By now most market watchers will have undoubtedly read the headlines surrounding Elon Musk’s tweeting habits that have knocked the share price of electric vehicle manufacturer Tesla.
In case you haven’t, a tweet from Musk suggesting he could take the company private at $420 per share – a reference to marijuana – and sent the share price rocketing.
However, following an investigation by the US markets regulator – the Securities and Exchange Commission (SEC) – he reached a deal to pay a $20m fine with the firm also paying the same.
He agreed to step down as chairman of the business, although he will stay on as chief executive.
It follows a year of controversy for the famed entrepreneur, who has also been filmed smoking marijuana and making accusations against a diver involved in the rescue of a Thai boys football team from a cave at the start of the year.
Performance of stock over YTD
Source: Google Finance
With negative headlines focusing on Tesla and Musk’s stewardship, Iain McCombie, manager of the five FE Crown-rated Baillie Gifford Managed fund, said the spotlight has been on the wrong thing.
“It is a company that everyone wants to talk about yet I think people are missing what is really interesting with Tesla,” he said.
“Obviously his tweets are a giant distraction and an embarrassment, and I wish he wouldn’t do it. Things are changing now, but let’s see.
“You have to accept the fact that Tesla is partly about the genius of Musk. You may not like the guy but you have to accept the fact that he has done some pretty remarkable things.”
He said that this, however, is what entrepreneurs are like and that, while not everybody’s cup of tea, are the reason they think differently to the rest of us.
“If Henry Ford had been allowed to tweet this stuff it would be pretty mild compared,” he explained. “I am not condoning what he did: I am just saying that a lot of these entrepreneurs are eccentric or singular. They challenge conventional wisdom.”
However, what people are missing in the short-term noise, is that Tesla is now starting to hit the volumes that are being required after years of ramping up production.
In the US, for example, the company sold more cars in the third quarter of this year than well-established car brand Mercedes-Benz, which is made by German manufacturer Daimler, he noted.
Tesla sales totalled 69,925 vehicles while Mercedes-Benz sold 66,542. The company was also just 1,754 cars short of another Daimler brand – BMW.
The Baillie Gifford Managed fund manager said: “Here is this upstart which is now outselling them. If you had said that a few years ago you would have been locked up but that is happening.”
While there are still a number of risks associated with the firm, he said that this change in the market landscape is far more important for the long-term health of the company.
McCombie added: “The bigger issue is for the incumbent car companies. They have spent over 100 years building up their knowhow in industrial combustion engines and they do a great job with that.
“But what happens if all of us say we want an electric car? Suddenly that knowhow is useless.”
The counterpoint is that these companies will develop their own line of electric vehicles that will undermine Tesla, but the manager is unconcerned.
“They have to deal with these legacy issues, they are going to have to wean themselves off these other cars,” he said.
He compared this moment in the auto industry to former camera film maker Kodak, which failed to innovate with the age of digital cameras and eventually went bust.
McCombie said: “This could be their Kodak moment. Kodak actually discovered the digital camera but they buried it because it was too frightening for them as it would kill their film business.
“The innovators’ dilemma for these car companies is that they have built brilliant businesses for themselves but what happens when the business is changing?”
Although Tesla will not own the market as a monopoly – there is a reason after all that these car companies have lasted for more than 100 years – it doesn’t have legacy issues, making it nimbler to react to market trends.
And it is a market that is changing all the time. Already, diesel engine car sales are in freefall – down some 30 per cent year-to-date – while electric car sales are rising.
While the pace may take a little longer than people might expect, it does not mean it is coming.
McCombie used two images to juxtapose pictures. The first is of Fifth Avenue in New York in 1900 where there is just one car among many horse-drawn carts.
The second picture taken just 13 years later finds just one horse & cart among a street filled with cars. This is not a long time in terms of investment, even though it is not as rapid as some might think.
“Back in 1900, I’m sure there were a lot of people saying that the horse has been the main mode of transport for 3,000 years it is not going to go away,” the manager said.
“That is what could happen and if it does I know where I would rather be – owning the disruptor not the traditional car companies.”
McCombie has headed up the £3.8bn Baillie Gifford Managed fund alongside Steven Hay since 2012, during which time it has returned 84.08 per cent, beating the IA Mixed Investment 40-85% Shares sector peer.
Performance of fund vs sector since manager start
Source: FE Analytics
One of the biggest moves in recent years has been to gradually reduce the UK weighting within the fund to create an equal weighting among the four major equities buckets – US, UK, Europe and Asia.
This is in-line with many active managers in the sector, who are focusing on becoming more global, letting the stock selection outweigh the asset allocation.
“If you look at our track record of outperformance over 30 years we think around 85-90 per cent of that has come from stockpicking and the rest has come from asset allocation,” he said.
“Effectively the UK weighting has been going down – not because we think it is a bad place to invest, I don’t think that at all – but what we are trying to say is in the long-run clients should have a good mix of assets and not be skewed to one particular market.”
Baillie Gifford Managed has a yield of 1.49 per cent and a clean ongoing charges figure (OCF) of 0.43 per cent.