Douglas Brodie, who runs around £1.7bn of assets in funds available to financial advisers at Baillie Gifford, has revealed why he sold his long standing investment in Tesla at the end of 2022, but owns another Elon Musk operated company, SpaceX instead.
Brodie, who runs both the Edinburgh Worldwide investment trust and the Global Discovery fund, told FTAdviser: “We were the first fund at Baillie Gifford to buy Tesla shares. When we made that initial investment, it had a market cap of around $2bn. At one point when we owned it it went above $1trn.”
Outlining the reasons for the sale he said: “The role of the funds I run is to look for special companies as they are being built into commercial entities. I think one could say by the end of 2022 that Tesla had reached the stage of being a commercial entity. It had completed the journey, and that was the natural time for us to sell.
"I would also say that the nature of our funds is that we are regarded as smaller company specialists, and at the size Tesla got, it was certainly stretching the definition of smaller company, and when a company gets to that size, it becomes about large company stock analysis, which is not within our wheelhouse.”
Many of those sceptical of the investment case for Elon Musk companies is a concern that the entrepreneur may be stretching himself too thinly, or have a too much focus on big ideas, rather than on the day-t-day operation of a business.
Brodie said: “At its core, innovation is about solving problems, and increasingly technology is a part of that. But also, human capital is crucial to this. The big thing that separates the winners from the losers is the ability to commercialise the idea, and grow it to scale. And that is about execution of a strategy.
"Anyone make something sound like the solution to a big idea, but executing it is a different thing. And one of things about SpaceX is that while Elon is the driving force behind SpaceX, and he and galvanises the workforce.
"The actual day to day operations are run by other people. No one is expert in everything, and it's fair to say that rocket engineering is not Elon’s domain. That is the key when investing in founder lead companies: to harness the talents of the special people that create them. In terms of executing the vision, that tends to be at a different layer to that of the founder. And some of the most successful investments I have made in my career have involved Elon.”
Space X is presently the second largest holding in Brodie’s Edinburgh Worldwide investment trust.
Many Baillie Gifford funds, and funds which have innovation as part of their remit, have suffered in performance terms over the past year, as rising interest rates reduce the attractiveness of longer duration assets for many investors, and funds which invest in innovative companies tend to have to own long duration assets as the companies will generate the bulk of their returns in future.
Brodie says the decade prior to the present rate rising cycle, “aspects of the previous decade were weird. Mediocre ideas with questionable unit economics got funding. And it created a kind of laziness, as some founders started to believe that just by throwing a wall of money at something they could create scale".
"But it doesn’t work like that," he added. "Weird distortions came into markets back then. And where we are now in markets, it's not that there is no capital around, just that the quality of the ideas has to be better, and the quality of the people. From my point if view that's definitely a positive.”
The funds Brodie runs aim to invest in companies that are at an earlier stage than other Baille Gifford funds, such as Scottish Mortgage.
David.Thorpe@ft.com
