Tesla’s S&P 500 Entry Takes Away Secret Weapon for Stock Pickers

The celebration that has greeted Tesla Inc.’s addition to the S&P 500 has the potential to leave one of its constituencies cold: star managers who have ridden the electric-car maker’s ascent to superior returns.

Not many of the 215 active managers with at least $500 million in assets whose funds are indexed to the equity gauge have ventured to invest in Tesla. But the 21 who have are richer for the move. Almost 80% of them have beaten the benchmark this year with an average gain of 24%. Compare that to the 194 who didn’t take the plunge. Only 28% are ahead of the index, with a smaller gain of 13%.

Tesla’s entry into the S&P 500 in three weeks will rob them of that edge. The carmaker will enter as a top 10 weighting with its current market-cap of nearly $550 billion, giving it sway over the most-tracked benchmark. While its addition will no doubt spark volatility as investors offload stocks of other companies to make room, it’ll likely also create headaches for managers using Tesla to profit in a rough year for active investing.

“It could create more of a hurdle for active managers because this is obviously a stock that’s had phenomenal performance over the past few years that hasn’t been included in a lot of active managers’ prospective benchmarks and now will be,” said Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors. “If Tesla continues on its run, that could be a second-derivative of including it into the S&P 500 -- it’s a more challenging environment for active managers.”

Tesla’s S&P 500 Entry Takes Away Secret Weapon for Stock Pickers

Tesla is up almost seven-fold this year, trouncing the S&P 500’s 13% and ballooning its market cap from just $75 billion at the start of 2020. S&P Dow Jones Indices -- the index’s overseer -- had considered adding the company in several steps due to its mammoth size, but announced Monday that it would include it in one shot on Dec. 21.

Tesla surged 46% in November alone, largely attributable to investors piling into it ahead of forced purchases by passive funds that track the S&P 500. Those gains might not be finished , according to Goldman Sachs Group Inc. Large-cap core funds opting to buy Tesla at its benchmark weight would trigger purchases totaling $8 billion, strategists including Ben Snider wrote. That’s 1.5% of the automaker’s value.

Others argue that Tesla is due for a pullback that could make it harder for the S&P 500 to move meaningfully higher. That could give managers who trail their benchmark an opportunity to catch up.

“It’s more of a question of whether Tesla will be a winner in the future like it has been in the past,” Tim Hoyle, chief investor officer at Haverford Trust Co., said by phone. “Putting stuff into an index after they’ve quintupled, probably makes it easier for active managers to beat the index.”

While Tesla’s elimination as an “alpha generator” gets press, in certain respects the phenomenon illustrates the gulf separating mutual fund performance metrics from the real-world experience of investors. To wit: An active manager who owned the stock prior to inclusion can, obviously, keep owning it afterward, maintaining exposure to Tesla’s upside. That the fund’s performance will track more closely to the S&P 500 should matter little to an investor who is, say, saving money for retirement.

Still, for managers looking to post benchmark-beating returns in hopes of attracting new clients, Tesla’s addition makes that marginally more difficult.

“Stock selection is obviously a big part of it, and owning Tesla, an outside of a benchmark name was one way,” SSGA’s Bartolini said. “But going forward, it’s going to be trickier.”

©2020 Bloomberg L.P.

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