Kenya Fund Market Wrap-Up Report – August 2025: Navigating the Changing Interest Rate Landscape

In this comprehensive Market Wrap-Up for August 2025, we analyze the performance of Money Market Funds in Kenya, USD MMFs, Fixed Income Funds, and Special Funds against the backdrop of significant monetary policy shifts and evolving economic conditions. The month marked a continuation of the downward yield trend that has characterized Kenya’s investment landscape for eight consecutive months, directly impacting fund performance and investor strategies.

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Monetary Policy Context: CBK’s Continued Easing Cycle

The performance of Kenya’s investment funds in August 2025 must be understood within the context of the Central Bank of Kenya’s continued monetary easing cycle. At its August 12, 2025 meeting, the Monetary Policy Committee lowered the Central Bank Rate (CBR) to 9.50 percent, marking the seventh consecutive rate cut in an effort to stimulate economic growth while maintaining price stability.

This aggressive easing cycle began in response to moderating inflation pressures and the need to support economic recovery. The decision reflects the MPC’s assessment that inflation remains well-anchored within the target range of 2.5-7.5 percent, with inflation rising modestly to 4.5 percent in August from 4.1 percent in July 2025, still comfortably below the midpoint of the target range.

Money Market Funds in Kenya: Resilience Amid Rate Pressures

Money Market Funds in Kenya continued to face headwinds in August 2025 as yields trended downward for the eighth consecutive month. This sustained decline reflects the broader easing of monetary conditions and the more stable economic environment that has emerged following a period of elevated inflation and exchange rate volatility.

The decline in Money Market Fund yields has been primarily driven by lower Treasury Bill rates, which serve as the anchor for most MMF portfolios. However, despite the challenging environment, some funds have demonstrated remarkable resilience through superior portfolio management and strategic asset allocation.

Top Performing Money Market Funds (KES)

The Gulfcap Money Market Fund emerged as the market leader with an impressive average daily return of 12.89% per annum (net 10.96%), significantly outperforming the market average of 9.87%. This performance demonstrates that active fund management and strategic positioning can still deliver superior returns even in a declining rate environment.

Following Gulfcap’s stellar performance:

• Cytonn Asset Managers MMF – 12.45% p.a. (net 10.58%)
• Nabo Africa MMF – 12.32% p.a. (net 10.47%)
• Lofty-Corban MMF – 11.88% p.a. (net 10.10%)
• Orient Kasha MMF – 11.59% p.a. (net 9.85%)

The performance differential between top and bottom performers was substantial, with the highest-performing fund (Gulfcap at 12.89%) significantly outpacing the lowest performer (Equity Money Market Fund at 4.99%). This spread highlights the importance of active management and the value-add that experienced fund managers can provide through superior credit analysis, duration management, and asset allocation strategies.

Market Dynamics and Portfolio Strategy

The sustained pressure on Money Market Fund yields reflects several underlying market dynamics:

Treasury Bill Rate Environment: The decline in T-Bill rates has been particularly pronounced, with the 91-day Treasury Bill yield falling below 9% by February 2025 for the first time since late 2022. The Central Bank of Kenya has actively rejected expensive bids to reduce the government’s borrowing costs, contributing to the downward pressure on short-term rates.

Liquidity Conditions: Improved liquidity conditions in the banking sector have reduced the premium that banks are willing to pay for short-term funding, further compressing Money Market Fund yields.

Investor Demand: Despite declining yields, investor demand for Money Market Funds remains robust, particularly from retail investors seeking capital preservation and liquidity.

USD Money Market Funds: Currency Hedging Gains Prominence

Dollar-denominated Money Market Funds have attracted increased investor interest as a hedge against local currency fluctuations and a means to capture international yield opportunities. The performance of USD MMFs reflects both international interest rate trends and local demand dynamics.

USD MMF Performance Leaders

Kuza Asset Management Limited led the USD MMF category with the Kuza USD MMF delivering 5.90% p.a. (net 5.01%), followed closely by:

• Etica USD MMF – 5.86% (net 4.98%)
• Nabo Africa USD MMF – 5.71% (net 4.85%)
• Sanlam USD MMF – 5.42% (net 4.61%)
• Lofty-Corban USD MMF – 5.11% (net 4.35%)

The cumulative average return for USD MMFs stood at 5.15% (net 4.38%), reflecting the appeal of dollar-denominated investments in the current environment. The consistent performance across USD MMFs suggests that international interest rate conditions remain favorable for these products.

Strategic Considerations for USD Investment

The growing interest in USD Money Market Funds reflects several strategic considerations:

Currency Diversification: Kenyan investors are increasingly recognizing the importance of currency diversification in their portfolios, particularly given historical volatility in the Kenya Shilling.

International Yield Opportunities: USD MMFs provide access to international money market instruments that may offer different risk-return profiles compared to local alternatives.

Inflation Protection: Dollar-denominated investments can provide protection against local inflation pressures and currency devaluation risks.

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Fixed Income Funds: Attractive Yields Drive Performance

Fixed Income Funds continued to attract significant investor interest in August 2025, offering higher yields than Money Market Funds while maintaining relatively conservative risk profiles. The strong performance of this category reflects the strategic positioning of fund managers and the availability of attractive medium-term investment opportunities.

Outstanding Fixed Income Performance

Mayfair Fixed Income Fund delivered exceptional performance with 15.28% p.a. (net 12.99%), representing a strong rebound from previous months and demonstrating the potential for active management to capitalize on market opportunities.

Other strong performers included:

• Gulfcap Fixed Income Fund – 13.13% (net 11.16%)
• Nabo Africa Fixed Income Fund – 12.09% (net 10.28%)
• Zimele Fixed Income Fund – 11.92% (net 10.13%)
• Kuza Fixed Income Fund – 11.82% (net 10.05%)

The cumulative average return for Fixed Income Funds reached 11.84% (net 10.07%), significantly above Money Market Fund returns and reflecting the yield premium available to investors willing to accept moderate duration and credit risk.

Market Opportunities in Fixed Income

The strong performance of Fixed Income Funds reflects several market opportunities:

Government Securities: Kenya’s government bond market continues to offer attractive yields, particularly in the medium-term segment where Fixed Income Funds typically invest.

Corporate Bonds: The development of Kenya’s corporate bond market has provided additional investment opportunities for Fixed Income Funds seeking yield enhancement.

Duration Management: Active duration management has allowed fund managers to capitalize on interest rate movements and optimize portfolio positioning.

Special Funds: Specialized Strategies Deliver Value

The Special Funds category showcased the value of specialized investment strategies, with Britam Asset Managers maintaining clear leadership across multiple tenor options.

Britam’s Market Leadership

Britam Asset Managers demonstrated exceptional consistency across different lock-in periods:

• Britam Special FIF (1 Year) – 10.83% p.a. (net 9.20%)
• Britam Special FIF (6 Months) – 10.65% p.a. (net 9.05%)
• Britam Special FIF (3 Months) – 10.63% p.a. (net 9.04%)

This consistent performance across different tenors reflects Britam’s sophisticated approach to asset-liability matching and their ability to structure products that meet specific investor requirements while maintaining competitive returns.

Economic Environment and Inflation Dynamics

The performance of Kenya’s investment funds in August 2025 occurred against a backdrop of moderate inflationary pressures and improving economic conditions. Inflation rose to 4.5% in August from 4.1% in July, marking the third consecutive monthly increase but remaining well within the Central Bank’s target range.

Inflation Drivers and Implications

The August inflation increase was primarily driven by:

• Transport Costs: Faster increases in transportation-related expenses
• Food and Non-Alcoholic Beverages: Rising prices for staple foods including vegetables and corn
• Seasonal Factors: Weather-related impacts on agricultural production

Despite the uptick, annual average inflation remained moderate at 3.6% in August, up slightly from 3.5% in July. This benign inflation environment has provided the Central Bank with room to continue its accommodative monetary policy stance.

Economic Growth Outlook

Kenya’s economic growth prospects remain positive, with the IMF projecting real GDP growth of 4.8% for 2025. This growth is expected to be driven by:

• Services Sector: Continued expansion in financial services, telecommunications, and tourism
• Agricultural Recovery: Improved weather conditions supporting agricultural output
• Infrastructure Investment: Ongoing public and private sector infrastructure projects

Treasury Securities Market Trends

The Treasury securities market has experienced significant evolution in 2025, with important implications for fund performance. The Central Bank’s strategy to reduce the government’s borrowing costs has led to more selective acceptance of bids in Treasury auctions.

Recent Auction Performance

Recent Treasury Bill auctions have demonstrated strong investor appetite, with the CBK receiving excess bids of KSh 14.8 billion in early September, indicating a performance rate of 161.5%. This oversubscription reflects:

• Attractive Yields: Despite the declining trend, current yields remain attractive relative to alternative investments
• Liquidity Needs: Investors’ continued requirement for liquid, low-risk investments
• Rate Locking: Anticipation of further rate declines driving investors to secure current yields

Digital Investment Platform Impact

The introduction of digital platforms for Treasury securities investment has democratized access to government securities, with retail investors increasingly participating directly rather than through intermediaries. The Treasury Mobile Direct (TMD) platform and online portals have enabled:

• Direct Access: Individual investors can now participate without intermediaries
• Cost Reduction: Elimination of broker commissions has improved net returns
• Market Participation: Increased retail participation has added depth to the market

Fund Industry Dynamics and Competition

The Kenyan fund management industry continues to evolve, with increased competition driving innovation and improved service delivery. The performance dispersion observed in August 2025 reflects the growing differentiation among fund managers.

Competitive Landscape

The market has seen increased consolidation and specialization:

• Scale Advantages: Larger fund managers can spread costs across bigger asset bases
• Specialization: Niche players focus on specific market segments or strategies
• Technology Investment: Digital platforms and analytical capabilities become competitive advantages

Investor Preferences

Shifting investor preferences are driving product development:

• Currency Diversification: Growing demand for USD-denominated products
• Yield Focus: Investors seek higher-yielding alternatives to traditional MMFs
• Flexibility: Demand for products with varying lock-in periods and liquidity options

Risk Management and Regulatory Environment

The performance of funds in August 2025 reflects effective risk management practices and a supportive regulatory environment. The Capital Markets Authority continues to enhance the regulatory framework to protect investors while promoting market development.

Key Risk Factors

Fund managers are navigating several risk factors:

• Interest Rate Risk: Duration risk management in a changing rate environment
• Credit Risk: Careful credit analysis given economic uncertainties
• Liquidity Risk: Maintaining adequate liquidity to meet redemption demands
• Currency Risk: Managing foreign exchange exposure in USD funds

Investment Implications and Strategic Outlook

The August 2025 performance data provides several key insights for investors:

Short-Term Outlook

Money Market Funds: While yields may continue to face pressure, well-managed funds can still deliver competitive returns through superior asset selection and allocation strategies.

Fixed Income Funds: The yield premium over MMFs makes Fixed Income Funds attractive for investors seeking higher returns with moderate additional risk.

USD Funds: Currency diversification benefits and international yield opportunities support continued interest in dollar-denominated products.

Long-Term Considerations

Economic Recovery: Kenya’s improving economic outlook supports the investment environment across all fund categories.

Policy Normalization: Future monetary policy normalization could provide opportunities for yield improvement.

Market Development: Continued development of Kenya’s capital markets will create new investment opportunities and improve market efficiency.

Key Takeaways for Investors

Based on the comprehensive analysis of August 2025 fund performance:

1. Active Management Matters: The significant performance dispersion across funds demonstrates the value of skilled fund management, particularly in challenging market conditions.
   
2. Diversification Benefits: USD Money Market Funds provide important diversification benefits and should be considered as part of a balanced portfolio approach.
   
3. Yield Opportunities: Fixed Income Funds continue to offer attractive yield premiums over Money Market Funds, making them compelling for investors with moderate risk tolerance.
   
4. Special Fund Value: Specialized funds like Britam’s tenor-specific offerings provide tailored solutions for investors with specific time horizons and return requirements.
   
5. Market Adaptation: The fund industry’s adaptation to changing market conditions demonstrates resilience and innovation in product development and management approaches.
   

Conclusion: Navigating the New Normal

The August 2025 fund performance data reveals a market in transition, where traditional yield sources are under pressure but new opportunities are emerging. The continued monetary policy easing by the Central Bank of Kenya has created a challenging environment for yield generation, but skilled fund managers are demonstrating their ability to deliver competitive returns through superior portfolio management and strategic positioning.

As Kenya’s economy continues to stabilize and grow, the investment fund industry remains well-positioned to serve the evolving needs of investors. The combination of improving economic fundamentals, supportive monetary policy, and continued innovation in fund products creates a favorable environment for long-term wealth creation.

Investors should continue to focus on fund selection based on management quality, risk management practices, and alignment with their specific investment objectives and time horizons. The performance dispersion observed in August 2025 underscores the importance of due diligence in fund selection and the value of professional investment management in navigating complex market conditions.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

10th September, 2025