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Hacking your portfolio

Investing 101

Earlier in the year, the Federal Government announced a push to target cybercrime with $748 million to be spent on new initiatives and an expanded security workforce. The announcement came following a targeted cyber-attack on all levels of government, industry, political organisations, education, health, essential service providers and operators of other critical infrastructure. The cyber threat was from a sophisticated state-based cyber actor possibly artificial intelligence due to the scale and nature of the targeting and the methods used. The attack has forced the Federal Government to rethink its cybersecurity measures and to allocate resources from the defence portfolio.

The Federal Governments concerns have become front of mind for many Australian businesses as the impacts of COVID-19 require millions to work from home (WFH). WFH may be the best operating conditions for hackers with networks and information spread across less secure networks and varying levels of security by different companies. There is little doubt the sector is becoming a growth opportunity for the months and years to come.

Along with the announcement comes plans for the Government to spend $1.35bn over the decade and the creation of 500 new jobs. This move to expand Australia’s cyber security workforce is an opportunity to gain exposure to a growing sector that is just in its infancy. The US 2019 budget for cyber security was $15bn and France is targeting a 4,000 head count by 2025. You may remember the hacking of 130 high profile Twitter accounts such as Jeff Bezos, Bill Gates, Elon Musk and Barack Obama. According to the Global Risk Report 2018, the World Economic Forum (WEF) listed cyber threat as one of the most critical risks threatening the world economy. In this piece we look at two unique Australian opportunities to access the sector:

  • BetaShares Global Cybersecurity ETF (HACK) is a great way to gain exposure to cyber security companies, all in one fund. The ETF is a diversified portfolio of the largest leading and emerging global cybersecurity companies. It is also a lower cost and more cost-effective way to gain this exposure without having to worry about international trading fees and currency conversions. The portfolio has 45 global companies developing cybersecurity products and services, mostly in the US. The ETF’s largest exposure is to network giant Cisco Systems.

    1 month3.70%3.79%
    3 months13.74%13.98%
    6 months8.87%8.71%
    1 year17.36%17.50%
    3 year23.96%24.50%

    Main features of HACK

    • HACK tracks the Nasdaq Consumer  Technology  Association Cybersecurity Index (before fees and expenses). 
    • The index provides exposure to the leading companies in the global cybersecurity sector.
    • Made up of large and emerging leading global cybersecurity companies from around the world that are primarily involved in the building, implementation and management of security protocols.
    • Management costs 0.67%
    • Fund has returned 17.36% for the 12 months to 31 July.

    Top 10 holdings

    NameWeight (%)
    OKTA INC5.7

    For those with an appetite for risk and volatility, Tesserent (ASX:TNT) is an emerging, pure play but micro cap exposure to the sector. The company is Australia’s largest cybersecurity firm which is now set to expand its offering to the Federal Government after it signed a binding purchase agreement with Seer Security to acquire its businesses in Melbourne and Canberra. The deal transforms the firm into Australia’s main cybersecurity company into a high-security firm focused on Australian Federal Government departments and agencies including defence and law enforcement. TNT primarily provides its clients with security services such as firewall protection, authentication, anti-virus, anti-malware/spyware, intrusion detection, and security event management.

    The Seer business is earnings and cash flow accretive to the Group, having achieved in excess of $7.6m revenue and $2.2m in sustainable earnings in FY20. It puts TNT on a strong revenue and earnings footing for FY21. Another attractive point is that the company is now backed by federal government contracts.

    Australia’s cyber security market is still in its infancy and needs to improve at a rapid rate to prevent attacks that can cause widespread damage. According to a study conducted by Cisco, 81% of Australian companies face more than 5,000 threats daily whilst 33% receive between 100,000 to 150,000 threats per day. Being the leading cybersecurity firm in the country, it puts Tesserent in pole position to win contracts and take on a pipeline of work.

    All in all, Tesserent is the leading pure play Aussie cybersecurity stock that not only is backed by the Government but is in the right space. If current market conditions continue, there is a tremendous opportunity for investors to capture exponential growth for a company that is just in its infancy.

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