One of the big soap opera’s of the year in investment markets has been whether Tesla will be included in the main US equity index, the S&P 500, which is generally the largest 500 companies listed in New York.  The criteria to be included in the index includes having four consecutive quarters of profitability, which has been illusive for Tesla until recently.  The pressure on the S&P committee who decide the 500 names in the index has been growing all year to add Tesla.  In mid-November, S&P confirmed that Tesla will be added to the index when the market opens on Monday 21st December.   

 

Why is this important?  Well, there is $11.2 trillion of assets that track the S&P 500 index according to S&P Dow Jones Indices.  That means that Tesla will have to be bought by those that track the S&P 500 index, which means roughly $73 billion in required trades on 18th/21st December to ensure the tracking of the index remains in-line.  That’s a lot!  As of 8 December, Tesla was valued at $616bn and with Elon Musk owning roughly 20% of Tesla, that means there is $492bn of shares available.  Over the past year there has been about $16bn worth of trades in Tesla each day, so $73bn could cause issues.  Since the announcement that Tesla will be added to the main S&P 500 index, the share price has risen by 59% (to 8th December).  Tesla’s share price started the year at $86 and as at 8th December it stands at $649.88, that’s a 656% rise this year alone.  On any metric, Tesla looks expensive and is now twice the value of VW and Toyota combined.  VW and Toyota have generated a combined profit of $40.2bn compared to Tesla’s $0.8bn (data from JP Morgan).  It just shows how far investment markets can move share prices based on sentiment rather than fundamental data.   

 

We own Pershing Square Holdings for our higher risk clients, which is a UK listed hedge fund that is joining the UK’s FTSE 100 index (the largest 100 companies listed in London) on 21st December.  It isn’t quite the same scale as Tesla, however there is a similar issue that the size of assets tracking the FTSE 100 index means that there is going to be pressure on liquidity.  JP Morgan estimate that there will be 3.14m shares in Pershing Square needed by assets tracking the FTSE 100 index, which is 11.2x the daily average volume of shares that change hands.   

 

We are completely benchmark agnostic, which means we don’t look at what is in the FTSE or S&P 500 to make our investment decisions.  We think it is important to remain that way and Tesla is a good example, whereby you would’ve missed out in this year’s growth if you own a US equity fund tracking the S&P 500.  It’s not to say trackers are ‘bad’, we do use them, however you have to be aware of what you own and what you don’t.  It’s been a good year to own Tesla, especially if you are Chief Executive Elon Musk, who’s wealth has increased by a healthy $124bn according to Bloomberg (to 11th December)! 

Thanks for reading and