Companies cannot economise on cyber security: the dangers have become far too great today. Yet the entire sector fell on the stock market as much as the overall tech market. Erik Swords, manager of the Allianz Cyber Security fund since October 2021, thinks this means that it is a good time to take a closer look at the sector.
The fund manager is quick to point out that cybersecurity is not really tangible, yet is increasingly coming to the fore as we use more connected devices and mobiles. “The megatrend of digitalisation is everywhere in our lives. And as we move towards autonomous vehicles, this will only increase. In other words, as an administrator, I can sleep well because I know this topic will be with us for some time to come. That was not always the case as cyber security has long been a stagnant market with little innovation. The protection of networks on an ever-increasing scale and in an ever-increasing number of different layers has heralded the tipping point. And after a roundup of the IT industry, the cyber security market is expected to grow 12.6 per cent annually until 2030.”
Swords said he is not worried that the current economic slowdown will have an effect on the sector. “The number of connected devices continues to grow regardless of economic growth, while more and more data comes online: more touch points therefore more danger. It was also notable that Russia started its war in Ukraine with a cyber attack.” He underlines that cyber security has become vital for companies. “Over the past five years, we observe that business decisions to invest in cyber security are no longer taken by the IT manager but by the top of the company. The organisation’s brand name must now be protected at all times and a hack is out of the question.”
Investment universe
The investment universe of the Allianz Cyber Security fund consists of some 215 listed companies worldwide and the sector is hugely fragmented, according to Swords. “No single company accounts for more than 10 per cent of revenue in the sector. Competition is enormous, requiring companies to be very innovative and constantly reinvent themselves. One consequence is that a wave of consolidation occurs from time to time, as is the case in the identity management segment today. A battle has erupted within this sub-segment because that’s when you get the gateways under control.» Swords also follows a whole slew of private companies, some 50 companies, closely. “We maintain a good relationship so we can keep our finger on the pulse. Important because these companies are generally more innovative and active in new trends.”
The manager finds it frustrating that the sector has declined so much in recent months. Much, he said, has to do with the wrong assumption. “The market assumed early this year that cyber security would be a defensive sector and thus better absorb the market decline because historically this segment has always been defensive. But in the past, the sector was not a growth sector unlike today. Back then, there was no widespread adoption nor was the sector critical.” He said he agrees that after the pandemic, too many stocks in the sector were a bit too far ahead of the curve.
“Over the past three years, market expectations invariably went higher which meant that the average valuation had risen considerably.” Swords does add that the steep price declines have been driven by market conditions as fundamentally nothing has changed. “Shares from the cybersecurity sphere have fallen as much as the tech market making the average valuation attractive. Hence, the sector is trading below its historical average and is cheaper than average relative to the entire tech sector.”
Segments
In the overall tech sector, Swords said he sees a slowdown. «We expect IT spending to increase by 3-4 per cent in 2022 and remain flat in 2023. Some companies will undoubtedly be cautious and postpone some IT spending. Cyber security, for its part, will grow 12 to 13 per cent this year while that growth could slow slightly but relatively speaking, the importance of cyber security continues to increase. However, companies can hardly skimp on this spending. After all, the challenges and dangers do not disappear in a less favourable economic environment. On the contrary, they will become more prominent.”
He said he sees the most opportunities in cloud security. And IT specialists expect the strongest investment growth in this segment. “Cloud accounted for around 15 per cent of total IT spending in 2020. And that should increase to around 50 per cent over the next 10 years. And for every dollar spent in cloud, 3 to 4 per cent goes to cyber security today. We expect that percentage to increase given the importance of cybersecurity, so the tailwind could be huge.”
Security automation or better automation of security tasks given the increasing pressure from intruders comes second among IT specialists in the study, and data and identity security is third. Data intrusions in SMEs are becoming increasingly common and this can cause enormous damage. And what a lot of innovation revolves around today, according to Swords, is what is known as Zero Trust. “It comes down to not trusting any action that happens on your network: don’t trust but verify and validate is the principle behind it, and a lot of data is analysed by artificial intelligence.” Finally, the manager noted that with the companies ZsCaler and KnowB4, he is playing on these growth trends.
Allianz Global Investor Fund - Allianz Cyber Security AT EUR
- ISIN code: LU2286300988
- Total expense ratio: 2.1 per cent
- Return YTD: -31.1 per cent
- Funds under management: EUR 224.62 million