Tesla may currently be experiencing the single most important moment in its 15 years as a company. The investing universe has been left gobsmacked after CEO and chairman Elon Musk declared last week that he was considering a serious business model reboot—by taking the EV maker private—and added that he had the necessary funding already lined up.
Meanwhile, the SEC has just subpoenaed the company after an intense tweetstorm by Musk caused an uproar even as the board claimed it had been blindsided by the turn of events.
Depending on which side of the divide you fall, this is either the end of a very good run (TSLA longs have enjoyed a nice 1,630 percent gain since Tesla’s IPO eight years ago) or simply good riddance (recent shorts have been getting burned and have sued Tesla and Musk).
Passive vs. Active Funds
Assuming the conspiracy theory that Musk has been spinning tales to spite the shorts is incorrect, it might be time to contemplate life after the company goes private.
Obviously, the first investment cul de sac that TSLA diehards will face is that TSLA stock will no longer be available on stock exchanges. Assuming you are not one of the top investors that Musk has claimed to be contacting to ask if they would like to remain shareholders once the company goes private, the only other way you can get your hands on the shares once the deed is done is to buy a fund that holds them and hope they don’t sell.
Luckily, there is no shortage of fund managers who would love to follow Tesla into private existence.
“Our inclination is that if we could go private with him, we would, but it’s complicated,” a large Tesla investor who spoke to Reuters on condition of anonymity has conceded. Related: Can The S&P 500 Shake Off Negative Sentiment?
In fact, there’s a growing trend where mutual funds are juicing their returns by increasingly investing in private firms. In other words, you don’t have to be a venture capitalist or a wealthy businessperson to invest in Musk’s SpaceX or any of the companies in CNBC’s 2018 Disruptor 50 Companies list.
But as the fund manager above noted, it’s not going to be a walk in the park. Most passive funds will have little choice but to drop TSLA stock the moment it’s removed from stock indexes.
One such fund is the Vanguard Total Stock Market Index Fund (VSMPX.O), which held about two percent of Tesla shares as of June 30. The company will have to sell or tender all its Tesla shares once it goes private. David Barclay of University of Chicago’s Booth School of Business says he’s not aware of a single security remaining in an index fund after it went private.
So the only feasible choice is to look at an actively managed fund. Here again, investors are in luck because Tesla’s active fund ownership is higher compared to peers like General Motors. The company’s largest active fund investors include Fidelity Blue Chip Growth Fund (FBGKX.O), which also owns Uber Technologies Inc and Lyft Inc.
Still, investors should be aware that active funds turn over stocks in their portfolios at a high clip of about 85 percent per annum. Further, the fund manager has to get the approval from existing clients before adding shares.
By Alex Kimani for Safehaven.com
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