The Capital Markets Authority (CMA) has warned managers of the fast-growing special funds against unethical marketing, including advertising of high returns but failing to provide sufficient information and disclosure to clients, which often masks significant risks.
Sources told the Business Daily that the markets regulator held a closed-door meeting with the special funds’ managers on July 2, amid the proliferation of this category of collective funds, with some players even irregularly hiring influencers to hype up the investment option.
The special funds accounted for a record 23.9 percent share of collective investment schemes as of the end of March 2026, with Sh203.5 billion packed into them.
A special fund invests according to the asset manager’s strategy and is unconstrained, featuring allocations to listed equities, real estate, private equity, offshore stocks and commodities based on opportunity sets.
The structure allows fund managers to concentrate on selected asset classes, including higher-risk instruments that generate market-beating returns but also expose investors to potentially significant losses.
Individual managers of special funds have remained tight-lipped on the discussions during the meeting, dubbed a ‘housekeeping exercise’, with the CMA last week. But their lobby group, the Fund Managers Association (FMA), revealed that the regulator raised concerns about, among others, unethical marketing strategies, poor material disclosures and the use of unqualified sale representatives.
“The CMA held a forum with the managers of special funds and a separate one for custodians and trustees who hold fiduciary responsibility,” said Fred Mburu, the chief executive officer of FMA.
“While we did not attend the meeting as FMA, we have spoken to members about the need to tighten the code of conduct. Do clients understand the risk and the underlying investment strategy? How do fund managers report the net asset value (NAV) and returns to investors? Marketing ethics also come up, especially where intermediaries like social media influencers are selling special funds to clients on behalf of fund managers.”
The firms running the special funds charge management fees up to six percent of assets per annum in addition to performance charges when returns beat a set benchmark.
Sources at the CMA confirmed the Thursday meeting and highlighted the likelihood of new regulations targeted at special funds.
The regulator is also reportedly worried about fraud where bad actors have cloned legitimate special fund platforms to siphon funds from unsuspecting Kenyans.
In May, a Nairobi court allowed the Directorate of Criminal Investigations (DCI) to detain a man accused of defrauding investors millions of shillings through a fake online investment portal.
When Dickson Ndege Nyakango was arrested on May 4, investors said Sh33.6 million had been deposited into one of the bank accounts linked to the scheme.
Mom-and-pop investors have flocked into special funds in search of relatively higher returns, which outstrip gains from the more traditional unit trust funds like money market funds (MMFs) and fixed-income funds.
At Sh203.5 billion, the special funds asset base is sizeable enough to fully fund either one of the key government ministries like Health, Agriculture, Transport and Social Protection in a year.
Returns from traditional investments like MMFs have trailed special funds as their constituent assets, Treasury bills and commercial bank fixed deposits, lose ground from the prevailing lower interest rate regime.
In the quarter ended March 2026, assets in special funds grew more than four times faster than in MMFs, climbing 25 percent from Sh162.4 billion to Sh203.5billion. MMFs only rose four percent in the same period but have a larger asset base at Sh442.1 billion.
The CMA has attributed the growth of special funds to rising retail investor interest and the development of innovative products by fund managers.
“The trend highlights the continued strong interest in the fund management segment among the general public, particularly in the special funds segment,” the CMA said in its recent first quarter collective investment schemes (CIS) report.
The special funds’ share of assets in the total unit trusts industry has grown from 17.5 percent a year ago, while the number of special funds has grown from 29 to 38 over the same period. Standard Investment Bank’s Mansa-X shilling, dollar-denominated, and Shariah funds are the largest special investment vehicles in the class, dominating the category with 76.8 percent or Sh153 billion assets under management (AUM).
Other top special funds are Faida Investment Bank’s Oak Multi-Asset Special Fund, Madison Wealth Special Fund and Britam Special Fixed Income Fund.
The top special funds have consistently beaten returns from traditional asset classes like Treasury bills and bonds, raising their appeal among Kenyan investors who have been described as ‘returns-obsessed’ by various market players.
Mansa-X Kenya Shilling Special Fund, for instance, posted annualised half-year net returns of 23.15 percent while Faida’s Oak Special Fund posted an annualised return of 20.28 percent in the opening quarter of 2026.
Both returns significantly outpaced payouts offered by MMFs, bank fixed deposits and government bonds.
The CMA is concerned about managers driving customer acquisition through the marketing of high returns even as most funds place a disclaimer that the handsome payout may not always hold in the future.
The choice to annualise quarterly returns instead of reporting only the quarterly yield has also been a bone of contention as critics push for a standardised reporting matrix.
At the same time, the regulator warns that short-term investors may realise negative returns as most special funds are structured to smooth out losses over the long term.
For investors positioned for the short term, the CMA is concerned that any negative quarterly returns may turn away the clients, resulting in potentially sharp drawdowns.
A fund manager who spoke to this publication on condition of anonymity meanwhile said they are worried about certain complex asset classes like interest rate derivatives, which have the potential to amplify losses to clients as much as they can multiply returns.
Interest rate derivatives are financial contracts whose value is determined by the movement of underlying benchmark interest rates.
The source is concerned that some special funds could be using inflows from fresh investments by clients to mask or hide quarterly losses made on the market.
The CMA usually sets drawdown limits, above which the regulator would be required to close funds if client withdrawals breach the ceiling.
Regulators worldwide, including the UK’s Financial Conduct Authority and US Securities and Exchange Commission (SEC), have been enforcing stricter controls over investments deemed high-risk, such as crypto assets and private credit.
