Personal Investing
Claire Dwyer 1 Sep 2017 01:44pm

The internet of stings

In flicking through Deloitte’s hot-off-the-press financial statements this morning the real point of interest is not so much the hefty sums commanded by the firm’s equity partners, but rather the extent to which the group is ploughing money into new technologies.
Caption: Cybercrime is becoming and increasingly disruptive global threat

UK revenue rose 11.2% to £3.4bn in the year to the end of May, with the professional services company citing significant demand in its consultant business for “technology-enabled business transformation.”

Arguably Deloitte’s most compelling area of focus is its innovation in the field of cybersecurity with its dedicated cyber intelligence centre promising to “integrate state-of-the-art technology with industry insight to provide round the clock business-focused operational security.”

The commercial case is self-evident; as the number of internet-connected devices mushrooms, cybercrime is becoming an increasingly disruptive global threat that transcends national borders in the hunt for vulnerable targets.

The annual economic cost of cybercrime to the world economy is estimated to be as much as £300bn a year - some put the number far higher.

From organised cybercrime’s origins among the gang members and technology geeks who founded CarderPlanet (a credit card fraud website) in an Odessa restaurant in 2001 and Shadowcrew (a cybercrime message board) in the US in 2002, the industry has grown to global proportions, despite the attention of national crime authorities.

“Data is stored in virtual pools and the proliferation of devices, many of them mobile, means that the points of failure have increased. At the same time, the risks and potential damage from data theft and cyber attacks have grown exponentially,” says Aditya Khowala, a US equities focused investor at Fidelity.

“This has forced organisations to sharply increase their IT security budgets, which is positive for the cyber security industry as a whole.”

The most targeted industries tend to be those where payment card data can be obtained and easily monetised – such as retail which accounts for a third of all cybercrime. Industries like finance tend to be more heavily regulated, while technology firms guard their intellectual property (IP) very closely. Other IP-protective industries such as entertainment and healthcare account for just 4% and 2% of global reported crime, since they typically have less valuable data for criminals to monetise.

One NASDAQ listed company which has caught the attention of investor Hyun Ho Sohn, manager of the Fidelity Global Technology Fund, is Imperva, a firm which pledges to defend business critical data and applications, both in the cloud and on-premises.

A recently published white paper penned by researchers at the company highlights the pace of the rise in cybercrime stating that 79% of networks were breached, compared to 62% three years ago.

It also cites malware and spear-phishing as “causing the most headaches,” while adding that low security awareness among employees is the greatest inhibitor.

Portfolio manager Sohn emphasizes the need for robust due diligence in assessing this complex sector, calling for thorough value chain analysis.

For investors, the implications of an increasingly interconnected, internet-enabled world are considerable - both for better and worse.

Clearly, on one hand, companies which enable consumers, corporates and governments to be on the cutting edge of security will prosper, while those that see their networks and data compromised will suffer significant brand-value losses.

From an investment perspective the real challenge will be the pace of change, as well as getting the measure of the private companies which may be a threat to revenue streams of listed corporates - or which may themselves become an exciting investment opportunity if and when they list.


Claire Dwyer is a senior manager in Fidelity’s Personal Investing business. Prior to this she worked at Cambridge Associates and Mondrian Investment Partners. She is a chartered alternative investment analyst.

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