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The stock market showed two sides during February. The first half showed strong stock market development which however, there was a relatively sharp decline in the second half. Despite this, the Global Security Fund's return was positive and rose by 0.42 percent (S share class) and 0.41 percent (R share class) during the month, which was worse than the comparison index MSCI World TR which rose by 3.46 percent but significantly better than the cyber security indices which retreated by 5.26 percent (Prime Cyber Defense Index) and 4.83 percent (ISE Cyber Security Index) respectively.
It was again an active month for the fund's holdings and just under half of the companies released their quarterly reports with only a few remaining to report in March. The reports were in line with expectations or better with a few exceptions. The cyber security company Fortinet reported stronger than expected in terms of both sales and profit. Although February was a bad month for the cyber security sector in general, Fortinet was up 17.6 percent and was the fund's best performing holding with a contribution of 1.07 percent. Fortinet is one of two holdings whose main focus is networking. The company has invested more in organic growth rather than acquiring smaller companies. With sales growth for the fourth quarter of 21 percent compared to the previous year, the conclusion is that the company has succeeded. However, demand and the future growth forecast may become a little weaker when customers are attracted to cloud solutions rather than their own data centers, but the company is well positioned with organic products and a strong operating margin and balance sheet.
It was a strong month for the more traditional security and space companies, which rose by 8.28 percent (iShares Aerospace & Defense) and 7.74 percent (Procure Space ETF) respectively. Of the fund's holdings, US marine manufacturer Huntington Ingalls Industries was one of the month's top performers, up 12.91 percent and contributing 0.68 percent. The company has been sensitive to the Covid-19 pandemic and the latest report points to a downward trend that now indicates a possible reversal after strong sales growth in the fourth quarter and a backlog of $46 billion, which is over 4x annual sales. The industry has a long production cycle and the market expects the order backlog and new expected orders to translate into a long trend of 3 percent annual growth in the shipbuilding industry.
Aircraft manufacturers General Dynamics and Boeing both had strong price developments during the month of February with an expectation that air traffic will increase, which will benefit these companies. The companies were up 12.44 percent and 10.16 percent respectively, which benefited the fund by 0.85 percent and 0.68 percent.
Cyber security company Leidos was the worst performing holding during the month, retreating 15.88 percent. The price trend affected the fund negatively by 1.9 percent. The company reported slightly worse sales growth than expected but better than earnings per share. The market's interpretation of the result feels exaggerated as the company has had sales growth of 10.1 percent compared to the previous year and a stable operating margin. Weaker organic growth than expected is driving the company to acquisitions, and Leidos has entered into an agreement with Gibbs & Cox, a marine architecture and engineering company.
ManTech was another cyber security and IT company that fell sharply during the month of February, down 12.09 percent. The company beat sales expectations but missed on earnings per share and the price trend negatively affected the fund by 1.05 percent. The outlook for the coming year is subdued compared to recent years where sales growth is expected to increase by an average of 6 percent. Other cyber security companies that retreated during the month were SAIC, Booz Allen and CACI which were down 9.5 percent, 8.65 percent, and 7.45 percent respectively which negatively affected the fund by 0.56 percent, 0.85 percent and 0.53 percent.
Although many companies have priced in a subdued 2021, a strong backlog will help protect the downside. The trend towards increased investment in security solutions continues, which will benefit companies in the security sector.
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