Yves Kramer, Pictet Asset Management
“Regulation is the best [earnings driver] for me. When it’s mandatory, you have no choice,” Kramer, who co-manages the Pictet Security Fund, told FSA on a recent visit to Hong Kong.
Examples of government initiatives that are expected to benefit IT security companies are the General Data Protection Regulation (GDPR) and the Revised Payment Service Directive (PSD2) in Europe.
The GDPR, which seeks to strengthen data protection of European Union residents, applies to all companies both inside and outside of the EU that collect data from EU residents. The PSD2 initiative allows bank customers to use third-party providers to manage their finances. However, the initiative will require banks to enhance IT security because they will be disclosing sensitive customer information to the third-party providers.
The GDPR will be rolled out in May and the PSD2 this month.
Because of these regulations, the chief security officers of banks and companies have been reviewing their security solutions to determine the vulnerability of data and networks, Kramer said. Because the initiatives impact all EU banks, “they will be massive drivers for companies that provide cyber-security solutions,” he added.
IT security companies account for 42% of the Pictet Security Fund. Examples are providers of cyber-security solutions, network monitoring, identification and biometric solutions.
The fund manager also invests in physical security companies (37% of the fund), such as those that provide police and forensic tools, video surveillance cameras and makers of security outwear such as helmets. A third component is security services companies (21% of the fund), which include those that provide guard services and hazardous waste management.
Security demand
Although nearly 70% of the fund invests in US equities, Kramer noted that the demand for security solutions is split globally.
“What drives the performance of a security stock is the growing demand — 50% of demand comes from the US and the other half from the rest of the world.”
Commenting on expensive valuations of US equities, Kramer said that he has little concern. “So long as earnings are increasing, I’m fine with valuations.”
More generally, he expects that earnings of US companies will continue to grow this year, especially with the tax reductions and cash repatriations that were implemented by the Trump administration.
Investment process
Kramer is responsible for covering IT security companies, while co-manager Frédéric Dupraz looks at physical security companies. Both share the task of assessing security services.
The investment universe consists of 320 companies globally. The managers first filter is finding companies with at least 20% of sales derived from a security theme. Then they exclude those that are related to weaponry or the military.
After these filters are applied, the managers are left with around 200 stocks, which are further analysed using quantitative and qualitative screens. Quantitative screens include trading liquidity and share price volatility, while qualitative screens include analysing the business franchise, such as market exposure, pricing power and sales growth, as well as management.
The fund managers also use valuation metrics, such as the forward-looking discounted cash flow.
The managers then choose 65-75 names for the portfolio.
Kramer pointed out that the security fund has relevant professionals on its advisory board, such as Doron Bergerbest-Eilon, president and CEO at security consultancy Asero Worldwide, Jules Trocchi, CEO at Security Direction International, another security consultant and James Arroyo, a data expert and director at the Ditchley Foundation, a policy think tank.
The fund managers and the board meet at least three times per year.
“They may have seen something that may be interesting or we would consult with them if we need some clarification with some of the opportunities that we see,” Kramer said.
The three-year performance of the Pictet Security Fund versus its benchmark index.
