Baillie Gifford American managers Tom Slater and Gary Robison have joined colleague James Anderson in slashing exposure to Tesla, a situation which reflects the “challenging maths” of trying to more than double their returns as the company’s valuation balloons.
Elon Musk’s electric car company made up 8.4% of the £7.4bn fund at the end of December but a month later that had been pared back to 5.1%.
Slater (pictured) explained during a recent webinar the decision to ditch Tesla shares “reflects the more challenging maths of making at least two and a half times our money from today’s starting market capitalisation of hundreds of billions of dollars than was the case a year ago”. Tesla’s shares have risen by 900% since the start of 2020, prompting concerns it is in bubble territory.
Baillie Gifford American is one of 11 funds in the Edinburgh fund group’s stable to cut its exposure to Tesla in the last month.
Scottish Mortgage, which is also run by Slater and Baillie Gifford heavyweight Anderson, also halved its exposure to the EV company in January. The £19.1bn trust endured a two-day slump this week, with shares diving as low as 10% on Tuesday, after Tesla was caught up in a sell-off thanks to comments Musk made over the weekend over the high valuations of bitcoin.
Opportunities in e-commerce
Slater and Robinson have generally been reducing their positions in Faang holdings. By the end of January the pair had sliced their 6.2% holding in Amazon to 5.6% and cut their position in Google parent Alphabet from 2.8% to 2%, pushing the tech giant out of their top 10 holdings. They sold out of Facebook altogether.
The managers said they were finding more opportunities in developing sectors such as e-commerce, biotech and cloud services.
E-commerce makes up just 15% of all retail in the US, with some large categories which have still not made the transition online, leaving plenty of room for growth, they said.
“The hyper connected network isn’t confined to the so called Faang stocks, it’s everywhere and it sets the table for more outliers to emerge and we suspect some are still just germinating,” said Dave Bujnowski, another co-manager on the fund.
Bujnowski said companies moving toward hyper connected infrastructure include online marketplaces for used cars like Caravana and Vroom which offer shoppers a better selection, better prices and delivery to your driveway.
“The kicker is that online penetration for this category is still in the low single digits now that will shortly go up over the next five or 10 years,” Bujnowski said.
Other e-commerce opportunities that have arisen out of the pandemic include Chewy, an online website for pet food. The company’s success has been spurred by the surge in pet adoption during the pandemic and the trend of businesses shifting online.
Cloud companies could rival the Faangs in the next decade
The emergence of Amazon Web Service has lowered the barriers to starting and scaling e-commerce businesses, Robinson said. “Because of AWS the smallest companies can now access powerful tools that were previously only available to big companies with lots of resources.”
Robinson said: “Over the next decade we could see the emergence of a similar cohort of dominant tech platforms, but this time in the B2B space.”
Other cloud based delivery models, similar to AWS, are beginning to appear in other areas such as Shopify in e-commerce, Twilio in communications and Stripe in payments which have all built a software layer above other infrastructure institutions, making it cheaper and easier for customers to use their services, Robinson noted.
“They all address large market opportunities, at least a trillion dollars in size. They all benefit from strong competitive advantages in the form of scale economies which cause the platforms to get stronger as they get bigger,” said Robinson.
He added: “For these reasons I think these companies have got a chance of being some of the biggest companies in the world over the next decade.”
Twilio’s shares rose last week, as the company reported better than expected fourth quarter results. Its revenue grew by 65% in Q4 on a year-by-year basis to $548.1m. Shopify also reported on Tuesday fourth-quarter revenue growth of 94% to $977.7m.
Baillie Gifford’s American fund has returned 510% over the last five years, quadruple the IA North American average of 114%, according to Trustnet.
