John Maynard Keynes and the Chest Fund
Investing in difficult times…
Last week I wrote in Investment Matters about the 1937 period, and the dangers of economic and social complacency when recovering from conditions and times such as the GFC (and the Great Depression).
These dangers were showcased late last week with the change in government in NZ. Seemingly celebrated by many Kiwis.
This week I wanted to separate investing and investment performance from economic performance, again using this time period (1928-1940) as a frame of reference.
One of the most noted economists to have lived was John Maynard Keynes (JMK). His contribution to economics sits just under Adam Smith and Karl Marx for guiding thinking as to how an economy (or macro-economy) should/could be constructed and managed. He was also a pivotal (yet not always successful) character in the global economic world in the 1920’s through to his death in 1946.
Keynes was a less well known but equally phenomenal investor
What was less well known about him was his success as an investor. Below are the returns of the Kings College (Cambridge) “Chest Fund” which JMK ran with sole discretion from 1927 until his death in 1946.
Source: IRESS; The Warren Buffett Portfolio, by Robert G. Hagstrom.
These were difficult times to be an investor, probably the worst ever
This period of time corresponds to the period when the UK market delivered a total return of -0.5%, and the US Dow Jones -25%! Possibly the worst possible time EVER to have been handed a portfolio to manage! Certainly makes the arrival of this CIO at First Samuel (one day before the top of the Pre-GFC market) look tame!
What were his investment principles?
In 1934, JMK wrote a full policy report for the fund outlining his investment principles. They were:
"1. A careful selection of a few investments having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time
2. A steadfast holding of these fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it is evident that they were purchased on a mistake
3. A balanced investment position, i.e. a variety of risks in spite of individual holdings being large and if possible opposed risks"
Hopefully, clients will recognise the ring in these remarkably simple principles.
At a time when the investment world is increasingly correlated as people flock to index funds / Exchange Traded Funds (ETFs) and time-tested assets (i.e. property), these principles would seem even more relevant as they are the antithesis of what is now common wisdom.
Despite conditions, his time-tested approach worked
Notwithstanding that JMK tended to concentrate his investments considerably (which I think is unwise for most investors), the “bottom up” focus on:
1. just investing in what makes sense;
2. making sure it is diversified; and
3. being patient
clearly paid substantial dividends for the very fortunate Kings' College beneficiaries.
The Chest Fund delivered a 13.2% p.a. compound return for 18 years.
This was despite the awful economic (great depression), market (negative returns) and global political (WWII) environment with which he had to contend over this time. Neither the UK nor US market cracked through their 1929 levels during this time frame (UK -0.5% return, US S&P500 -25%).
What are the comparisons with today?
As we noted last week, complacency is very high now and markets are at high prices. The chances that things simply proceed linearly from here seems low (but not impossible). The economic complacency particularly feels a bit like the 1937 period.
The most appropriate action for investors, therefore, is to seek professional guidance and make sure they have their long-term investment plans, particularly structures and asset mix, set appropriately. This is what First Samuel's wealth strategists are here for.
Being in the right mix of assets that match your needs, risk tolerance and investment timeframe is essential at all times.
At the underlying investment level (that being shares, income securities, property, alternatives and international) we apply the same investment philosophy at all times, much like JMK.
Notwithstanding whatever economic/political/market cycles throw our way, by investing in what makes sense and over an appropriate timeframe we believe good returns can still be achieved we are not sure what the next 12 months holds, but over periods greater than three years. We are confident of achieving double-digit average annual sharemarket returns.