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Tesla stock punishes wary fund managers

Among reasons for their wariness: Tesla sports a sky-high valuation and is notoriously volatile. Indeed, on Monday, the shares slid nearly 5% after Chief Executive Elon Musk said he might sell as much as one-tenth of his stake in the company following a Twitter Poll that urged him to do so. It was the stock’s biggest drop in five months.

Even so, the stock is up 50% since the end of September, a furious run that took Tesla’s market value above the $1 trillion mark. Many sidelined fund managers missed out on the rally, causing them to undershoot their benchmarks.

Just 32% of large-cap active funds outperformed the Russell 1000 last month, the worst in four months, said analysts at Bank of America. Funds focused on growth stocks were hit even harder: just 9% beat the Russell 1000 Growth Index, the lowest monthly hit rate since July 2002.

Tesla has a 2.5% weighting in the S&P 500 and contributed to nearly one-quarter of the benchmark’s total return over the past two weeks. The electric-car maker’s footprint is even bigger in some other benchmarks, coming in at more than 4% of the Russell 1000 Growth Index.

Some fund managers say underperforming is better than overpaying or getting caught in what they think might be a bubble. They point out that Tesla trades at roughly 151 times forward earnings, versus just 22 times for the S&P 500.

“This feels a lot like late 1998 and 1999,” Lew Piantedosi, director of growth equity at Eaton Vance, said referring to the run-up of tech stocks during the dot-com bubble. “Tens of billions of dollars of market cap being created on no news or incremental news. Meme stocks going from $2 to $500 in three months. The heavy retail-investor participation. It all has the characteristics of what we saw then.”

One of the funds Mr. Piantedosi manages, the $429 million Eaton Vance Growth Fund, didn’t hold any Tesla stock as of Sept. 30. While the Russell 1000 Growth Index gained 8.6% in October, thanks, in part, to Tesla, Eaton Vance’s fund rose 6.1%.

Mr. Piantedosi added that it is “virtually impossible” for traditional fund managers to beat benchmarks when certain stocks dominate.

Other funds avoiding Tesla include the $2.9 billion Dimensional Fund Advisors’ DFA U.S. Large Cap Growth Portfolio and the $7.8 billion Hartford Growth Opportunities Fund. Both underperformed their benchmarks last month. Dimensional and Hartford declined to comment.

Investors who eschew the valuation fundamentals Mr. Piantedosi fusses over came out of October significantly richer.

Take Tad Park, a Tesla investor and former software engineer who had used earlier winnings from the electric-car maker to launch his own line of ETFs. One of those, the Volt RoboCar Disruption and Tech ETF, jumped 36% last month. That made it one of the best-performing funds in the country, thanks to a roughly 40% allocation to Tesla through its stock and long-dated call options.

Mr. Park boasts that the fund carries more exposure to Tesla than any other ETF on the market. He says his bullishness is based on the likelihood of Tesla being first to market with autonomous cars.

“We really focus on trying to pick winners and concentrate heavily on our conviction,” said Mr. Park. “Not what the P/E ratio was.”

For Mr. Park, his conviction in Tesla is personal. In 2018, he started buying Tesla shares and options tied to the stock, drawing on a home-equity loan. Those shares ballooned and he sold $2 million last year to launch his firm, Volt Equity. Mr. Park said he currently has $5 million in Tesla stock that he is using to help fund the firm’s day-to-day expenses. The fund remains below the market radar though, with just $7.3 million in assets.

Mr. Park said Mr. Musk’s poll and possible sale is likely to create more turbulence around the stock. He plans to ride it out, he said.

Mr. Park’s approach is similar to that of Cathie Wood, the founder and famed stock picker behind ARK Investment Management LLC. Ms. Wood is a longtime Tesla bull, predicting the stock will eventually hit $3,000 by 2025, and counts the car maker as the top holding of three of her funds. Those funds hold about 11% of Tesla in each and added as much as 13% last month.

The gains helped ARK’s $22 billion flagship innovation ETF recoup much of the losses it suffered earlier in the year, after a shakeout for Tesla and other growth stocks. As of Friday, the fund was down less than 1% for 2021.

“ARK’s long-term thesis has not changed and the stock remains one of our highest-conviction names,” a spokeswoman for the firm said.

There are also several passively managed ETFs that count Tesla as its top holding after the shares’ October run.

The electric-car maker tops the $23.8 billion Consumer Discretionary Select Sector SPDR Fund. Tesla is also the second-biggest stock in BlackRock’s iShares U.S. Consumer Discretionary ETF, after a late-September index switch.

Now the question is whether Mr. Musk’s latest actions dent Tesla’s popularity with individual investors, who have driven the stock’s multiyear run. Laura Goldman, a 63-year-old former stockbroker whose Tesla holdings crossed the $3 million mark last month, said she started buying shares in 2016 because she is a self-described “greenie” who is concerned about climate change.

Mr. Musk’s poll has now prompted her to consider selling shares for the first time.

“Elon Musk clearly telegraphs what he thinks about his stock,” she added. “I’m thinking that’s a signal to lighten my holdings.”

This story has been published from a wire agency feed without modifications to the text

 

 

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