Whether it’s the NHS, British Airways or Equifax, it seems as though barely a week goes by where our personal information is not put at risk as a high-profile firm falls foul of a cyber-attack.
In 2017 there were an incredible 1.7 billion data breaches in the US alone – equivalent to more than one every 50 seconds. Worryingly, the number of breaches has almost tripled from 600 million since 2013 and cyber crime is now estimated to cost the global economy £300 billion every year.
Adrian Lowcock, head of personal investing at Willis Owen, says: “Cyber security is one of the most interesting areas within technology and is one of the big themes that is going to drive long-term investment opportunities.”
With experts predicting there will be a staggering 50 billion devices connected to the internet in the world by 2020, security is something which affects everyone from individuals and households to international organisations and governments.
It’s no surprise then, that cyber security is a major area of spending for companies looking to protect both their own data and that of their customers. And if a sector is grabbing headlines, you can be sure there are investment opportunities to be found within it too.
Peter Bourbeau, portfolio manager for the Legg Mason ClearBridge Large Cap Growth fund, says: “Security threats are becoming increasingly sophisticated, well-funded and orchestrated. Data breaches can be so harmful that organisations are making cybersecurity their top priority.”
But accessing this area of the market comes with risks too; companies promising cyber security solutions live and die by the ability to deliver and if their technology fails or becomes obsolete they can fall quickly and sharply out of favour. Staying ahead of not just their rivals, but the cyber-attackers, is vital.
Bourbeau adds: “It’s an exciting sector where no one company has a monopoly on endpoint solutions. The demand for redundant protection keeps increasing and you need a lot more sophistication to stay ahead of the bad guys.”
His fund, which has a five-star Morningstar analyst rating, has around a third of its assets in the technology sector. It has returned 27.3% over the past year. One company he particularly likes in the space is Silicon Valley-based Palo Alto Networks (PANW), which specialises in firewalls – a system on a computer which monitors what gets in or out of the network. The firm has been “at the forefront” of the fast-changing sector and “keeps innovating”.
He also likes Splunk (SPLK), a US business which notices patterns in computer usage including which websites are visited and which keys on a computer are used. Its software can identify if strangers have infiltrated a network. Another up-and-coming favourite is Akamai Technologies (AKAM). Previously better-known for its cloud computing business, its security division is growing more than 30% a year.
Cyber Firms Need to Stay One Step Ahead
Graeme Clark is portfolio manager on the Janus Henderson Global Technology fund, which has a four-star Morningstar analyst rating, and has returned 25.8% over the past year. With so many constant innovations in the sector, he warns that investors need to ensure they don’t end up trapped in legacy firms which have been left behind by the competition. He names US firm FireEye (FEYE) and firewall company Check Point Software Technology (CHKP) as examples of such businesses.
Lowcock likes the Polar Capital Global Technology fund, which has returned an impressive 33.9% over the past year, rating manager Ben Rogoff’s ability to spot trends in the industry. The fund has a Silver rating from Morningstar and analyst Samuel Meakin says the team combine “thematic analysis, to identify the growth areas of the industry, with rigorous bottom-up company analysis”.
But Lowcock points out that investors don’t need to stick rigidly to specific technology funds to access this theme. He likes the Marlborough UK Micro Cap Growth fund, which taps into the trend through the UK’s Alternative Investment Market (Aim). The fund has 27% of its assets in the technology sector and manager Giles Hargreaves has identified cyber technology as a major growth area. The fund has returned 12.2% over the past year.
Alternatively, investors can also access the trend by looking outside of active funds to ETFs which track companies in the sector. BlackRock’s iShares has recently launched a Digital Security ETF (LOCK), which aims to track companies which protect individuals and other businesses from online attacks. Around 50% of the fund is in firms providing software solutions with other holdings including those involved in manufacturing digital security parts and physical security firms that provide protection from physical criminal activity.
Bourbeau says: “Make no mistake, cyber security is a priority for any company with a presence on the web or any vendors that sells into the space. Reputational risk, financial liability and national security are all areas where business and government leaders cannot afford to take shortcuts.”
