Interactive Investor

Baillie Gifford: our latest views on Tesla and Elon Musk

20th December 2022 09:39

by Sam Benstead from interactive investor

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Baillie Gifford Positive Change manager Lee Qian speaks to interactive investor's Sam Benstead about the fast-growing companies he invests in. This includes a discussion on Tesla (NASDAQ:TSLA) and its chief executive Elon Musk, and whether it is right that he now runs three companies, as well as insights on the healthcare and semiconductor sectors.

He also speaks about his reasons to be cheerful and fearful as we head into 2023, and why the portfolio has shunned America's giant technology stocks. Baillie Gifford Positive Change is a member of interactive investor's ACE 40 sustainable funds list.

Sam Benstead, deputy collectives editor, interactive investor:Our guest today is Lee Qian, manager of the Baillie Gifford Positive Change Fund. Lee, thank you for coming into the studio.

Lee Qian, manager, Baillie Gifford Positive ChangeThank you for having me.

Sam Benstead: Baillie Gifford is a high-profile backer of Tesla, and your fund is no exception. It's about 4% of the portfolio, but it used to be more. So, have you been selling shares in Tesla, or is this reduction in your position just a result of the shares falling in value this year?

Lee Qian: It's a combination of both. So, we have been reducing our Tesla positions and sold some shares earlier in the year when the valuation, in our view, was very demanding. So, we took that opportunity to reduce Tesla holding and redeployed the investments elsewhere. More recently, with a declining share price, I have also taken the position down as well. So, it's both factors.

Sam Benstead: And why did you still like the company? It's a top 10 position. Why is it there?

Lee Qian: We think that Tesla plays a very important role in helping to address climate change, first by electrifying transportation and enabling more people to drive electric vehicles and the role they have played in increasing the appeal of electric vehicles through engineering and decreasing the price of electric vehicles through economies of scale and manufacturing efficiency, that have opened the opportunity for more people to drive electric vehicles. And that has an environmental benefit.

But on top of that, Tesla plays an important role in energy storage and through battery, Tesla mega-packs are used increasingly by grid operators to balance the fluctuating generation of wind and solar energy. So, that plays an important role in. allow[ing] more green energy to be added on to the grid. So, we think there are multiple areas in which Tesla can help society from an environmental perspective.

At the same time, from an investment perspective, the penetration of electric vehicles is still low, it's single digits in most countries. We think that will increase over time as costs continue to come down and people are becoming more conscious of climate change. And so, we think the growth opportunity is strong. At the same time, the competitive advantage for Tesla is very strong as well. We think profitability comes through at an impressive level and we believe the company will generate very attractive profit growth over the long term.

Sam Benstead: And there has been some controversy about Tesla's environmental, social and governance (ESG) rating linked to its workplace practices and sourcing minerals from some parts of Africa. What do you think about that and why does it deserve a place in your Positive Change fund?

Lee Qian: So, we analyse those ESG factors closely. We looked at the battery supply chain. We looked at the worker treatment. Our ESG analysts even went out [on] visits and to see the changes the company have put through in health and safety in the factory. And we have engaged with the boards numerous times on governance issues as well. So, we do consider those carefully. But at the end of the day, we invest in Tesla because [of] the benefits of its products on society, the fact that more and more people can drive electric vehicles, and that impact on reducing CO2 emissions is very significant. And for that reason, we continue to own Tesla in the portfolio.

Sam Benstead: Elon Musk is the chief executive. He also runs SpaceX and now Twitter. So, are you concerned that he's being stretched too thin by managing three companies, not just the one that you invest in?

Lee Qian: Yes, it's something that we are actively considering and frankly, the Twitter situation does raise concern for us, and we will be engaging with the company on that issue. I think it could turn out to be a distraction and potentially a bigger distraction than maybe the company or Elon Musk himself realise. It's one thing to engineer rockets and cars, quite different to manage a social media platform and try and keep everyone with polarising views all happy at the same time. That could be quite big work.

So, it's something we do actively consider and monitor. One thing I would flag up is Tesla as a company is much more advanced than it was three or four years ago. It's now profitable. It has a very clear structure in terms of manufacturing and a road map for increasing its production capacity. So, we think it's in a much more mature place. That arguably means that even if Elon Musk spends a bit less time on this, the company can still function very well.

Sam Benstead: And are you engaging with the company? Would you like to see him maybe appoint another chief executive of Twitter so they can focus on Tesla?

Lee Qian: I think the reality is that Elon Musk will do what Elon Musk wants to do. So, I think there's limited room for us to influence him directly. But what we can do is engage with the board and make sure that the board is up to speed in terms of talent and senior management within Tesla. So, we're seeing areas the board can influence in terms of making sure that there is a good pipeline, there's a good succession plan, there's good people with operational, manufacturing backgrounds, at the senior management level. Those are just the type of conversations we will be having.

Sam Benstead: Healthcare is the biggest sector that you invest in. You own Moderna (NASDAQ:MRNA) So, why did you like that stock so much and what other healthcare companies do you own and why?

Lee Qian: We like Moderna because it's having a very strong position in MRNA technology. This is a relatively new way of producing treatments and therapeutics, leveraging on messenger RNA. It could be a very interesting opportunity because with MRA, companies can make therapeutics much faster.

We have seen with the Covid that both BioNTech and Moderna were able to engineer a Covid vaccine in record time. MRNA could open up a whole range of treatments and therapeutics for diseases that previously have been very hard to target with older technologies. So, we think that's a very large opportunity. At the same time, we have been impressed by the management team, its execution with the Covid vaccine and the ability to ramp up manufacturing and delivery from essentially a standing start is very impressive. And the culture, the very high speed of innovation, and the strategy of the company gives us a feeling for excitement about its long-term prospects.

Sam Benstead: And what other medical challenges and diseases could Moderna feasibly solve in the next decade?

Lee Qian: So, [over] the next decades, there are more infectious diseases that Moderna can target, so it's coming up with a better flu vaccine, which is still a huge cause of death, especially among the elderly every year. And there are other respiratory diseases that Moderna is targeting. It is also advancing progress in areas such as personalised cancer vaccines that Merck, which is one of Moderna's partners, is partnering on [and it] has exercised its right to advance one of the candidates, showing confidence in Moderna's approach. So, there are several therapeutic areas that Moderna could address over the next 10 years.

Sam Benstead: A cancer vaccine. How might that work? How probable is it? And if they do manage to pull it off, what does that look like for the business in terms of, ultimately, profits?

Lee Qian: I think it's still early stage. So, I think it's in phase one and phase two trials now. But it’s a hugely exciting opportunity. And with personalised cancer vaccines, a patient will get their tumour sequenced and the company will design an MRA vaccine and that will trigger the body's own immune system to create T-cells that will attack the cancer cell. So, it's very much to help the body and engineer itself, help the immune system develop a way to attack cancer rather than relying on chemotherapy, or other very strong treatments that have very strong side effects.

Sam Benstead: For the company, what would that mean in terms of its bottom line?

Lee Qian: That could be transformative, hundreds of billions of dollars are spent on cancer treatments every year. Even if Moderna take a single-digit percentage market share and that would transform the business revenue and profit. So, it could be hugely impactful.

Sam Benstead: You're also a big backer of semiconductor companies. So ASML (EURONEXT:ASML) and Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM), these companies are very much linked to Taiwan and there's geopolitical tension there with China. Do you focus on the geopolitics, or do you just look at the companies and think these are brilliant, we want to own them regardless of what could happen?

Lee Qian: I think it's very hard to avoid geopolitics nowadays, especially for a company like TSMC. And semiconductors have always been political. If you look at its history, the government have always played a very strong role. So, I think with TSMC in particular, the potential geopolitical risk is something that we incorporate when we look at the business fundamentals. It's one of the factors we consider, but we also focus a lot on just a competitive advantage, the long-term growth opportunity for the semiconductor industry. And in those areas, we continue to be very optimistic about TSMC.

Sam Benstead: You avoid big technology companies. There's no Apple, Google, Microsoft, or Facebook in the portfolio. Why is this?

Lee Qian: I think for the big tech platforms, there's the whole question around the impact on society. There are definitely benefits. Google opens a wealth of information for people to access. The Android operating system powers more than 2 billion smartphones around the world. Most are in emerging markets [and] that is helping people to access mobile finance, mobile health care services. Those are incredibly powerful and beneficial.

But at the same time there are also quite considerable negative consequences with technology, and especially social media, around the problem of social media addiction, around the fact that people tend to get a more polarised view over time, and social media and technology most likely play a part in that trend. So overall, we don't feel that those companies fit within our impact philosophy in terms of really addressing a social environmental challenge.

Sam Benstead: As we head into 2023, there's a lot to be worried about in the investment world. Can you give me a reason to be cheerful and a reason to be fearful?

Lee Qian: Well, I think there's always reasons to be fearful, I don't think 2023 is new. Every year people worry about certain things and sometimes they happen, sometimes they don't. I guess this is not really for me to predict exactly what disaster might happen.

Reasons to be hopeful? There is increasing awareness of climate change, and this is not going away and there's increasing awareness by governments that climate and energy and healthcare and foods are all really interrelated. Environments where climate change accelerates and, flooding and droughts become more common and wildfires become more common, that will be environments where food will become scarcer, energy will become scarcer.

As people realise that, I think there will be greater focus and willingness to invest in renewable energy, [and] invest in technology that will help us to overcome climate challenges. So that is something that I'm excited about. It might happen more next year; it might happen the year after.

But over the time frame that we are investing, over the next five to 10 years, I am quite certain that we will see increasing efforts to tackle climate change and I think that will benefit a lot of the companies that we invest in for positive change. In terms of reason to be fearful, I think geopolitics is probably the big risk. There are continuing concerns around actions that might lead to conflict in Europe and in Taiwan, as mentioned. That is something I think is a known unknown, and we don't know exactly what might trigger that, but we know the risk is there, it's something for us to consider and take into account when we are thinking about the probability of different scenarios that might happen in the future.

Sam Benstead: And finally, the question we ask all our guests. Do you personally invest in the fund?

Lee Qian: Yes, I do.

Sam Benstead: Thank you very much.

Lee Qian: Thank you very much for having me today.

Sam Benstead: And that's all we have time for. You can check out more Insider Interviews on our YouTube channel where you can, like, comment and subscribe. See you next time.

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