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

In 1836, Société Générale created the world’s first closed-end equity fund, Mutualité Industrielle. It promised to be a diversification tool targeted towards less-wealthy investors. We confirm that the trust’s returns were indeed better than returns on synthetic portfolios such investors had access to. However, it never became a commercial success. This paper presents a possible rational explanation why this innovation was liquidated in 1873. First, we show that the trust offered a performance similar to randomly-selected portfolios. Second, portfolio strategies to which mostly wealthy and sophisticated investors had access were able to outperform the trust. Mutualité Industrielle’s failure to offer a sufficiently attractive alternative to investors is consistent with its difficulty to attract sufficient funds to keep the trust in business.