Scottish Mortgage sells out of Illumina

Speaking to clients on its latest ‘Manager Update‘ Q/A on Wednesday (1 November), SMT’s lead manager Tom Slater confirmed that they had sold out of the gene sequencing firm.

The managers first took a position in the company in March 2011 and in 2016 it was the second biggest holding in the trust.

Slater and the trust’s co-manager, Lawrence Burns, cut back the position in Illumina earlier this year and as of 30 September, it made up 0.7% of the portfolio, according to the latest half-year report.

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At that time, the managers said that they continued to believe in the investment opportunity of gene-sequencing, but said Illumina’s execution had been “disappointing”, which has been reflected in a weak share price.

In the intervening month, the pair pulled SMT’s investment in the company altogether and, on the recent call, Slater said the changes in the company’s management had been another trigger to sell the stock.

“The execution at Illumina in recent years has been disappointing. You have seen a management change there. But we do not think there were any quick fixes,” Slater said.

The company’s board chair was ousted at the John Thompson back in May, while the CEO Fracis deSpuza held onto his seat the time he resigned from the role after shareholder pressure, who voted in Jacob Thaysen as a replacement in September.

“And at a time where you think about edge, you think about competition in those markets and where there are real challenges. I think it is important to accept the there is ones that just have not turned out how you hoped, so you sell and move on,” Slater said.

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Illumina has been embroiled in a lawsuit with a former Cornell researcher over its cancer-screening tech. Last month, EU regulators ordered the company to sell cancer test developer Grail, which it bought for $8bn, after it made the purchase without regulatory approval.

Activist investor Carl Icahn has also sued Illumina’s former CEO and board of directors in the following weeks, accusing them of breaching their fiduciary duties.

China and Alibaba sale

In the webinar, the managers were asked by clients about their opinions on China, after the pair had pulled back on investing in the region over the past year.

Burns touched on the sale of Alibaba the managers had made earlier in the year, explaining it had been part of the wider, ongoing shift regarding its Chinese investments that was about “raising the bar” on the positions it was taking in China.

According to the trust’s preliminary results published back in May, the sale of Alibaba and two other Chinese holdings were driven by concerns about the growth of the major online platforms in China following state regulatory interventions, concerns the managers echoed on the webinar.

Burns described the e-commerce giant as one of its “largest” and “longstanding” investments in China, but said that as they factored in geopolitical risks and domestic regulatory risks there needed to be a “corresponding amount of upside to make it worth taking those risks”.

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SMT first invested in Alibaba in 2012, when the company was still private. The firm was also the inaugural private equity allocation in the portfolio.

Touching on the Alibaba sale on the webinar, Burns said the company had faced “a number of competitive battles that they looked less well placed than they have been in the past”.

He added that when companies go through those periods “the  culture changes, [and] it becomes one that is more trying to preserve what you have, rather than to ambitiously and radically grow and disrupt what you do not have, and I think that changes the nature of companies at times”.

Making the most of the new space in the portfolio, the Scottish Mortgage managers said they had made some new additions, including South Korean e-commerce company Coupang.

Burns said that since the firm made its initial public offering in 2021, its share price had fallen 60-70%, but the SMT managers saw this as a buying opportunity.

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“If you look at what they have achieved, underlying they have been growing their top line sort of 20% year on year, they have moved from unprofitable on a run rate of divergence between $2bn and free cash flow year,” Burns said. “And yet, the market has not really given much time for that.”

“That is indicative of some of the opportunities that we are seeing in this environment, where you are having companies, both that we own and some that we do not own, that are executing fundamentally very well, but are not being rewarded in any way by the market. We are looking to be opportunistic,” he added. 

Not an emotional process

At the end of the call, both managers were asked by host Stewart Heggie, commercial director at Baillie Gifford, what question they had hoped would not come up.

Slater said he was “glad” that they had not been asked “how we were feeling”. He explained that when it comes to running SMT, he does not think feelings “come into it very much”.

“We have a clear philosophy around how we select our investments, or investments. We have a clear process, which we execute in a very clinical and dispassionate way about thinking about opportunity and likelihood of capitalising,” he said.

“It is not a very emotional process. So, how I feel about it does not really come into it. I am pretty glad you did not ask me how I was feeling.”