Moderating Influence of Portfolio Rebalancing on the Relationship between Asset Allocation and Financial Performance of Pension Funds in Kenya

Abstract

Purpose: This paper examined the moderating influence of portfolio rebalancing on the relationship between asset allocation and financial performance of pension funds in Kenya. Methodology:  The study used a descriptive research design with data collection form used to gather secondary data. The target population for this study was 1,258 registered schemes as per RBA as of 31 December 2021. The sample consisted of 294 registered schemes. Secondary data was obtained from the Retirement Benefits Authority (RBA) for the study variables for the six-year period between 2016- 2021. The data was analyzed using multiple linear regression and subjected to diagnostic tests. Findings: The study findings revealed that portfolio rebalancing had a significant moderating influence on all the variables except guaranteed funds which was not significant. This is expected since return on guaranteed funds is fixed (minimum guarantee) and therefore, the return on investors’ funds will remain constant overtime even with portfolio rebalancing of the fund’s asset under management. The study findings resonate with policy discourses suggesting that active portfolio rebalancing may yield better returns to members through proactive management of portfolio risks. Unique Contributions to Theory, Practice and Policy: The study validates the modern portfolio theory whose premise is selection and construction of asset portfolios to maximize the portfolio expected return and the concurrently minimize the attendant risk. The study can help policy makers such as Retirement Benefits Authority (RBA) in Kenya review investment ceilings imposed on different asset classes which restrict the range of asset allocation strategies available to those charged with pension fund asset management responsibilities by establishing quantitative limits on investment, typically by asset class. The trustees and fund managers can use the study findings to ensure adoption of an optimal mix of different asset classes that can maximize member’s returns.