One of the advantages of goals-based investing is the ability to identify and allocate assets to investments with a time horizon of 15 years or more. Whether the purpose of these assets is retirement, multigenerational transfer, or charitable contributions, it’s liberating to be able to consider a panoply of investments with the potential for outsized returns for a part of the portfolio that could be set aside for at least 15 years. A 15-year time horizon affords investors a perspective that looks beyond market cycles to consider direct, private investments, like buildings and companies, as well as secular trends in the public market arena.
The combination of the right theme and patience pays handsomely. The Internet emerged on the investment scene in the mid-1990s, as AOL and Internet Service Providers joined Cisco and other Internet infrastructure players. The promise of the Internet – its potential to change the way we live and work – was well known by the late 1990s. An investor who bought into the Internet theme by holding the S&P Internet Services Infrastructure index at the beginning of 1999 faced an 82 per cent drawdown by 2001. But the cumulative total return over the subsequent 15-year period was 233 per cent, despite poor timing. As of today, the S&P Internet Infrastructure Index has expanded by 845 per cent.
Thematic investing nowadays remains a longer-term endeavor, but it’s also global. No longer does the United States have the monopoly on great, new ideas. The dispute between the US and China is less about trade and more about the fight for global dominance in artificial intelligence, communications and life sciences. While we have a sense which investment themes will remain consequential, we are less confident about where they will be executed.
As the World Economic Forum convenes in Davos, big-picture, global issues, like the impact of climate change, are taking center stage. Cresset, through direct investing on the private side and thematic investing on the public side, has created a unique niche in aspirational investment strategies. Cybersecurity is one of Cresset’s investable themes.
The importance of cybersecurity can’t be overstated. Data hacks, perpetrated by state-sponsored entities as well as criminals, have negatively affected a swath of individuals and entities in the public and private sectors. The White House Council of Economic Advisors estimates that malicious cyber activity cost the US economy between $57 billion and $109 billion in 2016. Even more important, defending against cyberattacks is part of our national security. Their report warns that cyberattacks against critical infrastructure sectors could be highly damaging to the US economy. Globally, the stakes are much higher: global financial damage from cyberattacks exceeded $1 trillion in 2018.
The risks rise exponentially as the number of connected devices proliferates, threatening not just our financial well-being but also our privacy. As of this year, it is estimated that over 50 billion devices comprise the “Internet of Things.” Corporate leaders invest heavily in cybersecurity and those trends will continue. Cybersecurity remains among the top three technology initiatives among business leaders surveyed.
While the US historically has been the center of technological innovation, there’s no certainty that our nation’s dominance will continue. For these reasons, we believe a long-term, globally focused allocation to cybersecurity as one of Cresset’s thematic investment strategies makes sense and will, like it or not, be vital in an increasingly interconnected world.