Tesla entry to S&P 500 sparks shares surge and boost to Scottish Mortgage

by Graeme Evans from interactive investor |

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A green light to enter the US index is a massive boost to Elon Musk and funds that own Tesla stock.

S&P 500-bound Tesla (NASDAQ:TSLA) kept investment trust Scottish Mortgage (LSE:SMT) and UK retail investors happy today after another milestone in the remarkable rise of the electric car maker.

The green light for Tesla's admission to the S&P 500 on 21 December triggered a 14% rise in after-hours trading on Monday night. That’s because Wall Street is preparing for a US$51 billion trade by index funds adjusting their holdings to include the world's most valuable car company.

With a stock market valuation of about $400 billion, Elon Musk's Tesla will account for about 1% of the index and become one of the largest ever stocks admitted. Due to its huge scale, the index committee of the S&P Dow Jones Indices is asking the investment community whether Tesla should be added in one go or two separate tranches.

After internet giant Yahoo was admitted to the index in 1999, Reuters noted today that shares surged by 64% between the announcement and its actual inclusion five days later.

Nasdaq-traded Tesla had failed to gain entry in September, but after reporting its fifth consecutive quarterly profit last month with a surplus of $331 million, it was given the all-clear to join the Wall Street benchmark by the S&P index committee.

The shares have jumped by about 450% in 2020, leading to big profits for its army of followers in the UK and substantially benefiting the £16.8 billion Scottish Mortgage Investment Trust.

The FTSE 100 investment trust posted a net asset value of 998.7p a share at the end of September, up 76% from 567.3p at the end of March. Tesla, which represents 12% of the trust's total assets, made a 25% contribution to absolute performance for the period despite the trust selling over 40% of its holding in Tesla as part of a rebalancing raising £1.2 billion.

Plenty of commentators have argued that the rise for Tesla shares since delivering a surprise quarterly profit in October of last year has left it in bubble territory, pointing to the fact that production in 2019 was a mere 5% of German car giant Volkswagen.

The company has overtaken VW and Japan’s Toyota to become the world’s most valuable car maker and is significantly larger than US giants Ford Motor and General Motors combined.

Scottish Mortgage has owned Tesla stock since 2013, and over the time has endured large drawdowns in the share price as well as its most recent stratospheric rise. 

Managers James Anderson and Tom Slater wrote in the trust's interim results report earlier this month that the underlying return picture for Tesla was “far from an aberration”.

They said: “Tesla has made significant operational progress. It has successfully added capacity and the production ramp of its latest model has progressed far more smoothly than for any of its previous vehicles.

“Demand for its products is strong and the response from its traditional competitors remains muted. It is still our largest holding even though we sold over 40% of our shares during the period to ensure that the portfolio has an appropriate level of diversification.”

Last night's rise for Tesla shares added about £11 billion to Musk's personal fortune, with his net worth now estimated by Bloomberg to be $117.5 billion (£88.7 billion) and bigger than Facebook's Mark Zuckerberg.

As well as rising to third on the world rich list, this week has also seen Musk's rocket company SpaceX put four astronauts into space. He's also recovering from what's believed to have been a moderate case of Covid-19.

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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