Keynes the Investor

David Chambers and Elroy Dimson

OxfordUniversity[1] and LondonBusinessSchool[2] respectively[3]

John Maynard Keynes was an active investor throughout his life, first investing for his own account in 1905. In the early 1920s, he persuaded the Fellows of King’s College, Cambridge to allow him, as bursar, full discretion in managing a portion of the endowment fund, called the “Chest”. Keynes took personal responsibility for investments made by the Chest, in contrastto the City institutions that Keynes advised, for which decisions were taken in collaboration with others. In addition, this fund was deemed outside the onerous Trustee Acts, which severely restricted the type of securities to be held by the rest of the endowment. The Chest therefore represents the purest test of Keynes’ skills as an institutional investor.

A thorough analysis of Keynes’ investment abilities is of interest, firstly, because of who Keynes was. Just as importantly, this is also a study of how a sophisticated investor confronted the investment challenges of the interwar years. This period constitutes a major transition point in modern financial history. During these years, Britain moved from the weakly-protected, retail investor, bond-centric investment world of pre-1913 to the more tightly-regulated, institutional investor, equity-centric financial system of the second half of the 20th century.

Keynes’ investment activities were an important part of both his public and personal lives. Yet, they have been dealt with only cursorily in the literature to date. Moggridge (1983) reviews Keynes’ personal and institutional investment activities in Vol. XII of The Collected Writings (hereafter “CW”), and provides annual performance estimates that suggest Keynes was a star investor, which is confirmed in a study by Chua and Woodward (1983) that used the same data. Westall (1992) gives us an insight into Keynes’ influence at Provincial Insurance, but fails to undertake quantitative analysis of his investment record. Skidelsky (1983, 1992, 2000 and 2005) discusses Keynes’ investment prowess, but relies heavily on Vol. XII of The Collected Writings. Backhouse and Bateman(2006) review all aspects of Keynes’ contributions except for investment. Walsh (2007) emphasises understanding the man’s investment philosophy, but does not present evidence on investment performance.

Although Keynes gave something of a commentary on his investment strategies in his correspondence, we do not have a comprehensive picture of the portfolios he constructed. This paper attempts to remedy the situation. The record of Keynes’ trading has remained dormant in the Kings College Archives, and has not yet been analysed in detail.

We therefore reconstruct Keynes’ investment decision-making from these records of portfolios and transactions. Preliminary analysis of his asset allocation policy, his portfolio holdings and their size, yield and industry characteristics indicates he departed dramatically both from the market and from the institutional consensus. Furthermore, his commitment to equity investing was both evident and pioneering. His aggressive purchase of equities in the Chest in the UK and US eventually pushed the equity weighting of the whole endowment over 50% by the 1940s. This was as dramatic and far-sighted a change in the investment landscape as the shift to alternative assets has been in more recent times.

We also providethe first detailed analysis of his investment ability in the context of the Chest, principally in terms of an event study of his buy and sell decisions. This evidence is not strongly in his favour, although it does appear both that Keynes was a better seller than a buyer.After the crash of 1929, he underwent a major change of heart as to the best way to manage portfolios, and there is some evidence of this shift in the changing pattern of cumulative returns around his buy and sell decisions before and after the end of 1929.

While Keynes’ timing abilities improved after his switch to a bottom-up stock picking approach, his major contribution to the performance of the Chest appears to have been his strategic allocation to riskier assets, notably equities. It was not until the second half of the twentieth century that institutional fund managers followed Keynes’ lead.

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[1]Department of Economics, Manor Road, OxfordOX1 3UQ, UK. Tel +44 1865 271076. Email

[2]LondonBusinessSchool, RegentsPark, LondonNW1 4SA, UK. Tel +44 20 7000 7000. Email

[3] We wish to acknowledge the support of the King’s College Cambridge archivist, Patricia McGuire. Valued comments were received from Peter Clarke, Oliver Dawson, and participants in seminars at the University of Cambridge and University of Oxford.