Go Active or Stay Passive: Investment Trusts, Financial Innovation and Diversification in Belgium’s Early Days

34 Pages Posted: 24 Oct 2019

See all articles by Jan Annaert

Jan Annaert

University of Antwerp Department of Accounting & Finance; University of Antwerp - Antwerp Management School

Gertjan Verdickt

University of Antwerp - Department of Accounting & Finance

Date Written: October 8, 2019

Abstract

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

Annaert, Jan and Verdickt, Gertjan, Go Active or Stay Passive: Investment Trusts, Financial Innovation and Diversification in Belgium’s Early Days (October 8, 2019). Available at SSRN: https://ssrn.com/abstract=3466063 or http://dx.doi.org/10.2139/ssrn.3466063

Jan Annaert

University of Antwerp Department of Accounting & Finance ( email )

Faculty of Applied Economics
Prinsstraat 13
Antwerp, B-2000
Belgium

HOME PAGE: http://https://www.uantwerp.be/en/staff/jan-annaert/

University of Antwerp - Antwerp Management School ( email )

Boogkeers 5
Antwerp, 2000
Belgium

Gertjan Verdickt (Contact Author)

University of Antwerp - Department of Accounting & Finance ( email )

Faculty of Applied Economics
Prinsstraat 13
Antwerp, B-2000
Belgium

Register to save articles to
your library

Register

Paper statistics

Downloads
84
Abstract Views
643
rank
302,694
PlumX Metrics