Tap into the global boom in fighting cyber crime –and net 86% returns

WITH Covid-19 forcing millions of people to work from home, cyber security – defending computer systems, networks, programs, devices and data from malicious cyber-attacks – has become a priority for workers and businesses alike.

Even before coronavirus, there was already a massive growth in the number of people working online and the pandemic has speeded that up. In 2000 there were less than 250million internet users worldwide but that has now rocketed to 4.5billion – 59 per cent of the world’s population.

As more consumers and businesses use the internet to shop, stream, work and communicate, so do hackers who threaten to disrupt everything from how we buy things online to transport, healthcare, banking and even governments. Keeping data secure is crucial for the smooth operation of businesses and countries, but there is also a huge associated opportunity for investors. Companies that offer cyber security services are in growth mode.

Darius McDermott is managing director of fund scrutineer FundCalibre. He says the investment opportunities in cyber security are diverse and interesting. ‘With 100 ransomware attacks taking place every 20 minutes, it is no surprise that global cyber security spending is expected to reach over $1 trillion,’ he adds. ‘The ‘WannaCry 2.0’ ransomware attack that brought the UK’s NHS systems to a standstill in 2017 is just one example and there are many more.’

A recent report by investment house

Guinness Asset Management on innovation in a post-Covid world noted increased use of the cloud to store and transfer data was driving demand for more sophisticated cyber security software.

Matthew Page, co-manager of investment fund Guinness Global Innovator, says: ‘As consumers demand improved online experiences, and as firms see the benefit in transferring their operations to offsite data centres or delivering their products and services via the cloud, there continues to be an attractive opportunity for longterm growth.’

Despite cyber security being a massive growth area, Ryan Hughes, head of active portfolios at wealth manager AJ Bell, says that so far it hasn’t translated into great investment returns – which could mean there is untapped potential.

‘Cyber security is a rapidly growing area that is becoming ever more important for our everyday lives given how much of our time is now spent online,’ says Hughes. ‘As a result, companies working in this area are getting a lot of attention, but it hasn’t yet translated into significant investment returns, with cyber security underperforming more mainstream technology investments in the last couple of years.’

Investors wanting exposure to cyber security, he says, should consider exchange traded fund L&G Cyber Security. This looks to track the share performance of a portfolio of major cyber security firms and it has stakes in widely-used software providers such as Norton and CheckPoint.

The fund is not cheap, with an annual charge of 0.75 per cent, but it gives investors specialised exposure. Currently, the portfolio has 54 holdings, most of which are US based. The fund is on the radar of Teodor Dilov, analyst at wealth manager Interactive Investor. He says: ‘Though it is not on our top fund rated list due to its rather niche focus, and higher investment risk, it has delivered returns over the past three years of more than 86 per cent.’

Aanand Venkatramanan, head of ETF investment strategies at L&G, says business growth expectations for the cyber security sector are between around 12 and 15 per cent per year, implying an attractive opportunity for investors.

‘People’s and firms’ data needs to be kept safe and secure,’ he says. ‘The growth prospects of the cyber security market are compelling. Our fund is Europe’s first cyber security exchange traded fund, providing investors with a simple, liquid and cost-effective way to gain access to this high growth and rapidly evolving megatrend.’

AJ Bell’s Hughes says investors looking for more mainstream exposure to technology which will include some cyber security should consider investment trust Polar Capital Technology. He adds: ‘It’s more expensive than L&G Cyber Security EFT with an annual charge of 0.99 per cent plus a performance fee. But it has proven to be an expert manager in the technology area over many years.’

Over the past three years, it has delivered shareholders total returns of 119 per cent.

If you are looking to invest in cyber security, it is important not to double up on your exposure as it could be a part of other technology funds you hold. That is the view of Ben Yearsley of Plymouth-based adviser Shore Capital. Like Hughes, Yearsley likes L&G Cyber Security fund, but suggests other funds. They include Pictet Security, which has top 10 stakes in monitoring and security software firm Splunk and US multi-national cyber security company Palo Alto.

He also likes exchange traded fund Rize Cybersecurity and Data Privacy. It has an annual fee of 0.45 per cent and investments in cyber security firms Onespan and Cloudflare. One individual stock pick in this sector is Avast, a Czech cyber security company listed on the London Stock Exchange and a major player worldwide.

Keith Bowman, equity analyst at Interactive Investor, says: ‘Given the big weighting of tech and cyber security in the US stock market, a technology fund is probably the best way for private investors to get exposure to cybersecurity.

‘That said, Avast, a constituent of the FTSE100 Index, is a point of interest. Its AVG and Avast branded software help consumers stay safe online, with over 435million active global users. Its first-half results for this year saw it reporting a 12 per cent improvement in earnings.

‘It announced an interim dividend of 4.8 cents a share, a rise of 9.1 per cent, giving it a yield of about 2 per cent, which is not unattractive in this ultra-low interest rate era.’

Jeremy Gleeson is manager of Axa Framlington Global Technology. He says: ‘Nowadays, the perpetrators behind cyber-attacks can be crime syndicates, rival corporations or even government sponsored organisations.

‘It means the resources they have behind them are often meaningful. There is no “silver bullet” when it comes to protection against cyberattacks, which means companies need to obtain solutions from different suppliers to protect themselves from being vulnerable to attack. Hence, we take a portfolio approach, investing in several companies involved in the sector, each of whom might provide specialist products to ward off certain types of malicious cyber activity.’

Key holdings in the Axa fund include ZScaler (a specialist in cloud-based security), Palo Alto Networks (firewalls), ProofPoint (email), Akamai (a provider of software to protect cyber attacks on servers) and Okta (software allowing secure single sign-on to various applications such as mobiles).

Another way into this investment area is via insurers. Nick Martin, manager of Polar Capital Global Insurance fund, says: ‘Cyber insurers play a pivotal role in security. With the increase in people working from home, cyber insurance has become more important.

‘Companies we see as well placed in this growing market include Hiscox, Beazley and US listed Chubb.’