EFFECT OF MANAGEMENT FEE ON EFFICIENCY OF MONEY MARKET UNIT TRUST FUNDS IN KENYA

Abstract

Management fee is a compensation to fund managers for their professional asset management services. However, there is an ongoing debate whether fund managers charge fees that are commensurate to the services they
offer. Management fee is justified when fund managers earn high risk adjusted returns, outperform benchmarks and increase fund value because it would translate to efficiency. On the contrary, high compensation to
fund managers that is not justified would be an evidence of agency problem where managers seek to pursue
their self-serving interest instead of focusing on risk management, portfolio monitoring and cost management
thereby resulting to fund inefficiency. Therefore, the main objective of this study was to determine the effect
of management fee on fund efficiency. The study was guided by agency theory and X-efficiency theory. The
study adopted a causal and longitudinal research design. Secondary data was collected from 25 money market
unit trust funds (MMFs) over the period 2018 to 2024 yielding 122 fund year observations. Descriptive statistics provided simple summaries of the population. Inferential statistics and panel data regressions were utilized
for testing of statistical hypotheses. A two-stage analysis was adopted whereby in the first stage, efficiency
scores were computed using Data Envelopment Analysis and in the second stage, Generalized Method of Moment was used to determine the dynamic relationship among study variables. The findings revealed that, during the study period, MMFs were not 100% efficient. Further, management fee had no significant effect on
fund efficiency (β=0.266, p-value>0.05). The lagged efficiency score was positive and statistically significant
meaning there was persistence in fund efficiency (β=0.203, p-value<0.05). The results revealed that the rate of
management fee to income charged by the fund does not influence its efficiency level. Further, a fund’s past
efficiency level has an influence on the current level of efficiency.