Mutual Fund firm

At the CMA At a Stock Brokerage firm

3. What position do you hold in the firm ………………………………………………

4. For how long have you been working in the organization?

0 years to less than 3 years 5 years to less than 10 years

3 years to less than 5 years 10 years and above

5. What is your gender?

Male Female

6. What is your level of education? (Tick applicable box/boxes)

Professional (CPA,CPS, etc) Diploma

First Degree Advanced Degree

Other (Please specify) ……………………………………………………………

7. Years of Participation in the Stock Market/Capital Markets.

0 years to less than 3 years 5 years to less than 10 years

3 years to less than 5 years 10 years and above

8. Indicate to what extent you are responsible for your organization’s stock trading/
investment matters:
No Responsibility Partly Responsible Fully Responsible

85
 SECTION B: REGULATION IN THE MUTUAL FUNDS SECTOR IN KENYA

Indicate the extent to which you agree with the following statements by using a scale of 1 to 5
where 1= strongly disagree and 5 = strongly agree.

Disagree
Disagree
Strongly

Strongly
Neutral
Agree

Agree
REGULATORY FACTORS

9. Kenyan laws and regulations promote ethical conduct in 1 2 3 4 5

mutual fund operations
10. Mutual fund trading practice is fair and effective. 1 2 3 4 5

11. The rules, regulations and laws are up to date and in line 1 2 3 4 5
with modern mutual fund global best practice
12. Entry requirements into the mutual fund business are 1 2 3 4 5
achievable for an average Kenyan company
13. The laws and regulation governing mutual funds are 1 2 3 4 5
regularly updated to stay in touch with technological and
financial innovations.
14. The laws and regulations that govern mutual fund 1 2 3 4 5
operations in Kenya are adequately enforced
INSTITUTIONAL FACTORS

15. Individual and institutional investors are aware of the 1 2 3 4 5

benefits of investing in the mutual fund market.
16. Mutual funds in Kenya are keen on all classes of 1 2 3 4 5
investors, small and large.
17. Mutual funds in Kenya promote a culture of savings in 1 2 3 4 5
Kenya
18. Mutual funds are doing a good job in market awareness in 1 2 3 4 5
Kenya
19. Mutual fund companies in Kenya have invested in modern 1 2 3 4 5
trading systems

86
 Disagree
Disagree
Strongly

Strongly
Neutral
Agree

Agree
20. The political and economic environment affects 1 2 3 4 5
investment in the mutual funds market
21. The relatively small number of variety and volume of 1 2 3 4 5
participating securities traded at the Nairobi Securities
Exchange negatively impacts mutual funds development
in Kenya

22. In your opinion, what are the major challenges hindering efficient regulation of
mutual funds in Kenya?
..........................................................................................................................................
..........................................................................................................................................

23. What, in your view, are some of the ways the above challenges can be overcome?
…………………………………………………………………………………………
…………………………………………………………………………………………

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SECTION C: TRANSPARENCY OF MUTUAL FUNDS IN KENYA

Indicate the extent to which you agree with the following statements by using a scale of 1 to 5
where 1= strongly disagree and 5 = strongly agree.

Disagree
Disagree
Strongly

Strongly
Neutral

Agree

Agree
24. All shareholders are made continuously aware that they 1 2 3 4 5
are entitled to ask for any information about the
operations of the mutual fund
25. All correspondence relating to policy changes is 1 2 3 4 5
available to all stakeholders.
26. There are no hidden charges in mutual funds 1 2 3 4 5

27. All conflicts of interest are reported in writing by fund 1 2 3 4 5

managers and trustees
28. All information regarding stock prices and returns on 1 2 3 4 5
portfolio, from inception, are available at all times on
website

In your opinion what are other variables which can be used to determine the transparency of
mutual funds in Kenya?
…………………………………………………………………………………………………
……………………………………………………………………..…………………………..

88
SECTION D: COMPETITIVENESS IN THE KENYAN MUTUAL FUND SECTOR

Indicate the extent to which you agree with the following statements by using a scale of 1 to 5
where 1= strongly disagree and 5 = strongly agree.

Disagree
Disagree
Strongly

Strongly
Neutral
Agree

Agree
29. Mutual funds are able to engage in profitable business at 1 2 3 4 5
the Nairobi Securities Exchange
30. Mutual funds on average yield a better return for investors 1 2 3 4 5
than other financial assets
31. Mutual funds in Kenya keep low operational costs 1 2 3 4 5

32. Mutual funds in Kenya always give the customer the 1 2 3 4 5

benefit of bulk purchases
33. Mutual fund companies in Kenya use the active strategy in 1 2 3 4 5
managing portfolios.
34. Mutual fund companies in Kenya use the passive strategy 1 2 3 4 5
in managing portfolios
35. Saccos provide mutual fund companies in Kenya with 1 2 3 4 5
their strongest competition.
36. Mutual funds in Kenya have adequate strategies in place 1 2 3 4 5
to swiftly mitigate losses in case of stock market
upheavals
37. Stock broking companies are enthusiastic purveyors of 1 2 3 4 5
mutual fund stocks
38. Most mutual fund companies deal with only one or two 1 2 3 4 5
stock brokers in acquiring and disposing of their stocks
39. Mutual fund companies do their own market research, 1 2 3 4 5
rather than buying it
40. Mutual fund companies in Kenya pay bonuses and 1 2 3 4 5
commissions to staff who outperform the benchmark
index

89
 Disagree
Disagree
Strongly

Strongly
Neutral
Agree

Agree
41. All costs borne by the shareholder are properly itemized 1 2 3 4 5
and disclosed to shareholder

42. What in your view are other measures which can be used to promote competitiveness
of mutual fund markets in Kenya?
…………………………………………………………………………………………
…………………………………………………………………………………………

90
Appendix III: Mutual Fund Companies In Kenya

UNIT TRUST COMPANY NAME OF FUND TYPE OF FUND

1 British American British American Money Market Fund Money Market Fund

British-American Equity Fund Equity Fund

British-American Managed Retirement Fund Managed Funds

British-American Balanced Fund Balanced Funds

British American Bond Plus Fund Bond Funds

2 Old Mutual Old Mutual Money Market Fund Money Market Fund

Old Mutual Equity Fund Equity Fund

Old Mutual Balanced Fund/Toboa Balanced Fund

Old Mutual East Africa Fund Balanced Fund

Old Mutual Bond Fund Bond Funds

3 Stanbic Stanbic Money Market Fund Money Market Fund

Stanbic Fixed Income Fund B1 Bond Funds

Stanbic Fixed Income Fund A Bond Funds

Stanbic Equity Fund Equity Fund

CFC Simba Fund Balanced Fund

4 African Alliance Kenya African Alliance Kenya Shilling Fund Money Market Fund

African Alliance Fixed Income Fund Bond Funds

African Alliance Kenya Equity Fund Equity Fund

African Alliance Managed Fund Managed Funds

5 CIC Asset CIC Money Market Fund Money Market Fund

CIC Fixed Income Fund Bond Funds

CIC Equity Fund Equity Fund

CIC Balanced Fund Balanced Fund

6 ICEALion ICEA Money Market Fund Money Market Fund

ICEA Equity Fund Equity Fund

ICEA Growth Fund Equity Fund

ICEA Bond Fund Bond Funds

7 Commercial Bank of Africa CBA Market Fund Money Market Fund

CBA Equity Fund Equity Fund

91
 UNIT TRUST COMPANY NAME OF FUND TYPE OF FUND

8 Zimele Asset Zimele Money Market Fund Money Market Fund

Zimele Balanced Fund Balanced Fund

9 Amana Capital Amana Money Market Fund Money Market Fund

Amana Growth Fund Equity Fund

Amana Balanced Fund Balanced Fund

10 Genghis Capital Genghis Money Money Market Fund

Genghis Diversified Balanced Fund

Genghis Iman Balanced Fund

Genghis Bond Bond Funds

Genghis Equity Equity Fund

11 Madison Asset Madison Asset Money Market Fund Money Market Fund

Madison Asset Equity Fund Equity Fund

Madison Asset Balanced Fund Balanced Fund

12 Dyer & Blair Dyer and Blair Equity Fund Equity Fund

Dyer and Blair Bond Fund Bond Funds

13 Standard Investment Bank Standard Investment Income Fund Bond Fund

Standard Investment Equity Growth Fund Equity Fund

(Source: CMA Website - Listing As at 30th June 2013)

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Appendix IV: List of Member Firms - Nairobi Securities Exchange

LIST OF MEMBER FIRMS – NAIROBI SECURITIES

EXCHANGE
1 Dyer & Blair Investment Bank Ltd
2 Francis Drummond Investment Bank Ltd
3 NgenyeKariuki& Co Ltd (under Statutory
Management)
4 Suntra Investment Bank Ltd
5 Old Mutual Securities Ltd
6 SBG Securities Ltd
7 Kingdom Securities Ltd
8 Afrika Investment Bank Ltd
9 ABC Capital Ltd
10 Sterling Capital Ltd
11 Apex Africa capital Ltd
12 Faida Investment Bank Ltd
13 NIC Securites Ltd
14 Standard Investment Bank Ltd
15 Kestrel Capital (EA) Ltd
16 Discount Securities Ltd (under Statutory Management)
17 African Alliance Kenya Investment Ltd
18 Renaissance Capital (Kenya) Ltd
19 Genghis Capital Ltd
20 CBA Capital Ltd
21 Equity Investment Bank Ltd

(Source: NSE Website - Listing As at 30th June 2013)

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