GLOBAL SECURITY FUND IS A SHARE FUND INVESTING IN COMPANIES IN SECURITY GLOBAL. WITH SAFETY is meant in addition to TRADITIONAL SECURITY, ALSO CYBER SECURITY.
You can download the report here.
Note: this annual report was prepared in late February and before the coronavirus outbreak. Although the outlook for the stock market has changed dramatically in a short period of time, we believe it is still relevant to publish this report as it highlights the value of the security sector - a sector that largely has companies that fit into a “business-to-government” model . Under current circumstances, we believe that these companies have good prospects and less uncertainty as we do not believe the investment trend in security is changing. Rather, we believe there may be an increased focus on security.
Historical analysis of the security sector - that's why we started the fund
What led us to start the Global Security Fund was to a large extent the good qualities that the sector has shown historically. And as we had reason to believe would be valid in the future. An analysis of the historical return on equities in the security sector over the past 30 years (1988–2018) revealed that the sector outperformed both the Swedish, US and global equities and equities in the technology sector during the period. In addition, at a risk that was three percentage points lower than that of Swedish equities.
What also emerged in the analysis was that the security sector, compared with Swedish equities, exhibited the same frequency of loss months, but that these loss months were not as large. In addition, the security sector performed better during periods of geopolitical uncertainty, which may be related to the fact that investors' focus on perceived safe security companies tends to increase during these times.
Swedish equities and the technology sector, on the other hand, tended to fare better late in the business cycle, as risk appetite is normally higher. The conclusion we could draw from the analysis was that the security sector offers an attractive historical return profile, but at the same time it can reduce the risk in a portfolio of Swedish and global equities. The strongest portfolio combination in the historical analysis, that is, the combination that yielded the most return per unit risk, turned out to be Swedish equities and a portfolio of security companies.
Actual development during the first year of the fund
During the Fund's first management year (February 21, 2019 - February 21, 2020), a return of 19.97 percent was achieved after fees, which is significantly higher than the historical return for the sector of 15.8 percent.
During the same period, Swedish equities returned 24.2 percent, which is higher than the historical average, while the technology sector returned a full 34.8 percent - also significantly higher than the historical average. It has been a period of high risk appetite, which indicates that we are either late in the business cycle or that the market's behavior has changed and to a greater extent prefer growth over value companies. History speaks for the past.
In retrospect, the technology sector has outperformed the security sector (value companies) by ten percent or more over a twelve-month period on several occasions. But in all cases, this has resulted in this return differential - ie the best time to re-focus on value companies has historically been periods when the technology sector has developed relatively strongly. The most extreme example is the technology bubble that led to a crash for growth companies and a revaluation of value companies, the security sector in particular.
Regarding the Fund's ability to reduce the risk during periods of negative return for Swedish equities, this connection has also been valid during the Fund's first management year. The four loss months recorded for OMX's total return during the period totaled -19.2 percent. The corresponding figure for the Global Security Fund was -5.1 percent.
The fund's holdings have noted a large spread in returns. The winners include cyber security company Carbon Black, which was acquired during the period by VMware and IT supplier Leidos, but also more traditional security companies such as Booz Allen Hamilton and Lockheed Martin. In the negative balance were the system suppliers Dassault and Palo Alto Networks and Saab.
The security sector - a future investment
In 2015, the UN defined 17 global goals for sustainable development until 2030. Sustainable development is an important goal and many are unaware that it is precisely security that is defined as Objective 16 - peaceful and inclusive societies. If we lack a well-functioning society, we cannot achieve any of the other goals - it is a basic prerequisite
In our opinion, there are four main arguments that suggest that the security sector will be a good investment in the long term.
1. Megatrends
There are five mega trends indicating where we will be in 30 years; economic power shifts, climate change, demographics, urbanization and technology. Although there are many funds that focus on these trends in the form of pharmaceutical funds, technology funds, etc., there is no one to talk about the geopolitical risks these trends entail. We believe that these risks will lead to an increased demand for security.
2. High growth
Most of the companies we invest in are classified as value companies. These are companies that are characterized by low P / E ratios, high direct returns and strong balance sheets. They give the portfolio a stable base. But in the security sector there are also companies that can be classified as pure growth companies, especially in cybersecurity. For example, during the first year, cyber security company Carbon Black performed best with a return of just under 100 percent.
Investment bank Morgan Stanley forecasts annual cyber security growth of over 12 percent by 2022. We believe double-digit growth until 2025. In cyber, there are also areas that have significantly higher growth.
The space industry is also an area of high growth. Both Goldman Sachs and Morgan Stanley believe that the space industry will become a trillion industry, measured in dollars, by 2040. That would amount to an annual growth of 6 percent.
3. Increased investments by NATO and the Swedish state
Both NATO and the OECD countries are placing increasing budgets on security. This means that the industry will receive increased demand from government customers - a trend that we believe is long-term sustainable and that benefits companies in the sector. Having state customers is significantly safer than so-called 'business-to-consumer' models.
4: Price development under geopolitical risk
Our historical analysis indicates that the security sector is performing significantly better than other sectors under geopolitical concern. According to award-winning economic research, risks should be spread as it helps investors build a more resilient portfolio. Including security shares in a portfolio of Swedish and global equities has proven to generate a better risk-adjusted return over time. We are convinced that this relationship will continue to apply in the future.
