A pair of investing kingpins at a long-time major Tesla shareholder break down why they're still bullish, why you won't find Google or Facebook in their holdings, and why Musk's bitcoin bet doesn't matter
- Edinburgh-based asset manager Baillie Gifford was Tesla’s biggest institutional investor for years and remains a major shareholder.
- US equities head Tom Slater and other star managers at the firm break down their outlook for Tesla and other mega-cap tech investments.
- Slater & Co. also discuss why Baillie Gifford has aggressively pared holdings in past successful tech investments.
- Visit the Business section of Insider for more stories.
Baillie Gifford, a 113-year-old asset manager tucked away in Edinburgh, Scotland, transformed into a technology-investing juggernaut in recent years after taking early stakes in firms, such as Alibaba, Google, and Facebook.
Tesla (TSLA) is one of the $445 billion asset manager’s biggest bets, making Baillie Gifford a household name as one of the electric automaker’s largest external investors and biggest backers. For years it was Tesla’s biggest institutional shareholder, a designation it only recently lost after regulatory reasons forced it to pare its position.
Now, in 2021, Baillie Gifford remains bullish on Tesla’s prospects, even as it further trims its position and takes profits following a more than 840% stock surge since the start of 2020.
Tom Slater — the firm’s head of US equities and decision-maker on long term growth portfolios — spoke recently at series of webinars, providing insight into his strategies for the funds he co-manages: the £19.4 billion ($27 billion) Scottish Mortgage Investment Trust and the £7.1 billion ($9.9 billion) American fund. James Anderson, co-manager of the Scottish Mortgage Investment Trust and a partner at the firm, weighed in as well.
The duo spoke about why they’re still bullish on Tesla, why they’ve aggressively pared holdings in past successful tech investments, and opined on Tesla’s recent $1.5 billion bitcoin purchase.
Slater remains bullish on Tesla as it pertains to the US domestic environment.
Speaking on the American fund, Slater said they bought into Tesla when they didn’t just have an interesting concept, but they had a “fantastic product, which was getting rave reviews” and had demonstrated scalability.
Slater said for new entrants the challenge will be scaling production. While for the incumbents, he believes the pace of progress is glacial.
Incumbents can see the potential demand and have been warned about the shift to electric vehicles, Slater said, yet the structure of the business model and nature of incentives makes it difficult for them to respond and he sees no evidence of them changing.
“So why do we have a significant holding in Tesla? Because I think they’re the most important company in the world for driving us towards a sustainable energy future,” Slater said. “And with that comes a huge opportunity. Why is it less than a year ago? Because the capitalization was $150 billion a year ago today, and today $750 billion in mid-February.”
He continued: “So you keep that discipline upside from here and reflect that in holding sizes, but you don’t give up on something that has a massive opportunity which looks increasingly likely to materialise.”
Going beyond Tesla, Slater, discussing the Scottish Mortgage Investment Trust, said China has become particularly noteworthy for its pipeline of ideas in the private market. He and his colleagues see potential challengers forming in China as dramatic technological progress takes place.
“Of course Tesla way underperformed Nio last year, so perhaps we should be asking Mr. Musk why they’re doing so badly… I’m going to by the way!” said James Anderson, co-manager of the Scottish Mortgage Investment Trust.
Nio is a holding in the investment trust portfolio, almost equal to Tesla at 4.8%, and faced challenges with being targeted by short seller Citron research as well as facing concerns over its ability to continue as demand dropped in China and subsidies were reduced. Both Anderson and Slater were impressed with the commitment of Nio’s management to get the company back on track.
“So one of the important factors for us, when Nio is going through some of its dark days, was that William Lee was still there, was still engaged, was putting more of his own capital into the business to ensure it got through that period,” Slater said.
The challenges with Nio were similar to some of those the firm has faced with Tesla over the years.
In making the decision to reduce the Tesla stake, it was purely a behavioral decision and always has been with Tesla, said Slater, for the Scottish Mortgage Investment Trust.
The managers stick to the investment process as much possible with a clear idea about what is attractive about the company, where there are opportunities and where there is the likelihood to capitalize on opportunities, Slater said,
There then needs to be a judgment call on whether the opportunities to capitalize have increased or decreased and where those opportunities are relative to stock price.
“Getting away from the headlines, getting away from the hysteria, trying to be aware of your own behavioral challenges and thinking through these issues and focus on process,” Slater said.
Trimming early investments
In both the Scottish Mortgage Investment Trust and the American fund, there have been a trimming of positions in some of the big technology firms in which Baillie Gifford was a prominent early investor.
Anderson highlighted that investors won’t find Facebook (FB) and Google in the trust the same way they did in the past. While in the American fund, Slater said the fund sold out Facebook and reduced stakes in Amazon (AMZN) and Alphabet (GOOGL) saying these companies have been huge successes and phenomenal investments, but they’re much less prominent today.
We won’t always be right on selling out of companies, Anderson said, referencing his sale of Apple three to four years ago that was too soon. Giving up on a company can be very dangerous, he said.
“Providing the hard-cold process analysis that Tom’s been talking about and checking that there is still upside does matter, and I think this has occurred in quite a lot of companies where 2020, for sad reasons, did accelerate developments rather than enlarge the opportunity set,” Anderson said. “Please don’t suggest in any way that we’re about to exit Amazon, but it is something that we think the opportunity set has not carried on increasing to the degree to which the share price increased.”
The selling strategy for the trust ultimately comes down to the pipeline of ideas available, Slater said.
“You come into the office every day and you could sell these things, but you choose not to, except where you have a better idea where you think the risk adjusted upside over the next 5 or 10 years is higher,” Slater said. “And that’s being the really encouraging thing that there are these ideas coming into the portfolio.”
The bitcoin bet
Whether investors see further trimming of Tesla across Baillie Gifford’s funds in coming months is anyone’s guess. Slater doesn’t appear to see any challengers in the domestic automaker market yet.
And he doesn’t also appear fazed by Elon Musk’s recent $1.5 billion bitcoin investment.
“On the bitcoin piece, all I’d say is that in the context of the very substantial liquid resources that the company now,” Slater said. “I don’t see Tesla putting some of its capital into bitcoin as a particularly substantive issue for investors and Tesla’s equity.”
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