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3.73 % return for the month of July took the fund to nearly 24 % gain for the year. This after a convincing reporting period for the traditional defense companies both in Europe and in the USA.
The fund has 56 % allocation to European defense industry, based on the argument that European defense companies primarily benefit from greatly increased defense budgets in the region. Increased production, capacity and new products also make European defense companies more competitive globally. American defense companies are still the most innovative with the best product range, but they already account for about 60 % of global production, measured in USD. In the short term, there also does not seem to be room in the US state budget or consensus for large percentage increases in defense appropriations. However, the fund strives for a diversified portfolio that is spread across regions, sectors and sub-sectors. The benefits of that are clearly visible when we have seen increased volatility in European companies and that, for example, the intelligence sub-sector within American defense has performed strongly.
In line with high growth expectations from European defense companies, we see that some of the portfolio's largest companies reported sales growth of over 20 % and where Rheinmetall with an impressive 49 %, also has good EBIT growth and a continued strong margin.
| Company | Sales growth | EBIT growth | EBIT margin | |
| Rheinmetall | 49 % | 111 % | 12 % | |
| The Kongsberg group | 21 % | 39 % | 13 % | |
| Saab | 22 % | 22 % | 9 % | |
| Leonardo | 16% | 17 % | 6 % |
BAE Systems also reported strong growth, particularly in its marine and land-based systems and has a broad global exposure including North America, Asia & Pacific.
Leonardo had slightly more challenges, which did have an 18.8 % increase in new orders and 16 % in sales growth, but remained at the same EBIT margin due to increased costs. Increased costs are linked to large projects that have been delayed along with delays in supply chains. These are general risks for the sector, but even if they materialize, the demand remains for a long time and only causes the order backlog to grow.
On a global basis, the world's largest defense company Lockheed Martin lifted the sector as a whole with its strong report for Q2. They showed a sales increase of 9% and significant growth in operating profit. This underlines the strong demand globally in defense and security with strong order books and which is supported by the long-term geopolitical outlook.
Cyber security
The cyber security sector Q2 reports were characterized by continued strong growth but also improved profitability. Many companies have not yet reported and will do so during August. The sector is characterized by product development and innovations largely driven by the AI trend and the great need for AI-driven security. Crowdstrike and Microsoft are making significant investments in AI technology. The other trends we see are cloud-based solutions where Zscaler and Cloudflare are prominent, but also integrated security services and platforms that provide an overall solution. Palo Alto, CrowdStrike and Fortinet are still market leaders. Microsoft and IBM benefit from offering their existing customers improved security and are positioned to make large investments in AI to meet increasing demand.
The CrowdStrike event on July 19, 2024
On July 19, 2024, CrowdStrike suffered a massive IT incident that affected millions of Windows systems globally. The incident was caused by a faulty configuration update for their Falcon sensor, which triggered System Crashes (BSOD) on the affected devices. The incident led to significant operational disruptions for businesses and critical infrastructures. CrowdStrike has published a preliminary report and is conducting an in-depth analysis to ensure that similar events are not repeated in the future.
CrowdStrike has been a key position for a long time for the fund and has given very good returns, 125 % up last year. As a result of the event, the fund reduced the position from approx. 3.4 % on an ongoing basis to approx. 0.6 %, which limited the losses. CrowdStrike is likely to have a strong market position going forward, but the incident could damage customer confidence and pose risks for potential lawsuits and claims for damages.
Best & worst performing positions
| Best positions for the month | Worst positions for the month | |||
| Kongsberg Group | 25,98% | Microsoft | -6,40% | |
| RTX (Raytheon) | 17,03% | Cloudflare | -6,43% | |
| Lockheed Martin | 16,02% | Zscaler | -6,68% | |
| Huntington Ingalls | 13,66% | Booz Allen Hamilton | -6,88% | |
| IBM | 11,10% | CrowdStrike | -39,47%* |
* The position in Crowdstrike was reduced by approx. 75 % which made the decrease in the position on average 15%
The best performing position was the Kongsberg group (+26%) which reported strongly and is also the fund's top position for the year; + 136 %. On a positive note, American defense companies returned strongly, somewhat as a result of the mentioned quarterly report from Lockheed Martin. The worst performing position for the month was Crowdstrike but was limited by the position being reduced. The cybersecurity sector as a whole was volatile during the month and returned negatively.
Macro
August began with broad declines after the Bank of Japan raised interest rates, which in turn affected one of the world's largest carry trades in USD/JPY. When many and large investors close such positions, it has a big impact. Japan's Nikkei was down 11 % on Monday, August 5, compounding stock market concerns after Friday's weak US jobs report. The economic uncertainty and geopolitical tensions, which could push inflation up again, combined with the uncertainty surrounding the US presidential election, mean that the risks in the market remain high. The world's eyes are now on Iran, which is expected to respond to Israel's elimination of the Hamas leader - an event that also occurred on Iranian soil.
Based on our global outlook and economic situation, Finserve Global Security Fund I should be a suitable building block in a portfolio.