Attack of the cybermen highlights investor opportunity

Cyber-crime is rarely out of the headlines these days. The list of the household names which have had data stolen by hackers breaking into their supposedly secure IT systems is growing.

Electronics and entertainment giant Sony, dating website Ashley Madison, white goods and mobile phone retailer Dixons Carphone and telecom TalkTalk are among the recent victims.

‘Cyber-crime is the crime of our era, of our generation,’ TalkTalk boss Dido Harding said following the theft of the names, addresses and bank details of more than 150,000 of her customers in October. The company’s shareholders also felt the impact. Shares lost 22.1% of their value in the days following the attack on concerns at how the event would affect the £2.2 billion market cap’s profits.

TalkTalk following 21 October’s data breach

Source: Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

Harding’s appraisal of the issue reflects the digital age we are living in where data is everywhere and connectivity through the cloud is growing. It’s a rare company that doesn’t use some form of IT system in its day-to-day operations.

Cyber-crime costs the global economy $455 billion a year, a US think-tank claims. It is safe to assume that with increasing reports of online data breaches this figure has probably increased and if not it soon will.

One of the latest updates from this market is Chancellor George Osborne highlighting concerns that terrorist group Islamic State could attack computers that manage air-traffic control and power station systems. He has pledged to double funding to £1.9 billion by 2020 to tighten the country’s defences.

Whether its terrorists or 15-year-olds in their bedrooms, the problem is expected to increase. Companies’ budgets to protect their systems from people using computers to steal their information with committing fraud in mind or disrupt their operations are growing. With cyber security featuring in risk meetings in offices across the land there are several ways investors could get exposure to this growing trend.

Call for security

Cyber-crime is not just an issue for companies. The man in the street is also a target thanks to the rise of smart phone and tablet computer ownership. The cyber security market is estimated to be worth $170 billion by 2020, according to researcher Markets & Markets. This makes companies offering cyber security software, hardware and services the first place to look for an opportunity to gain exposure to increasing spend on people and companies beefing up their protection.

Why Malware attacks happen

Source: Sophos

The US is a large market and there are many such players based across the Atlantic, but there are a few home grown companies for investors to research. Names such as verification and security testing software developer NCC Group, anti-virus provider Sophos and Corero Network Security should be on an investors’ research lists as should identity software-maker Intercede, identity management specialist GB Group and software testing firm SQS.

UK cyber-crime fighters

To tap investor interest with the increased spending on the issue Europe’s first cyber security-specific ETF – ETFS ISE Cyber Security GO UCITS – was launched in September. It has some $12.3 million under management and provides UK investors with access to US companies. The ETF is eligible to sit in an individual savings account (ISA) and self-invested personal pension (SIPP).

ETFS ISE Cyber Security owns shares in 33 companies, which include data and security specialist Barracuda Networks, management consultancy Booz Allen Hamilton, technology giant Cisco Systems and IT security company Check Point Software Technologies among others.

Europe’s first cyber security ETF

Source: Datastream

NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

Got it covered 

There are other ways of gaining exposure to this market. While the reputational damage caused by such attacks is difficult for a company to repair, the financial costs can be covered by an insurance policy. 

Instances of data breaches are expected to rise and so too will the premiums insurers charge to cover such occurrences.

Global cyber insurance premiums are forecast to reach $20 billion in 2025 up from $2 billion a year today, according to German insurer Allianz.

Today it is a small, niche market with no listed company specialising solely in cyber insurance, but there are general insurers who are growing their expertise in this area and the size of the premiums they collect from the market is increasing. Insurers providing such cover include Novae, Hiscox and Beazley. Novae started writing cyber insurance at the start of 2014, collecting £10 million of premiums in its first 12 months.

Those wishing to gain early exposure to the market by adding a provider to their portfolio need to research the stock available to look at its wider business and not buy an insurer simply because of its cyber offering.

Mark Dunne

AJ Bell Head of Research