Tesla founder Elon Musk has courted controversy and outrage in equal measure this summer, making libellous comments about British cave diver Vernon Unsworth, tweeting a proposal to take the company private and smoking marijuana in an online interview.
In an exclusive interview, James Anderson, co-manager of Scottish Mortgage (SMT), discusses the investment trust’s five-year holding in the loss-making electric car company that has increasingly mystified some of his shareholders.
Anderson, a senior partner at Baillie Gifford in Edinburgh, says while Musk’s slur of Unsworth was ‘ethically unacceptable’ and ‘completely unjustified’, he believes the entrepreneur deserves ‘constructive criticism’ and support for the important work he is doing.
Tesla shares – in which Baillie Gifford held a 7.8% stake and which accounted for 5% of Scottish Mortgage assets – have plunged in the month since Musk proposed taking the company private in a $420 per share buyout. Nonetheless, Anderson blames the ‘malignant’ influence of short-sellers hoping to profit from Tesla’s demise and a negative media for the bulk of the company’s woes.
This is the first part of a longer and wide-ranging interview with Anderson which we will publish in the next few days.
Can’t watch now? Read the transcript
Gavin Lumsden: Hello, I’m delighted to have with me today James Anderson, co-manager of Scottish Mortgage investment trust. James, thanks very much for coming in, it’s very good to see you. Now in preparation for today we asked a number of our younger wealth manager readers, who are under 30, to suggest some questions to put to you.
So James McCathie of BRI Wealth Management noted that Scottish Mortgage managers – you and Tom Slater – look for strength in management and financial positions and then he goes on to say:
‘Tesla seems to have exhausted debt financing. We should also consider Elon Musk’s proposal to take the company private and his recent Twitter outburst. How do these recent events,’ he asks, ‘fit with the above attributes?’
James Anderson: Well can I start with the financial position because this is an element and I might throw back at you or the wealth manager. It somewhat puzzles us. It wasn’t a shock to us that building a car company in a completely different way with a completely new technology was going to cost capital. Our view is, and I mean this entirely seriously, the point of equity capital markets is to provide serious amounts of capital for the long term, for projects that are for the good and that are driving forward our societies and economies. And, as indeed to be fair to you, you implied, that is what Tesla is doing. So the ultimate objectives we feel very much fit the philosophy from that point of view. And we don’t share the shorts’ perturbation that this needs capital.
As for the more recent events I think it’s an incredibly difficult balance to get right and we’re trying very hard. You know I think this is a classic case of where there is a need for support and for constructive criticism as to what’s going on. So I don’t think you’d be surprised that we have had conversations with Mr Musk about just about all the various items that come up. We felt that the criticism of the diver’s case that he made was completely unjustified and we felt that was ethically unacceptable and we conveyed that.
I would say on the other side though, the direction of your and the wealth manager’s question is entirely right. You need support at these times.
GL: Earlier this year Tesla shareholders didn’t vote for appointing a chairman to oversee what he was doing. Is that something that should be reconsidered? Or a number two to take some of the strain off him?
JA: I think we can look at all the different comparisons. I think that you need the right supporters internally. If you want a comparison temperamentally, I think the closest one is actually Apple under Steve Jobs. And you know whether it be the chairman of Apple, in that case, or whether it be if you look across the board at most of the visionaries we’re talking about. They tend not just within the company but to have very close and supportive families around them and I think that, on many of these issues, can perhaps explain the degree of stress but I’d also Gavin, I’d want to open one slightly different front on that.
Our own conversations would suggest are a critical part of this and one which I feel the media in general – I’m not talking about Citywire in particular here at all – but the media in general I think needs to ask itself a lot of questions – which is the extraordinary level of publicity given to the claims and rhetoric of the absolutely vicious short investment hypothesis and individuals behind them. I think that they are not to be viewed as a beneficial force for allowing a convenient avenue to attack over enthusiasm.
GL: They’re doing the complete opposite, they’re short-term speculators, the opposite to what you’re doing.
JA: Yes and I would go further. I think these people try and make their claims come true in ways that to me seem. I said Mr Musk behaved unethically, I believe many of these people do as well and I do wish that many of our most prominent media personalities and institutions would examine the claims and records of many of these people. And in some cases there is a lot of evidence through court cases of just how malignant they can be.
GL: I’m sure you’ve got a very strong point there but Mr Musk does seem to be bringing unnecessary attention and unnecessary risk to himself. Did you advise him not to take Tesla private?
JA: Oh, well first let’s be absolutely clear that we had no prior knowledge. We certainly in retrospect can see the level of stress rising that may have moved in this mental direction, but no prior knowledge when it happened.
I can’t fault him for the way he approached it with us and I presume his other leading shareholders – even if one has to await what the SEC findings are on where the backing was and the like. He offered us a conversation within days of that tweet and we conveyed our sympathies on some of the matters that we’re talking about, the short termism and the shorts and the like. But at the same time we, surely, correctly and appropriately, we expressed, not the view, but the reality that for many of our clients continuing to back a private company was difficult in terms of the mandates we offer in general.
GL: That’s quite significant given your investment trust actually holds unlisted companies.
JA: Scottish Mortgage, as I was about to say in fact, would have been able to because, as you know – and as we may talk about later – we do a substantial amount of unquoted investments so Scottish Mortgage itself, it was less problematic, but for many of our institutional clients, which make up much of the holding, would have been in a much more challenging position.
GL: You still think Tesla is a great company. Have you bought more shares since they fell off in the past month or so?
JA: Ah I think I need to be cautious about what I’m saying here but our support remains substantial. Now can I move it on slightly in one sense which I think is really important, both about our investment philosophy and the specifics of Tesla?
One of the great difficulties in financial markets at the moment seems to me to be the outrageous level of certainty that people have in their views. Now our position on Tesla, and please don’t take this in any way as walking away from support at all, but we don’t know if the company will be successful. We do not know where the share price goes in relation to that. So we need to have a set of different scenarios that we probability adjust and we await the outcomes as to what the returns for our clients and savers ought to be according to that.
So we certainly believe the position is that there is still a good possibility that Tesla will prove entirely and highly successful and the returns we make to that would outweigh the downside involved in all these complex tasks not working out. But I think one should always try to phrase things in terms of probabilities and payoffs rather than certainty. You know I don’t like it when people try to push the position and say “Tesla will be at X”. It may be at X and we think there is a chance that we can make a lot of money for our clients in exercising this vision, which is surely good for the world, but are we certain about it? No of course not.
GL: There’s no certainty but it does look like Elon Musk has increased the risk and the uncertainty around his enterprise.
JA: Well I think what’s so difficult at the moment is that – even taking out the gyrations of the share price which obviously alter your payoffs in turn – what’s difficult, and you know it’s something I feel strongly that needs to be talked about more.
Whether you talk about the progress of the underlying progress in technologies in electric vehicles, from the batteries to the solar energy, which is obviously in the background of this for Tesla specifically and in general.
Whether you talk about those industry developments which we think are showing signs of being for a very long number of years set up to move absolutely in the favour of electric vehicles. Or whether you think about the specific achievements of Tesla, the underlying economic developments as opposed to the,as you quite rightly refer to from a management point of view, seem to us as equally encouraging as some of the noises are discouraging.
It does look for instance as though Tesla, the series 3, was the highest single revenue generating car in August. Now that seems to me to be a quite extraordinary fact. And you know I do wonder at times whether a little more of the attention ought to be on the people who are going to struggle to cope with this on the other side of it in the traditional car industry and on to the oil and gas!
GL: Tesla is still a formidable opponent in that sense. Let’s move on…