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NEW YORK (Reuters) - Mutual fund stock pickers like to say they earn their higher fees because they spot good companies before they rally. But this year, many of those fund managers missed out on one of the hottest stocks in the U.S. market.
Shares of Tesla Motors Inc have soared more than 410 percent this year as the electric car maker, run by billionaire Elon Musk, beat Wall Street's earnings estimates and forced hedge fund managers who had shorted the stock to buy it to cover their positions.
Just a slice of the mutual fund industry participated in those gains, with only 190 of the 2,090 actively managed U.S. equity mutual funds holding the stock when the year began, according to Lipper data. For growth companies of Tesla's size - roughly $4 billion in market value then, and $20 billion now - 400 or more funds typically own shares, analysts say.
To be sure, Tesla is only one miss, at a time when managers were loading up on other high-flying stocks such as Best Buy Co Inc and Netflix Inc. Still, the oversight highlights the limits of active management and raises questions about whether the fees the funds charge are justified.
"If you're an average fund manager, it's very hard to consistently find the stocks that will help you beat the market," said Stephen Brown, a professor of finance at New York University's Stern School of Business.
Actively managed stock funds, on average, charge $1.20 in fees for every $100 invested, compared with 20 cents for a passive fund that simply follows an index. Yet actively managed funds consistently underperform the passive benchmarks that index funds track.
This year, only 39 percent of actively managed large cap equity funds have beaten the S&P 500 index and justified their fees, according to Morningstar. If that rate holds, it would be the best performance for the actively managed fund industry in more than five years.
A total of 45 index funds and exchange traded funds held Tesla at the start of the year, accounting for nearly 25 percent of the company's total fund ownership.
Tesla may have flown below mutual fund managers' radar because it is regarded as an alternative energy play - the volatile sector plunged in 2012, putting off some fund managers. Questions about the battery life of Tesla vehicles and doubts about demand for high-end electric cars also led some investors and analysts to be wary of the stock.
"Alternative energy is a very niche-oriented investing approach. Time will tell if they continue to perform well," said Todd Rosenbluth, director of mutual fund research at S&P Capital
Another Musk investment that has soared this year and received little attention from mutual funds is SolarCity Corp. Shares of the solar power company are up 408 percent year to date, but only seven actively managed funds owned the stock at the end of 2012. Forty-eight own it now, with more than half, 29 funds, having picked it up after May, when the stock was already up nearly 300 percent.
Not every fund company overlooked Tesla when it was, by today's standards, a screaming buy. Funds managed by Fidelity - including Will Danoff's $101 billion Contrafund - and T. Rowe Price started the year with sizeable positions.
Of the 132 funds that bought into Tesla this year, at least half took positions after the first quarter, when shares had already risen more than 170 percent, according to Lipper.
For those looking to take a position now, it could be risky. Tesla, which had a net margin of negative 7.5 percent in its most recent quarter, currently trades at 113 times forward earnings, compared with an average of around eight for traditional automakers.
"I think it's a bubble," said John Thompson, who runs the Vilas Fund, a long-short hedge fund. Tesla Motors did not respond to a request to comment.
Tesla's main product, an electric car with a range of up to 265 miles and a base cost of $62,400, is "probably a great third or fourth car for wealthy people, but it's not going to be a mainstream car," Thomson said. "And to have a $20 billion market cap, you need a mainstream car."
Reporting by David Randall; Editing by Linda Stern, Paritosh Bansal and Steve Orlofsky