With big bets on Musk, these funds may have a Tesla problem in '23

NEW YORK, Jan 4 (Reuters) - Tesla Inc's steep

sell-off is proving to be an ongoing nightmare for fund managers

that have bet heavily on the Elon Musk-led electric vehicle

manufacturer. Overall, 50 actively-managed U.S. equity funds have more

than 5% of their assets in the company, exceeding the barrier

that many portfolio managers will not cross for one equity

position to diversify their exposure. Those funds dropped by an

average of 42.1% last year, more than double the average 17%

decline among U.S. stock funds, according to Morningstar. The $6 billion Baron Partners Retail fund, which leads all

US mutual funds with about 52% of its assets in Tesla shares,

fell nearly 43% last year, while the $54 million Zevenbergen

Genea Institutional fund, which has 13% of its assets in Tesla,

fell nearly 59%. Both firms declined to comment for this story. Tesla fell about 65% last year, with declines accelerating

after Musk decided to buy social media network Twitter, which

some investors see as a distraction to the chief executive. Shares nose-dived 37% in December, and fell more than 12% on

Tuesday, the first trading day of 2023, after the company's

fourth-quarter deliveries fell short of expectations due in part

to ongoing logistical difficulties. The prospect of another year of weak performance may prompt

some of Tesla's biggest bulls to reduce their positions, said

Dan Ives, an analyst at Wedbush Securities. "It's a fork-in-the-road time for many of these

institutional investors, and a lot of where it goes from here is

dependent on Musk," he said. "Musk started the fire with the

Twitter circus show and he's the only one who can extinguish it

and get the Street to focus on the company's fundamentals

again." Musk completed a $44 billion acquisition of Twitter in

October. He soon began firing top executives and let go more

than half of Twitter's staff while appearing to shift strategy

tweet by tweet. His net worth has fallen by more than $100

billion, according to Forbes, bumping him from the position of

world's richest person. So far, there are few signs that Tesla's biggest backers are

losing faith. Star stock picker Cathie Wood's ARK Innovation ETF

bought 144,776 shares of Tesla during Tuesday's sell-off,

according to the company's website, pushing its stake in Tesla

to about 6.5% of its $5.9 billion in assets. The fund fell 67%

last year, putting it near the bottom of all U.S. equity funds. Ark declined to comment. While Tesla's stock is currently suffering, it is in a

position to outperform over time due to its superior battery

technology, said Graham Tanaka, whose $14-million Tanaka Growth

Fund has about 5.3% of its assets in the company. "Twitter is a temporary but huge distraction and it's

unfortunate that Musk has bit off more than he can chew, but it

has not damaged in any way the operations or future growth

prospects of Tesla," he said. Tesla's promotion of China chief Tom Zhu to take direct

oversight of the company's U.S. assembly plants as well as sales

operations in North America and Europe will likely be positive,

Tanaka said. From 2018 to the end of 2021, the stock posted a total

return of 1,700%, compared with the S&P 500's 90% return,

according to Refinitiv Eikon data. However, portfolio managers

focused on yearly performance may be less willing to stick with

the company in the face of rising competition and weakening

demand, analysts said. "Tesla's meteoric rise over the last few years has rewarded

shareholders of many funds but set the strategies up for

potential failure if they held on without paring back exposure,"

said Todd Rosenbluth, head of research at data analytics firm

VettFi. (Reporting by David Randall

Editing by Nick Zieminski)