Tesla’s stock market rally helped inflict its worst month of performance in two decades for US growth mutual funds, suggesting that the growing size of Elon Musk’s electric car maker has become a distorting force in financial markets.
The total market value of the company at the end of September was already 769 billion valuable companies in the world.
However, a large chunk of those profits accrue to common retail investors and day traders, with most professional asset managers being put off by the cost of Tesla stock relative to their profits. The company is trading at a forward price-earnings multiple of more than 150 times, according to estimates by FactSet, compared to an average of 22 times for the Wall Street blue-chip S&P 500 index as a whole.
As a result, only 9 percent of US growth mutual funds managed to beat their benchmark in October, the lowest monthly beat rate since July 2002, according to Bank of America, which in turn depressed the beat rate for the year to date. Only 17 percent of the growth funds are above their benchmark, so that 2021 will have the worst annual “hit rate” since 2016.
“Idiosyncratic stories about ‘make or break’ fund performance seem to have occurred more frequently in 2021 than in previous years,” said Christopher Harvey, an analyst at Wells Fargo, in a press release. “This speaks in favor of index concentration and mega-c -s and meme stocks. The meme stock craze underscores the growing influence of non-institutional trade flows and new portfolio risks for long and short investors. “
The trading frenzy that hit companies like video game retailer GameStop and movie theater chain AMC earlier this year riveted Wall Street as millions of retailers loosely organized on social media pushed their stocks to stratospheric heights and losses to hedge funds Billions of dollars being asked to wager against them.
The SEC review of the event found that the number of individual accounts trading GameStop rose from about 10,000 a day at the beginning of 2021 to nearly 900,000 at its peak on Jan. 27.
However, some fund managers see Tesla as the “original” Meme stock, thanks to its investors’ ardent belief in Musk’s plans to revolutionize, and even pioneer, several industries beyond auto manufacturing.
Tesla makes up one of the largest chunks of the S&P 500 index, which means the combination of its October rally and heavy weighting in multiple benchmarks is also hurting fund managers who aren’t just focused on growth or technology stocks.
Just 32 percent of traditional large US equity funds beat the market in October, their worst performance in four months. This has pushed the beat rate down to 38 percent since the beginning of the year, according to Bank of America analyst Savita Subramanian. Wells Fargo’s Harvey estimates that Tesla’s rally alone dampened US mutual fund manager performance by about 0.46 percentage points.
Nick Colas, co-founder of DataTrek, warned that Tesla, like the cryptocurrency Bitcoin, will likely “march on to its own frenetic drummer” for the foreseeable future.
“The only reason they’re trillion dollar assets is because they have a 10 percent chance one day of being a $ 10 trillion fortune,” he wrote in a note. “Any optimization of this probability calculation still means oversized added value or destruction. . . Volatility is the natural result and will not fade quickly. “