A look at the famed economist, who was a sterling money manager because of his willingness to question prevailing opinion and act against the consensus.
John Maynard Keynes. You know him as the author of the 1936 General Theory of Employment, Interest and Money. But from 1924 until his death in 1946, Mr. Keynes was the CIO of Cambridge's King's College.(1)
While economists rarely furnish practical advice, the grandfather of modern macroeconomics produced superb investment returns. Over his career, Mr. Keynes brought annualized returns of 16% to the King's College Discretionary portfolio. That compares with returns of 10% for the UK equity market over the period, with lower average volatility than the market.(2)
Was a superior knowledge of macroeconomics the key to his investing success?
Precisely the opposite. Mr. Keynes' performance was due to his willingness to question prevailing opinion and act against the consensus in three areas.
THE LANDED ENDOWMENTS
Often held as legacy assets from founding bequeathment, land and property dominated university investment portfolios in the early 20th century. In the decade before Mr. Keynes took control of King's College funds, real estate income provided 85% of the college's total income.
But once at the helm, Mr. Keynes replaced some real estate in favor of equities. In doing so, he stressed the cost of illiquidity. Land holdings were rarely sold. As a result, few institutional investors assigned value to liquidity. Mr. Keynes fretted over not being paid a premium for capital stuck in real estate investments.
Further, he preferred the potential upside of industrial growth in stocks. Perhaps what was most impressive about this strategy: few other institutions pursued it. From 1930 to 1939, the King's College average allocation to equities was 57%. By contrast, other endowments with more than $15 million in assets (gigantic at the time) invested only 25% of their portfolios in equities. Then, as now, following the herd offered little in the way of returns.
INTERNATIONAL DIVERSIFICATION
Mr. Keynes also managed to avoid home bias, in which investors prefer to remain local, even when their home country constitutes a small fraction of the investable universe. For example, in 1920 the UK produced just 10% of global economic output while the U.S. accounted for 46%, according to an article in the Journal of Finance by William N. Goetzmann and Philippe Jorion titled “Global Stock Markets in the 20th Century.”
To his credit, “Keynes championed the virtues of U.S. common stocks,” Messrs. Goetzmann and Jorion wrote.
From 1921 on, Mr. Keynes insisted on diversifying away from UK common stocks.
Whether in India, Africa, or the U.S., roughly 40% of the total equity allocation was invested outside of the UK.
FOR THE LONG HAUL
Mr. Keynes' successful shift into U.S. stocks during the Depression was more than fundamental attractiveness. Keynes the investor could afford to be patient. It was Mr. Keynes who famously quipped, “the market can stay irrational longer than you can stay solvent.”
But it was a lesson hard won. Early in his career, Mr. Keynes practiced “global macro” investing. Using his economics acumen, he assumed “he had the ability to time moves into and out of equities, bonds and cash.” And indeed, if any global macro fund manager were capable of foretelling the evolution of the economy (and profiting from it), one should think it might be Mr. Keynes.
The truth is rather different. Not even the grandfather of modern macroeconomics could predict the future. In 1938, Mr. Keynes confessed to the King's College investment committee: “We have not proved able to take much advantage of a general systematic movement out of and into ordinary shares … at different phases of the trade cycle.”
Thus, in the latter part of his investing career, Mr. Keynes sounded more like Warren Buffet than George Soros. He reflected in 1934, “As time goes on, I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about … there are seldom more than two or three enterprises at any given time in which I personally feel myself entitled to put full confidence.”
Mr. Keynes' convictions to diversify out of illiquid, widely held real estate assets, to invest abroad, and to maintain a very long time horizon, drove his excellent investment returns. In each case, Mr. Keynes flew in the face of accepted wisdom, preferring to find what worked, not what was popular. By honestly surveying the investment landscape and asking questions which tested the accepted narrative of “what college endowments do,” Mr. Keynes provided his institution with healthy long-term returns and a more stable endowment through time.
1 Keynes was technically the first bursar, who held responsibility for endowment investment.
2 Chambers, David, Elroy Dimson and Justin Foo (2014). “Keynes, King's and Endowment Asset Management.” NBER Working Paper 20421.
Peter W. Beer is vice president and economist at Payden & Rygel Investment Management.
