Understanding Special Funds: What every decision-maker needs to know

The Capital Markets Authority (CMA) has stepped up scrutiny of how Kenyan investment managers market their performance, raising flags over aggressive return projections in the rapidly expanding Special Funds sector, which has grown to command over Ksh.200 billion in assets under management.

At a recent industry forum, the regulator expressed deep concern that some fund managers are annualizing short-window returns; a practice that artificially inflates performance figures and creates unsustainable expectations that fund managers would not commit to in writing.

While market experts agree that Special Funds remain highly viable investment vehicles, the regulator's pushback highlights a growing demand for transparency in how financial products are sold to retail and institutional investors alike.

The core of the regulator's concern lies in simple math being used to imply complex future performance.

When a fund earns 11% over a six-month period, some managers market this as a 23% annualised return.

While the arithmetic is technically correct, it implies a forward projection that is rarely guaranteed. A short six-month window does not account for market cycles, sudden volatility, or shifts in asset valuations.

"A six-month window is simply too short a sample to justify extrapolating into a full-year expectation," notes Jesse Ochieng, a Global Markets Trader at Arvocap Asset Managers.

"Retail investors tend to read the headline number as a promise. Until a standardized industry reporting framework arrives, the burden of proof falls squarely on the investor."

To understand why these performance claims are so volatile, investors must first understand what a Special Fund is.

Unlike highly conservative alternatives, Special Funds operate with unconstrained mandates.

Because two Special Funds with similar names can hold entirely different underlying assets, comparing their headline yields without looking at their portfolios is highly misleading.

The headline return figure on a marketing flyer rarely reflects what actually lands in an investor’s bank account.

Therefore, investors must look closely at two critical factors: The Drag of High Fees where special Funds enjoy significant pricing flexibility.

Management fees in the Kenyan market can reach up to 6% per annum, often paired with performance fees if the fund beats its benchmark. The real return is always net of these fees and withholding taxes.

And mismatched benchmarks. A fund holding volatile equities or offshore assets that benchmarks its performance against the 91-day Treasury bill is holding itself to an artificially low standard.

An honest benchmark must reflect the actual risk and asset mix of the portfolio.

Experts urge investors to look past the top-line yield and request three key risk metrics before committing capital:

"First thing is volatility. A measure of how widely the fund’s valuation swings month-to-month. High-volatility funds are entirely unsuitable for cash needed in the short term," Ochieng says.

"Another thing is rolling returns. Instead of looking at a static multi-year average, rolling returns show the range of 12-month returns across every possible starting point in the fund's history."

Ochieng also mentioned liquidity terms as a defining factor.

"Many special funds have different redemption profiles based on the assets they typically invest in. It's is hence paramount for investors to ensure they liquidity contraints match that of the funds they're invested in," he stated.

Ultimately, a healthier investment landscape benefits both the market and the managers.

"The growth of the Kenyan Special Funds industry to over Ksh.200 billion proves these products fill a critical gap," Ochieng concludes.

"The current conversation is not about avoiding them—it is about ensuring they are understood on the same rigorous terms as any other financial commitment."