ASSET ALLOCATION AND FINANCIAL PERFORMANCE OF MONEY MARKET FUNDS IN KENYA

Money market funds play an increasingly important role in Kenya’s collective investment industry by offering investors liquid, professionally managed exposure to short-term financial instruments. Although these funds operate within a common regulatory framework and invest within a relatively narrow universe of eligible securities, their investor yields differ materially. This study examined the effect of asset allocation on the financial performance of money market funds in Kenya and assessed whether fund size moderates that relationship. For this focused article, Modern Portfolio Theory provides the anchoring theoretical lens for the asset-allocation pathway. Guided by positivism, the study adopted an explanatory longitudinal panel research design. The target population comprised 45 money market funds licensed by the Capital Markets Authority by the close of the 2020–2024 study period. A census was attempted, but criterion-based inclusion based on availability and completeness of audited information yielded an unbalanced panel of 88 fund-year observations from 19 funds. Secondary data were extracted from audited annual financial statements and official regulatory disclosures using a structured data collection sheet. Financial performance was measured by net annual yield; asset allocation by income-generating assets divided by total assets; and fund size by the natural logarithm of assets under management. Descriptive statistics, diagnostic tests and a hierarchical pooled-panel specification with year fixed effects and fund-clustered robust standard errors were applied. Asset allocation had a positive and statistically significant relationship with financial performance (β = 0.1674, robust SE = 0.0360, z = 4.6550, p < .001), leading to rejection of H₀₂. A one-percentage-point increase in the asset allocation ratio was associated with an approximately 0.167-percentage-point increase in net annual yield, holding the other modelled characteristics and common annual conditions constant. Fund size did not significantly moderate the asset-allocation relationship: in the dissertation’s full moderation model, the asset-allocation-by-fund-size interaction was negligible and statistically insignificant (β = 0.0031, z = 0.150, p = .881). The full four-interaction block added less than .001 to R²; this block-level change is not attributable to the asset-allocation interaction alone. The findings indicate that portfolio deployment is a meaningful direct performance channel across the fund sizes represented in the sample. The study recommends dynamic allocation management, stronger portfolio disclosure, continuous monitoring of deployment and liquidity, and future research using higher-frequency data and disaggregated instrument weights.