Economist John Maynard Keynes ran the endowment fund at King’s College from 1921 until his death in 1946. His highly successful approach is providing valuable insight for today’s investors.
The first in-depth analysis of Keynes’ investment career, co-authored by Cambridge Judge Business School finance scholars David Chambers and Elroy Dimson, has shed new light on Keynes’ beliefs and approach and is providing valuable insight for today’s investment practitioners.
The two articles, Keynes the Stock Market Investor and John Maynard Keynes: the Investment Innovator, use a mix of archival research and quantitative analysis to delve into Keynes’ 25-year investment track record for King’s College, Cambridge.
Financial markets have become more complex and institutions have a greater menu of assets in which to invest, but some of the basic challenges remain the same today,” says David Chambers, University Lecturer in Finance and Co-Director of the Centre for Endowment Asset Management at Cambridge Judge Business School. “Keynes’ story is about deciding on an investment approach and having the conviction to stick to it.”
The findings of this research have been disseminated to investors through seminars, presentations and keynote speeches. These have taken place at Newton, Goldman Sachs Asset Management, the Commonfund Institute, the FTSE World Investment Forum, Gutmann Center for Portfolio Management and the Swiss Investment Managers Circle among others.
Keynes ran the endowment fund at King’s College, Cambridge, from 1921 until his death in 1946. While he was hugely successful, institutional fund managers were slow to give up their reliance upon the two traditional asset classes, bonds and real estate, and to follow his decisive move into the new asset class of equities.
Keynes was fortunate in having the full confidence of the Fellows of his College,” says Chambers. “They backed him to take what at the time was a bold and unconventional approach to investing.”
The research shows that the Keynes’ UK stock portfolio out-performed the overall stockmarket by an average of eight percentage points each year. However, Keynes struggled in the 1920s and it was only after he radically shifted away from a top-down, market-timing to a buy-and-hold, stock picking approach in the early 1930s that his performance improved dramatically. Hence, “our research highlights the difficulties of taking a market-timing approach,” says Chambers. “It also draws attention to the patience required of the long-term buy-and-hold approach as practised by Keynes in staying exposed to an investment, in this case equities, when they go through periods of underperformance. When prices fall sharply, that’s exactly when you want a fund manager to be contrarian and add to your position – but it can be very hard to get an investment committee to stick with such a strategy when such opportunities arise.”
Keynes stayed true to his commitment to equities, Chambers explains, when the London stockmarket fell sharply in 1937-38 to the point where he resigned as chairman of an insurance company – one of several financial institutions with which he was associated – when the rest of the board were unwilling to stick with his strategy. Chambers says the research should encourage today’s investment practitioners, especially those with a relatively long time-horizon, to have similar confidence in their investment decisions.
These events have real impact, says Simon Pryke, Chief Investment Officer at Newton, part of Bank of New York Mellon:
The financial industry is still relatively unaware of its own history,” he says. “We invite academics in to talk about aspects of financial history because we can learn from the past and apply those insights to how we’re investing today.”
Newton is very much an active investment house, he explains. “We take committed positions on equities. Keynes was a real innovator who took quite high-conviction positions, so it’s a tremendous vindication of an active investment approach.”
“Keynes was very keen on equities and buying stocks which pay high dividends,” says Pryke. “That’s been a particularly interesting vindication for us because we run a number of strategies focused on generating equity income. Having a historical reference for that is really valuable.” Indeed, Keynes the Stock Market Investor has provided useful reference points for liaison with clients.
John Griswold, Executive Director of the Commonfund Institute, says the paper also foreshadows the endowment model that David Swensen and Jack Meyer went on to pioneer at Yale and Harvard respectively.
Keynes ran more concentrated portfolios than the typical stock picker or equity investor,” says Griswold. “His techniques – such as the heavy equity bias and deep research – were all very modern.”
Griswold has also gleaned material for client discussion from the Keynes paper. “We succeed by taking appropriate risks to achieve [attractive returns],” he says. “That’s one of the key lessons from Keynes the investor. He broke from the pack and exploited knowledge no-one else had.”