At a conference in Edinburgh on Wednesday, Plowden, manager of the Monks Investment Trust, likened the drive towards passive-index investing to the rise of collateralised debt obligations (CDOs) pre-2008.
He said: “It most closely resembles to me the growth and the whole industry that came up with CDS [credit default swaps] and CDOs and all of these abilities to package dodgy mortgages in to AAA-rated bonds.
“This was a statistical construct which was sold to people as a safe investment and no-one knew or cared what was in it. And look how that ended.
“It isn’t investing – and this is really the point. It’s a move towards blindly following statistical constructs. We tend to think of these index funds as dumb money, they are non-thinking money.”
"As soon as someone near the front falls, everyone else falls over – it’s like a domino effect"
Plowden, who manages the £1.5bn ($2bn, €1.7bn) trust, explained that investing is the careful selection and long-term ownership of value-creating businesses – something he argued is not possible with passive.
He stated that approximately 30% of the US market is owned by passive investors, and believes that passive products are all put together by “very clever investment bankers, mainly for their own purposes so they have products to sell”.
“There are now more indices on American stock markets than there are American stocks in the American stock market,” he said.
“A passive investor doesn’t know what’s in the package, doesn’t care what’s in the package and the main appeal of it is that it’s very cheap to get it in and out the package – which implies that there’s going to be a lot of trading in and out. And almost by definition, it’s trading not investing.”
Same suckers, new product
When asked about his comparison to the global financial crisis, Plowden said he suspects it’s the same investment bankers that came up with CDOs and CDSs in 2004, who “have found a new bunch of suckers to sucker”.
“They all work for investment banks, and it’s not contributing anything to the wider economy. It’s not making capital raising more efficient, or cheaper, it’s not protecting savers from volatility, it’s just boosting investment bank revenues for that quarter,” he said.
Plowden compared passive investment to people who are blindfolded and running at the same speed alongside others.
“It’s all fine and you can do it, everyone will support each other as you get carried along with the momentum. But as soon as someone near the front falls, everyone else falls over – it’s like a domino effect and I think that’s what happened with bad mortgages.
“I think that the more of the world’s savings that are investing with their eyes closed, the more dangerous it is.”
Earlier this year, Monks Investment Trust launched a tiered charging structure to pass on economies of scale gained from its large size back to its investors.
