Trustee board characteristics, portfolio diversification and financial performance of universities pension funds in Kenya

Abstract

The stewardship of retirement savings portfolios and their corresponding capital deployments is of global interest. The pension funds under the board of trustees have been reporting low assets to GDP ratio contribution as well as poor financial performance depicted by low and unpredictable return on assets especially in Kenya. The purpose of this study was to examine the mediating effect of portfolio diversification in the relationship between pension fund board characteristics and financial performance of Universities pension funds in Kenya. The study was guided by the following objectives to: assess the effects of board size; gender diversity, and financial expertise on financial performance; examine the effect of board size, gender diversity and financial expertise on portfolio diversification and; determine whether portfolio diversification mediates the relationship between board size, gender diversity and financial expertise and financial performance of Universities pension funds. The study was grounded on the Modern Portfolio Theory, Agency Theory and Stewardship Theory. A positivism research paradigm was adopted for this study. The research adopted an explanatory research design. Panel data from 26 university pension funds which met the inclusion criteria between 2015 and 2022 with a total of 208 observations were analyzed using both descriptive and inferential statistical techniques. Secondary data was sourced from the audited annual returns from the Retirement Benefits Authority by the Schemes trustees after whom document analysis was done. Prior studies have examined how board characteristics influence financial performance especially in the corporate world. However, there is limited research that has investigated whether this relationship operates through portfolio diversification and particularly within university pension funds. This study has addressed this gap by testing the mediating role of portfolio diversification on the financial performance of Universities Pension funds. “The study findings revealed that: board size had a positive effect on Financial performance (β = 0.1306, ρ<0.05); gender diversity had a positive effect on financial performance ((β = 0.1306, ρ<0.05) and financial expertise had a positive effect on financial performance (β = 0.1123787, ρ<0.05). On testing whether board characteristics under study had an effect on portfolio diversification (Mediator) the study findings indicated that: board size had a negative effect on portfolio diversification (β = -0.2879, ρ<0.05); Gender diversity had negative but significant impact on portfolio diversification (β = -0.0259, ρ<0.05 and financial expertise (β = 0.0122, ρ<0.05), financial expertise had a positive and significant effect on portfolio diversification (β = 0.0981, ρ<0.05). regression results for portfolio diversification on financial performance showed that portfolio diversification had a positive and significant effect on financial performance (β = 0.2654451, ρ<0.05). Mediation analysis results revealed that: portfolio diversification does not mediate the relationship between board size and financial performance (Z = -0.636); Portfolio diversification partially mediates the relationship between gender diversity and financial performance (Z = 3.213) and portfolio diversification partially mediates the relationship between financial expertise and financial performance (Z = 2.880). The study concluded that board size, gender diversity, and financial expertise significantly enhance the financial performance of university pension funds; financial expertise improves portfolio diversification; while gender diversity and board size showed mixed effects. Portfolio diversification positively influenced performance but partially mediated the effects of gender diversity and financial expertise. The study recommends that university pension funds ensure optimal board size, promote gender diversity, and prioritize financial expertise among trustees for better performance. Boards should also adopt strategic portfolio diversification aligned with fund objectives.