Influence of Asset Allocation Practices on the Financial Performance of Investment Firms Trading at the NSE

Purpose: The purpose of this study is to assess the influence of asset allocation practices on the financial performance of investment firms trading at NSE Methodology: This study adopted a positivist philosophy and a correlational research design to examine the influence of firm-specific factors on the financial performance of 63 investment firms listed at the Nairobi Securities Exchange (NSE) from 2014 to 2023. A census approach was used, and data was collected from secondary sources, including NSE, CBK, and KNBS. Panel regression models analyzed the relationships between asset allocation, portfolio diversification, corporate governance, and risk management, with diagnostic tests ensuring data reliability. The moderating effect of ownership structures was also evaluated, and findings were presented using statistical analysis tools like SPSS. Tables and Figures were also used to present the data. Findings: The study found that investment firms at the NSE allocated an average of 22.35 billion to bonds, 3.40 billion to money markets, and 25.86 billion to stocks, with significant variability in bond and stock investments. Regression analysis revealed a positive relationship between asset allocation and Return on Assets (ROA), with a coefficient of 0.0484 and an R-squared value of 0.3978, explaining 39.78% of ROA variance. A similar positive relationship was found with Return on Equity (ROE), with a higher coefficient of 0.3119 and an R-squared value of 0.3614, explaining 36.14% of ROE variance. The composite financial performance measure also showed a positive influence from asset allocation, with a coefficient of 0.1802 and an R-squared value of 0.3912, explaining 39.12% of the variance in financial performance. This supports modern portfolio theory suggesting that diversification improves profitability and aligns with shareholder interests by optimizing returns and managing risk. Overall, well-strategized asset allocation was found to contribute positively to the firms' financial performance. Unique Contribution to Theory, Practice and Policy: The study findings revealed that effective asset management practices significantly influenced the financial performance of investment firms trading at the NSE. To capitalize on this, firms should refine their asset management strategies by optimizing asset allocation to balance risk and return effectively.