A much wider universe of fund managers would soon have to take a position on the stock of Tesla, which increased 8% on Tuesday after the announcement that it would join the S&P 500.
The stock market valuation of the electric car manufacturer soared around $40 billion on expectations that the inclusion of Tesla in the most followed U.S. stock index of Wall Street in December, revealed late on Monday, would compel passive funds monitoring the index to purchase more than $50 billion of its shares.
Its inclusion would also compel actively managed funds that aim to beat the S&P 500 to grapple with an issue that many have for years avoided: whether to buy the most contentious Wall Street companies’ shares and if so how many?
King Lip, the chief investment strategist at Baker Avenue Asset Management in San Francisco, which owns Tesla shares, said, “Tesla is a very under-owned stock in actively managed funds.”
According to Lip, many fund managers have so far avoided Tesla, because of its low profitability and high debt exclude it from the screening lists compiled by fund managers considering new investments.
“If Tesla starts to take off… and if they don’t own Tesla, then they are going to unperformed by a pretty meaty amount,” he said.
The California-based car manufacturer has been by far the most valuable car company in the world, up over 400 percent in 2020, despite manufacturing that is a fraction of rivals such as Toyota Motor 7203.T, Volkswagen VOWG p.DE and General Motors GM.N.
Entry to the S&P 500 would place Tesla among the 10 most valuable companies in the index greater than JNJ.N and JPMorgan Chase JPM.N from Johnson & Johnson and approaching the valuation of Visa V.N.
Many investors believe the stock of Tesla is in a bubble, and some have cautioned at current levels against adding it to the S&P 500.
Chief Executive Elon Musk is contributing to the confusion surrounding Tesla, seen by many as a brilliant visionary, but who agreed to pay $20 million in 2018 and step down as chairman to settle fraud charges.
With Tesla in the S&P 500, if Tesla’s blistering rally continues, actively managed funds that prevent its shares will risk falling behind. On the other hand, if they keep the business out of their portfolios and the stock’s high-flying success reverses, they might find themselves ahead.
“The S&P 500 is shadowed by many active managers, so it makes it harder for them to overlook Tesla,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
In recent years, Krosby compared Tesla’s inclusion in the S&P 500 to China’s incremental addition to MSCI’s widely followed equity indices, which led global investors to pump hundreds of billions of dollars into the country’s stock markets, ranking their output against those indexes.
It is exceedingly unusual to add companies with extremely large stock market prices to the S&P 500, and S&P Dow Jones Indices said the inclusion of Tesla would produce a huge amount of trading by index funds.
S&P Dow Jones Indices said it will add Tesla to the index in two sections to ease its inclusion, with the company completely added as of Dec. 21.