Terry Smith has added a new position to his £22.2bn Fundsmith Equity fund, having bought shares in Fortinet, a cybersecurity solutions and services company.
Fortinet, which is headquartered in Sunnyvale, California and has a market cap of $45bn (£37bn), reported a net profit margin of 20.6% as of Q2 this year, which is a 22.3% increase compared to the same period in 2022.
According to Yahoo Finance, Wall Street analysts predict that Fortinet will announce quarterly earnings of $0.37 per share in its Q3 results, which are yet to be released, while consensus forecasts suggest its revenues will reach $1.4bn (£1.2bn) – a quarter-on-quarter uptick of 17.3%.
In a semi-annual update to shareholders in July, Smith noted that Fundsmith Equity’s free cash flow yield sat at 2.8%, a decrease from 3.2% at the end of 2022. Within the portfolio, there was a turnover in the first half of the year of 6.2%, largely due to the sale of Amazon, a stock that had only entered the portfolio two years previously.
“Where companies choose to invest outside a powerful core franchise in which they already have expertise we believe they are likely to destroy value, and especially so where they are entering a sector which already has poor returns,” the manager said.
As of the end of September, 67% of Fundsmith’s portfolio is held in US equities, a decrease of three percentage points from last year, but it has maintained its 5% allocation to UK equities. Its largest sector holding is consumer staples at 30%, followed by healthcare at 26%.
During the first half of this year, the biggest drivers for the fund’s performance included Microsoft, L’Oréal, LVMH, Amadeus, and, most significantly, Meta, which attributed 3.1%. Meta was a significant turnaround story for the fund, after being one of its largest detractors from performance in 2022.
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“Meta’s share price performance has been volatile, and here’s the important point, it is much more volatile than its fundamental performance, which should be our primary focus,” Smith said in his letter to investors in July. “Plus, we all need to try to ignore the cacophony of noise from commentators which can be useless, or worse where they have an axe to grind.”
Smith expressed concerns in July about its holding in Estée Lauder, which had fallen 1.2%, among the top five of worst returns.
“Estée Lauder is the only one of the five which concerns us. It fell in response to poor figures occasioned by a build-up, and subsequent write-off, of stock accumulated in anticipation of a reopening of travel by the Chinese after the lockdown,” Smith said.
Since its launch in November 2010, Fundsmith Equity has returned 504.1%, compared to its average peer in the IA Global sector’s return of 184.6%. Year to date, the fund has returned 4.3% compared to the IA Global’s average of 2%.
