Effect of Agency Costs on Fund Growth of Collective Investment Schemes in Kenya

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Keith Kathendu
Dr. Ogilo Fredrick

Abstract

This study sought to examine the effect of agency costs on the growth of collective investment schemes in Kenya. The study used descriptive research and targeted 36 fund managers approved by CMA. Secondary data collected from quarterly reports were relied on. Panel regression analysis was used to examine the association between study variables. The expense ratio was negatively associated with fund growth, indicating that higher expense ratios correspond to a decrease in fund growth. Conversely, the turnover ratio had a significant positive association with fund growth, demonstrating that higher turnover ratios lead to increased fund growth. The asset utilization ratio also showed a positive effect, although the effect size was relatively small. Additionally, the number of investors was positively associated with fund growth, suggesting that an increase in the number of investors enhances fund growth. The expense ratio, as a direct measure of agency costs, was found to have a negative relationship with fund growth. The turnover rate also negatively influences fund growth. High turnover rates, which represent frequent buying and selling of assets, are often associated with increased transaction costs. The asset utilization ratio positively correlates with fund growth, indicating that efficient use of fund assets leads to better performance outcomes. The study highlights that higher expense ratios negatively affect fund growth by eroding investor returns through excessive fees and administrative costs. To address this, fund managers should implement cost-effective practices, such as optimizing administrative expenses and reassessing fee structures. Clear disclosure of fee components and enhanced transparency regarding fund costs will allow investors to make informed decisions. Future studies could explore a broader range of agency cost indicators beyond expense ratio, turnover rate, and asset utilization. This could include metrics such as management fees, fund governance scores, and liquidity ratios. Additional indicators could offer a more comprehensive view of agency costs and their varied impacts on CIS growth.


 

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How to Cite
Keith Kathendu, & Dr. Ogilo Fredrick. (2025). Effect of Agency Costs on Fund Growth of Collective Investment Schemes in Kenya. The International Journal of Business & Management, 12(11). https://doi.org/10.24940/theijbm/2024/v12/i11/BM2411-010 (Original work published November 30, 2024)