Tesla’s October Surge Batters Active Managers Who Missed Out
Tesla’s October Surge Batters Active Managers Who Missed Out
(Bloomberg) -- Tesla Inc.’s October run is creating migraines for stock-fund managers who weren’t overweight the electric-car maker.
Elon Musk’s company rallied 44% last month, delivering the second-best performance in the S&P 500. It accounts for 2.5% of the index by weighting and contributed 11% of the S&P 500’s October gain.
As a result, fund managers who held Tesla below its weighting would’ve been fighting an uphill battle to keep up. Wells Fargo & Co. estimates that large-cap fundamental and quant funds lost 100 basis points and 65 basis points, respectively, in relative performance because of the car-maker’s rally.
Chris Harvey, head of equity strategy at Wells Fargo, said how to handle Tesla is a major debate among portfolio managers.
“Do we try and ride this out or do we cut our losses and go benchmark weight on the name?” he said. “Do I believe the stock will ultimately roll over and can I withstand the potential portfolio pain into year-end and possibly longer? Or is the risk too great and I need to cauterize the liability by going benchmark weight and focusing on other parts of the portfolio?”
For years, the fate of active funds has been at the mercy of a handful of technology giants. Now Tesla, with its relentless rally, is suddenly becoming a headwind for money managers, too.
Tesla’s October gain marked its best month of the year and propelled the company’s market value above $1 trillion for the first time. Much of its advance was thanks to news that Hertz Global Holdings Inc. would order 100,000 vehicles from the company, though the rally also snowballed amid a short-squeeze and a pile-in by bullish options traders.
Trading has been more volatile in November, with shares whipsawing after Musk cast doubt on Hertz’s plans. Tesla lost 3% Tuesday, though it rose about 0.5% early Wednesday.
Large-cap funds didn’t bounce back from a difficult third quarter after they were hit by a surging Tesla, said Harvey.
Several things might explain their aversion. Many have to pay up to own it since Tesla’s stock trades for over 190 times its forward earnings. For comparison, the S&P 500 trades at roughly 22-times its forward earnings.
Distinctive stories that make or break fund performance are seemingly occurring more frequently in 2021 than they have in prior years, Harvey said in a note. The phenomenon speaks to index concentration as well as the performance of meme stocks.
Harvey says one group of portfolio managers will say it’s a sunk cost and move on. Another will likely be forced to reduce their underweight position in Tesla to some degree.
“For these funds there may be little discretion. The risk managers will likely get into the act and the PM will be required to reduce their TSLA underweight to an agreed-upon level,” he said. “At the margin, we expect more institutional buying in the name due to the recent run-up and the portfolio impact/risk.”
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