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Global Security Funds (GDS) objective is to give our shareholders exposure to what we consider to be the most interesting defense and security companies in the world. To give an insight into how we reason when building the portfolio and which rules we have to adhere to given the fund's legal format, we have summarized the most important aspects below.
Company selection - To find the companies that will make up the fund's holdings, we follow an analysis process that we call global intelligence. In this process, the competence and experience of the fund's investment and finance team is combined. The investment team consists of a group with a total of 50 years of experience from the defense and security industry. The group provides a unique insight into the trends that characterize the industry and can thus give their view on which companies are best positioned to benefit from these trends. The finance team contributes with the financial analysis and makes a qualified assessment of the companies' valuation and key figures.
Portfolio weights - The weight that each company should have in the portfolio is determined partly based on our overall assessment of the company and its share and partly by rules that surround the fund. As the fund is a UCITS fund, there are certain rules attached to this format. Among other things, it is stipulated that a single holding may not constitute more than 10 percent of the portfolio. In addition to the UCITS rules, we have stated in the fund's prospectus that at least 51 percent of the fund must consist of large company shares in the defense sector. This is to ensure that the fund's risk level does not become too high.
Ethical screening - The Global Security Fund believes in following the strictest ethical standards. Therefore, we have developed our own policy to ensure that we follow, and in some parts go beyond, UN conventions. The fund also follows similar guidelines and regulations as the Swedish Ministry of Defence. We ensure that the companies in which the fund invests comply with international law and have a trading history with the Swedish government or the European Union. The fund thus avoids investing in companies where a significant part of the turnover comes from controversial weapons, for example weapons of mass destruction, cluster bombs and mines.
What do the fund's holdings look like today?
The fund is made up of a core of large global defense companies. During the month of June, the largest positions were Lockheed Martin, Northrop Grumman, General Dynamics, Booz Allen Hamilton, Raytheon and Saab. We judge all of these companies to have good future prospects with growing sales trends. At the same time, they offer a relatively high dividend, on average they have a dividend yield of 1.78 percent, while the corresponding figure for the portfolio as a whole is 1.55 percent.
Data as of 2019-06-20, source Morningstar
In addition to these large defense giants, which make up around half of the portfolio, the fund invests in a selection of stocks in defence, homeland security and niche IT security companies. The defense companies have a similar profile to those in the core portfolio, homeland security consists of companies that have large government contracts, including in IT infrastructure, while the niche IT companies are those that develop products and services in cyber security. Within homeland security, the fund has exposure to, among other things Mantech (currently 4.5 percent of the portfolio). As for the IT companies, we focus on those that have government customers or that are indirectly exposed to government purchases. It is a way to increase the predictability of these companies' earnings as they operate in an industry that is still relatively immature and difficult to assess.