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Pictet’s security investment theme aims to meet basic needs, yield long-term returns

Lim Hui Jie
Lim Hui Jie8/11/2022 08:41 PM GMT+08  • 8 min read
Pictet’s security investment theme aims to meet basic needs, yield long-term returns
Is there an investment theme that can be always around? Security could be one, as humans always want to be more secure, says Pictet's Anjali Bastianpillai. Photo: Albert Chua/The Edge Singapore
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One way investors can try and get returns is to put their money in stocks that fit into growth themes that can last for the long term. Such themes usually try and capture broad changes in technology, sustainability or healthcare.

From the perspective of Anjali Bastianpillai, senior product specialist at Pictet Asset Management, “security” is a constant theme with longevity as long as human beings are around.

The Maslow Hierarchy of Needs, a concept introduced by American psychologist Abraham Maslow in 1943, describes how every human being wants to satisfy their most fundamental needs to survive: food, water, shelter and security, before they become motivated to achieve higher-level needs that culminate at the top and fifth level of “self-actualisation”, which refers to how individuals have become self-aware, concerned with personal growth and potential, and less concerned with the opinions of others.

Security, the way Bastianpillai sees it, is the foundation of what human beings want: protection from violence and theft; emotional stability and well-being; health security; and financial security. Investments that can help meet such security needs are also what Pictet believes are the ones worth making.
Towards self-actualisation

There are multiple aspects and angles to investing in the theme of security. Taken at the most conventional level, security would refer to defence and protection — functions fulfilled by national militaries and police forces, and thereby they are public services that are not exactly investable.

Sure, it costs hundreds of millions of dollars to buy a new US fighter plane — just one indication of how lucrative the weapons industry can be. However, Pictet, like many ESG (environmental, social and governance)-conscious in-vestors, has excluded investments in weapon-makers. Yet, even if the sales figures of weapons are excluded, the security market is still worth north of US$500 billion ($690 billion), estimates the Bank of America. Furthermore, this is a market that is growing at a pace two to three times faster than the overall growth of the world economy, says Pictet, citing estimates by the Copenhagen Institute for Futures Studies.

This market’s margin, as a whole, has been trending up as well — an indication of its pricing power. According to Pictet’s estimates, back in December 2011, the ebit margins of this industry were below 16%. By December 2021, they have increased to more than 18%.

Bastianpillai points out that investing in security goes beyond simply physical security. “Investing in security is really helping to maintain the integrity, health and safety of people, governments, enterprises and countries,” she reasons.

For her, the concept of “security” extends to the broader realms of cybersecurity, financial security and security from diseases. This means Pictet may invest in not only a cybersecurity firm, but as part of the security theme, invest in a semiconductor firm too, given how the products made can go towards the protection of drivers in electric vehicles; or in a life sciences company finding ways to prevent the next pandemic.

Three drivers

Bastianpillai has identified three long-term drivers of the security theme, namely innovation, urbanisation and regulation.

The first driver, innovation, especially applies to the protection of digital infrastructure, which forms the base on which people and businesses connect, transact and interact. It involves protection ranging from the back-end servers all the way to individuals’ computing and mobile devices. “The need for innovation, especially in digital infrastructure, is constantly increasing,” she says.

The second driver, urbanisation, goes hand in hand with the security of critical infrastructure. As urbanisation grows, especially in Asia, there is a need to protect infrastructure like mass transit and critical buildings like hospitals and data centres, where the security of the building is an ever-growing concern.
The third driver is regulation. As the world advances, so will regulatory requirements for security, creating demand for security services. “Once you put a regulation in place, it’s only increasing, and it’s not going away,” Bastianpillai says. She points to the US’ Cybersecurity Act and China’s 2021 crackdown on tech companies to improve data security, which, in her view, augur well for companies in this sector that provide these services to tech companies.

These three drivers aside, there are other broader trends contributing to this theme of security. For example, many industries across various countries face a shortage of labour, partly because of the disruptions caused by the pandemic.

As a result, companies and organisations are being forced to adopt more automation in their business processes in order to make up for the shortfall. Now, the growing adoption of automation — be it hardware such as robots and newer equipment, or software needed to connect and control the various devices and machineries — has created a huge new need for digital security capabilities, says Bastianpillai.

Attractive investment opportunity?

The snapshot of the stocks held by Pictet’s security funds attests to these views. As indicated on Pictet Asset Management’s website, it has several security funds, denominated in different currencies such as Swiss francs, euros and US dollars, but with its holdings in similar proportions.

According to the fund factsheet of Pictet’s US dollar-denominated Security fund, as at June 30, it mainly invested in US-based companies, with 82% of the exposure to companies quoted in this market, followed by the UK, Sweden and Japan.

The fund holds around 34% of its investments in security services, followed by physical security at 32% and IT security at 27%. The remaining 6.5% is held as cash.

Its single largest holding is Thermo Fisher Scientific, a supplier of scientific instrumentation, reagents and consumables. This stock accounts for more than 5.13% of the fund’s net asset value.

Palo Alto Neworks, at some 4.6%, is a key cybersecurity player, and the second largest holding. Similarly, Norton Lifelock, the fourth largest holding, is a cybersecurity firm, with a share of 3.47%.

The third largest holding, at 3.66%, is Steris Corp, a medical equipment company specialising in sterilisation and surgical products for the US healthcare system. Other names in the top 10 are Digital Realty Trust, Extra Space Storage, Avantor, Johnson Controls International, Splunk and Kla Corp.

For the quarter to June 30, the fund underperformed the MSCI ACWI Index, MSCI’s flagship global equity index, by a quarter. In the monthly commentary dated June 30, the fund managers maintain that given the “persistent uncertainty” surrounding the current state of the economy, “securing the critical infrastructures of countries, protecting citizens’ integrity and ensuring the ability of businesses to meet their objectives are top priorities”.

They go on to say that the ongoing war between Russia and Ukraine has helped redefine the “key structural themes” to include cybersecurity, reshoring and security of supply chains.

Cybersecurity, in particular, is of growing importance. “The Russian invasion was accompanied by coordinated cyber-attacks. Going forward, malware, phishing and attacks on infrastructure are likely to happen at a higher rate,” say the fund managers.

Despite the near-term underperformance, they “remain confident about the fund’s ability to outpace the global equity market on earnings and cash-flow growth over the next few years. We are therefore confident that the fund is an attractive investment opportunity to capture a long-term trend with strong fundamentals and good diversification properties.”

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