A comparison of performance of unit trusts and the stock market in Kenya

Abstract

This paper seeks to make a comparison between the performance of equity unit trusts and the stock market. It answers two questions; whether equity funds are better performers than the market and whether the results obtained over the period of study are consistent with past conclusions of other researchers. Risk adjusted measures of return including Jensen's alpha, Sharpe Index and Treynor Measure are used in calculating the returns to be compared. Evidence from the results indicates that equity funds perform below the stock market unlike in a previous study by Kagunga that concludes unit trusts outperform the market. Raw returns analysis shows inferior returns across the equity funds industry compared to the returns from the market. Evaluating the same based on market adjusted returns simply emphasizes the fact that fund managers have not delivered superior returns relative to the market. In fact, there is only one out of ten funds that outperforms the market. It could therefore be concluded that equity fund managers should just manage indexed portfolios since they have not been able to beat the index. Further investigation could be done to see if the outcome is the same on including dividend yields before comparison is done. Our results question the value of engaging in rigorous investment strategies as opposed to passive; simply saving in high interest accounts or government papers for short term investment as well as long term since I year bond earns around 11% per annum with minimal deviation and 10 year bonds earn around 14%.