Tesla’s benchmark heft hurts growth-focused managers as shares soar
Tesla’s stock market rally has helped inflict the worst month of performance on growth-focused US mutual funds in two decades, signalling that the expanding size of Elon Musk’s electric carmaker has become a distortive force in financial markets.
The company’s overall stock market value already stood at $769bn at the end of September — up from just $75bn at the beginning of 2020 — before a 44 per cent rally last month lifted its market capitalisation to $1.22tn, making it one of the most valuable businesses in the world.
However, ordinary retail investors and day traders account for a large part of those gains, with most professional money managers turned off by the cost of Tesla’s stock relative to its profits. The company trades at a forward price-to-earnings multiple of more than 150 times, according to FactSet estimates, compared to an average of 22 times for Wall Street’s blue-chip S&P 500 index as a whole.
As a result, only 9 per cent of growth-orientated US mutual funds managed to outstrip their benchmark in October, the lowest monthly beat rate since July 2002, according to Bank of America. That, in turn, depressed the beat rate for the year so far. Only 17 per cent of growth funds are ahead of their benchmark, putting 2021 on track for its worst annual ‘hit rate’ since 2016.
“Idiosyncratic stories that ‘make or break’ fund performance seem to have occurred more frequently in 2021 than in previous years,” Christopher Harvey, an analyst at Wells Fargo, said in a note. “This speaks to index concentration and mega caps as well as meme stocks. The meme stock craze highlights the growing influence of non-institutional trade flows and new portfolio risks for both long and short investors.”
The trading frenzy that enveloped companies like video games retailer GameStop and cinema chain AMC earlier this year captivated Wall Street, as millions of retail traders loosely organised on social media pumped up their shares to stratospheric heights and exacted multibillion-dollar losses on hedge funds that had bet against them.
The US Securities and Exchange Commission’s review into the event showed that the number of individual accounts trading GameStop rocketed from about 10,000 a day at the start of 2021 to almost 900,000 at the peak on January 27.
However some fund managers see Tesla as the “original” meme stock, thanks to the fervent belief of its investors in Musk’s plans to revolutionise several industries beyond carmaking and even pioneer commercial space travel.
Tesla accounts for one of the biggest chunks of the S&P 500 index, meaning that the combination of its October rally and hefty weighting in several benchmarks also hurt fund managers who are not focused purely on growth or tech stocks.
Only 32 per cent of traditional large US equity funds beat the market in October, the worst rate in four months. That depressed the year-to-date beat rate to 38 per cent, according to Bank of America analyst Savita Subramanian. Harvey at Wells Fargo estimates that Tesla’s rally alone damped performance for US mutual fund managers by about 0.46 percentage point.
Nick Colas, co-founder of DataTrek, warned that Tesla, like the cryptocurrency Bitcoin, was likely to continue to “march to their own frenetic drummer” for the foreseeable future.
“The only reason they are trillion-dollar assets is because they have a 10 per cent chance of being a $10tn asset one day,” he wrote in a note. “Every tweak to that probability calculation still means outsized value creation or destruction . . . Volatility is the natural result, and it will not fade quickly.”