Effect of Macroeconomic Variables on the Net Asset Values Of Equity: Empirical Evidence From Pension Funds in Kenya

Abstract

Investors of pension funds just like any other investor seek to achieve high returns on investment while at the same time minimizing risks. For this reason, fund managers choose to invest pension in quoted equity with the sole objective of growing the fund by making capital gains through appreciation of stock prices and generating revenue in the form of dividends. The relationship between macroeconomic variables and the stock market index is a well documented subject in many literatures but the effect of the stock market index and macroeconomic variables on the net asset values of equity pension funds remains an uncharted course. Whereas it is acknowledged that macroeconomic variables influences the level of investments and returns - and by extension the net asset values of equity pension funds, the magnitude and the direction of the effects is an empirical issue. The purpose of this paper therefore was to investigate the effect of the Nairobi stock exchange index (NSEI) and selected macroeconomic variables – inflation (INFL), interest rate (WIR), and Money supply (M2) on the net assets of equity pension funds (EPF). To this end, published quarterly time series data from December 2001 up to and including December 2012 were obtained from the Central Bank, Kenya National Bureau Statistics, Pine Bridge and the Retirement Benefits Authority. Explanatory research was used to establish the relationship between the variables and as a preliminary, data was tested for stationarity using the ADF and KPSS test and the data was found to be I(1)- a necessity for cointegration. Johansen cointegration test was done, a multivariate vector error correction (VEC) model and the estimates obtained. Empirical results showed that the net asset values of equity pension funds formed a significant positive relationship with inflation, weighted interest rate and the Nairobi Stock exchange index and a negative significant relationship with money supply. The error correction model also indicated that the net asset value of equity pension funds adjusted by 44.3 % in one quarter and takes six months to eliminate the disequilibrium. Variance decomposition tests and impulse response functions indicate that approximately 81% of changes or variance in the net asset value of equity pension fund was explained by its own shocks and innovations. The implication of this study is that fund managers and scheme participants should know that the macroeconomic variables under consideration in this study and the stock exchange index indeed forms a long-term equilibrium relationship with the net asset value of equity pension funds and be concerned especially with changes in money supply.