Terry Smith adds tech stock owned by Smithson to flagship portfolio

Terry Smith has introduced another new stock into his £22.3 billion Fundsmith Equity, as volatile markets provide new opportunities for the veteran stock picker.

The new position is California-based Fortinet Inc (NASDAQ:FTNT), a cybersecurity company with a market capitalisation of $45 billion (£37 billion).

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Founded more than 20 years ago, it has 680,000 customers globally, selling companies a complete cybersecurity package on a subscription basis, which includes firewalls and risk-detection tools.

Revenue over the past 12 months was just under $5 billion, with a net income (profit) of around $1 billion, according to data from Morningstar.

The shares trade at a price-to-earnings ratio of 38 times, which is just under double the average for S&P 500 companies.

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However, growth is impressive, with sales increasing 25.5% in the second quarter of 2023 compared to the same quarter a year earlier. Shares have risen 290% over the past five years and are up 17.5% this year.

There have been setbacks though. The shares plummeted 26% in August 2023 after the firm reported worse-than-expected future business bookings due to difficult economic conditions.

Updating investors, Smith said: “We began a currently small holding in Fortinet.”

Fortinet is the fourth-largest position in Smithson Investment Trust. Managed by Simon Barnard, Smithson applies Terry Smith’s investment approach of buying “quality” shares to small and mid-cap stocks.

Fundsmith Equity fell 1.9% in October, ahead of the 2.3% drop for the MSCI World index. This calendar year it is up 4.5% compared with 6.9% for global shares benchmark.

Returns since launch in November 2010 are impressive still, delivering a 14.8% annualised gain. But over the past three years Fundsmith Equity has failed to outperform its benchmark, with T Class units returning 17% compared with 35% for the index, according to data from FE Analytics. Over five years, returns against the index are very similar.

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The top five contributors in the October were Microsoft, Novo Nordisk, Nike, L'Oréal and Procter & Gamble. The top five detractors were McCormick, Automatic Data Processing, Waters, IDEXX and Mettler-Toledo.

Microsoft has replaced Novo Nordisk as the largest position in Fundsmith Equity.

Smith, who has a lower turnover than most fund managers, has had a relatively busy year in terms of trading. Over August, he sold out of US cosmetics group Estee Lauder (NYSE:EL) and bought shares in hotel group Marriott International (NASDAQ:MAR) to replace it.

He has also added Procter & Gamble this year, and sold technology stocks Adobe and Amazon.