Go Active or Stay Passive: Investment Trusts, Financial Innovation and Diversification in Belgium’s Early Days
34 Pages Posted: 24 Oct 2019
Date Written: October 8, 2019
In 1836, Société Générale created the world’s first closed-end equity fund. Banque de Belgique immediately followed. Both trusts were marketed as cheap diversification tools for less-wealthy investors, who were generally underdiversified in the pre-World War I period. We study to what extent these trusts kept their promise. On average, they outperform randomly created portfolios with little diversification, at least when investors select stocks either from the entire stock market universe or from the set of low-priced stocks, suggesting that the trusts upheld their informal mandate. In contrast, when we compare with portfolios of high-priced stocks, which are less accessible to small investors, the trusts underperformed. These conclusions hold for a wide set of performance measures. We conclude that the trusts did not offer the diversification benefits that were mainly attainable for wealthy investors. In fact, this could potentially explain why investors held underdiversified portfolios.
Keywords: Diversification, Investment trusts, Financial innovation, Price anchoring
JEL Classification: N2, N23, G11
Suggested Citation: Suggested Citation