February: positive return despite weaker price development for the cyber security sector

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The stock market showed two sides in February. The first half showed strong stock market development as however, it turned into a relatively sharp decline in the second half. Despite this, the Global Security Fund's return was positive and rose by 0.42 per cent (S-share class) and 0.41 per cent (R-share class) during the month, which was worse than the benchmark index MSCI World TR which rose by 3.46 per cent but significantly better than the cyber security indices, which fell by 5.26 percent (Prime Cyber Defense Index) and 4.83 percent (ISE Cyber Security Index).

It was again an active month for the fund's holdings and just under half of the companies released their quarterly reports with only a few left to report in March. The reports were in line with expectations or better with a few exceptions. The cybersecurity company Fortinet reported stronger than expected in terms of both sales and profit. Although February was a bad month for the cyber security sector in general, Fortinet was up 17.6 percent and was the fund's best performing holding with a contribution of 1.07 percent. Fortinet is one of two holdings whose main focus is networking. The company has invested more in organic growth rather than acquiring smaller companies. With sales growth for the fourth quarter of 21 percent compared to the previous year, the conclusion is that the company has succeeded. Demand and the future growth forecast may, however, be a little weaker when customers are attracted to cloud solutions in front of their own data centers, but the company is well positioned with organic products and a strong operating margin and balance sheet.

It was a strong month for the more traditional security and space companies, which rose by 8.28 percent (iShares Aerospace & Defense) and 7.74 percent (Procure Space ETF), respectively. Of the fund's holdings, the American marine manufacturer Huntington Ingalls Industries was one of the month's best performing companies and was up 12.91 percent and contributed 0.68 percent. The company has been sensitive to the Covid-19 pandemic and the latest report points to a downward trend that now indicates a possible turnaround after strong sales growth in the fourth quarter and an order backlog of $ 46 billion equivalent to over 4x of annual sales. The industry has a long production cycle and the market expects that the order backlog and new expected orders will be translated into a long trend of 3 percent annual growth in the shipbuilding industry.

The aircraft manufacturers General Dynamics and Boeing both had strong price developments during the month of February with an expectation that air traffic will increase, which will benefit these companies. The companies were up 12.44 percent and 10.16 percent, respectively, which benefited the fund by 0.85 percent and 0.68 percent.

The cyber security company Leidos was the worst performing holding during the month and fell 15.88 percent. The price development had a negative effect on the fund by 1.9 percent. The company reported slightly worse sales growth than expected but better than earnings per share. The market's interpretation of the result feels excessive as the company has had sales growth of 10.1 percent compared to the year before and a stable operating margin. Weaker organic growth than expected drives the company to acquisitions and Leidos has entered into an agreement with Gibbs & Cox, a marine architecture and engineering company. 

ManTech was another cyber security and IT company that declined sharply in February, with a decline of 12.09 percent. The company beat sales expectations but missed earnings per share and the price development affected the fund negatively by 1.05 percent. The outlook for the coming years is subdued compared with recent years, where sales growth is expected to increase by an average of 6 percent. Other cybersecurity companies that declined during the month were SAIC, Booz Allen and CACI, which were down 9.5 percent, 8.65 percent and 7.45 percent, respectively, which had a negative effect on the fund with 0.56 percent, 0.85 percent and 0.53 percent.

Although many companies have priced in a subdued 2021, a strong order backlog will help protect the downside. The trend towards increased investments in security solutions continues, which will benefit companies in the security sector.

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