Carry and Trend in Lots of Places

Abstract

Investors intuitively know two fundamental principles of investing: (1) Don’t fight the trend, (2) Don’t pay too much to hold an investment. But do these simple principles actually lead to superior returns? In this paper we report the results of an empirical study covering twenty major markets across four asset classes, and an extended sample period from 1960 to 2014. The results confirm overwhelmingly that having the trend and carry in your favor leads to significantly better returns, on both an absolute and a risk-adjusted basis. Furthermore, this finding appears remarkably robust across samples, including the period of rising interest rates from 1960 to 1982. In particular, we find that while carry predicts returns almost unconditionally, trend-following works far better when carry is in agreement. We believe that this simple two-style approach will continue to be an important insight for building superior investment portfolios.

Keywords: Carry, trend, momentum, asset allocation

JEL Classification: G11