J. M. Keynes’ influence on institutional portfolio management

In the earlier part of his portfolio management career, J. M. Keynes pursued a short-term, asset allocation-based speculative approach to portfolio management, only to abandon it in the early 1930s in favor of a long-term, security selection approach based on identifying intrinsic value. It was the earlier Keynes who endorsed E. L. Smith’s 1924 U.S. monograph, Common Stocks as Long Term Investments, encouraging his insurance company contacts to conduct a similar study in the United Kingdom. This suggestion was taken up in the 1920s and 1930s by U.K. insurance actuaries, whose lead was followed post-1945 by pension fund actuaries. Among the latter, George Ross Goobey is the most well-known, his name being closely associated with the Cult of the Equity, which, with the increasing formalization of institutional portfolio management over the last two or three decades, has transmuted into the Cult of the Benchmark. Underlying this latter cult is the emphasis on asset allocation, which can be traced back to Smith’s monograph. It is ironic that Keynes’ enduring influence is more likely to be felt through his endorsement of Smith rather than by the adoption of the genuine investment approach of his later career.