A diversified growth opportunity from technology innovations and adaptations.
As city populations grow, we will spend our lives in an increasingly interconnected and urbanised environment. ‘To keep us safe, spending on infrastructure and personal security is rising,’ says Yves Kramer, senior investment manager of Pictet Security strategy.
Kramer and co-manager Frédéric Dupraz believe demand for closed-circuit TV and surveillance cameras is rising as owners, local councils and government agencies need to keep buildings, their contents and people safe.
Such systems cannot eradicate crime entirely, however. But when crime does take place, the emergency services and police forces call on increasingly sophisticated equipment to help track down criminals. The cost of forensic testing equipment and on-site kits has fallen, but innovative product and service providers can still increase their market share and margins. Artificial intelligence and facial recognition software is being deployed in the fight against crime.
The advent of internet-connected home security systems is also good for electronics manufacturers and their customers. Kramer and Dupraz think innovators in home security systems could see their earnings rise by 10% or more in the next five years.
The team sees even greater potential as the internet-of-things becomes a reality. Already, governments are planning and building the smart cities of the future.
‘Over the next few years, investment in smart cities could hit US$3 trillion, with a significant 14% share of the budget going to security-related spending,’ says Kramer.
People everywhere are already seeing a whole host of security features added to transport systems. On the roads, the truly self-driving car is being tested to eliminate the 94% of accidents that occur due to human error. Tighter regulation already means that many safety features, from lane departure alarms to automatic breaking at low speeds, are making their way from luxury vehicles into the middle and lower market. Stocks such as Denso and Autoliv are already experiencing a jump in demand for the safety components they produce.
‘Auto component innovators are snapping up tech firms to ensure they have the cloud computing power and artificial intelligence capabilities to keep connected car users safe,’ says Kramer.
Pictet Security is built on the need to safeguard the health, privacy and well being of everybody–at home, at work, when travelling and in public. It is far from an IT-only theme. Physical security is the second largest sub-theme in the Pictet Security strategy. At 34.2% of the portfolio, it sits right behind Security Services (42%)–explored in our first article. Almost 60% of the strategy’s exposure is outside the MSCI Information Technology sector, with a strong showing in Industrials and Consumer Discretionary.
The consensus forecast is one of synchronised global growth this year. Pictet’s proprietary research shows that the combined universe of physical, IT and security services should grow at a compound annual rate of 6.4%, significantly faster than the 3.6% annualised rate for the global economy from 2008 to early 2019.
Security related companies have also restructured and enhanced their cost discipline procedures. With revenues growing and their products in demand, many have expanded their margins substantially. From a post-crisis low of less than 10%, the average EBIT margin across the Pictet Security universe has climbed above 15%.
Structural growth and increasing profits are good for investors too. The Pictet Security strategy launched in 2006 so now has a track record over 10 years. The strategy has doubled in size to US$3.6 billion in the last year.
‘Pictet Security has proved a robust worldwide strategy through the cycle,’ says Frédéric Dupraz. ‘Covering 11 industries and sectors, it offers a diverse investment theme that goes far beyond IT.’
Pictet Security is benchmark-agnostic, investing in innovative and fast-growing companies that protect individuals, companies and governments worldwide. It is currently ranked 1st out of 30 for total returns in the Citywire Selector Global Themes sector over the last ten years. It also ranks third for standard deviation and maximum drawdown. Dupraz believes its strong scores are testament to the ability of the strategy to uncover strong growth stories, whilst drawing on the defensive strengths of well-run companies with strong cashflows.
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This article was provided by Pictet Asset Management and does not necessarily reflect the views of Citywire