Tesla’s 74% share price rise this year should make Elon Musk’s electric car company the biggest holding in Scottish Mortgage Trust, according to an analyst estimate.
Tesla’s startling 74% share price rise this year will have made Elon Musk’s electric car company the biggest holding in Scottish Mortgage Trust (SMT ), according to Jefferies analyst Matthew Hose.
Barring any unexpected profit taking by the investment trust’s managers James Anderson (below) and Tom Slater, which would contradict their long-held belief in running their winners, Hose estimated that Tesla would now account for 12% of the £9.1bn global fund.
This would be a big increase from its 7% weighting at 31 December and would see the much-debated stock jump from third to first place, displacing internet giant Amazon which has enjoyed a long stint as the portfolio’s biggest holding, representing 8.4% of the trust’s assets at the end of the year.
The trust's precise stake in Tesla will be revealed next week when fund management group Baillie Gifford publishes the January fact sheet.
Exposure to an individual company of more than 10% would require an open-ended fund to trim the position to bring it below the cap City regulations impose. As a ‘closed-end’ investment trust, however, Scottish Mortgage does not face the restriction, although its large position will doubtless continue to fuel debate over the wisdom of backing the company worth $135bn after a trebling in its shares in the past six months.
From a starting point of $418.30 in the New Year, Tesla shares have shot up as investors have reassessed the previously loss-making company, which has recorded two consecutive quarters of profits and impressed Wall Street with rising deliveries of its cars and the earlier-than-expected start to production at its factory in China.
They closed last week at $748.07, down from an all-time high of $887 on 4 February, their surge hurting investors such as hedge fund manager Crispin Odey who had ‘short’ bets that the stock would fall.
Jupiter Absolute Return fund manager James Clunie has also been hit, having shorted both Tesla and Scottish Mortgage in his fund
Tesla’s spike and more limited gains by Amazon and Netflix have helped increase Scottish Mortgage’s net asset value (NAV) by over 12% this year, growth that has not been fully reflected in the shares’ 8% rise.
‘Based on the December factsheet, we estimate Tesla now represents c.12% of the portfolio, becoming the trust’s largest holding if the position has been run,’ Hose told investors this morning.
The analyst said the portfolio gains would take some of the pressure off the trust’s board and managers, reducing the proportion Scottish Mortgage had in unquoted stocks, which had been nearing a 25% limit.
‘SMT's resulting strong NAV performance of late will have also reduced the weighting to unquoted investments to 18%, thereby offering some useful headroom to the 25% limit (at the time of purchase) within the investment policy,’ said Hose.
The recent growth puts Scottish Mortgage back on track after a wobble last autumn that saw the board have to buy back some shares to prevent their price falling to a big discount to NAV.
That and the rebound have seen the shares return to ‘par’ or NAV. Over 10 years they have delivered a total return to shareholders of 648%, placing it second in the AIC Global investment trust sector behind Lindsell Train (LTI ) on 711%.
Anderson has previously sought to dismiss the barrage of ‘hysterical headlines’ aimed at Tesla and Musk (above), although the entrepreneur’s unjustified slur against a British diver in 2018 provoked a rare rebuke from the loyal investor.
In response to concerns over the heady multiples to profits at which Tesla shares trade, Anderson and Slater have denied that they are insensitive to valuations, arguing that they are simply pricing in the considerable upside they see.
‘We cannot be certain in these opinions but we think the rewards for shareholders, if they prove to be justified, considerably outweigh the risks. As ever, we do not want to interrupt the potential for exponential compounding,’ Anderson explained in Scottish Mortgage’s annual report two years ago.
According to Refinitiv data, Baillie Gifford owns 7.7% of Tesla, most of it through the investment trust. It is the biggest external investor behind Musk who owns 18.8%.