Carry and Trend in Lots of Places

Abstract

Investors intrinsically know two fundamental principles of investing: (1) don’t fight the trend and (2) don’t pay too much to hold an investment. But do these simple principles actually lead to superior returns? In this article, the authors report the results of an empirical study covering 20 major markets across four asset classes in an extended sample period from 1960 to 2014. The results confirm overwhelmingly that having a favorable trend and carry leads to significantly better returns, on both absolute and risk-adjusted bases. This finding appears remarkably robust across samples, including the period of rising interest rates from 1960 to 1982. In particular, the authors find that while carry predicts returns almost unconditionally, trend following works far better when carry is in agreement. The authors believe that this simple two-style approach will continue to be an important insight for building superior investment portfolios.