The best investment idea to back now

The NHS ransomware affair now seems like a dim and distant memory for most of us, but it left a big impression on me. Even though I'm a starry-eyed liberal on most things, I have a very well hidden "prepper" sensibility. Preppers are a weird crew, who believe that Western civilisation is more fragile than we think and that it could all cave in with the right attack and thus we should always "prepare" for the worst.

A good friend who works for a strange part of the military once warned me that "if the Russians really wanted to cause mayhem, all they need do is attack our military cyber networks and we'd be disabled and lose the war. Game over." So in the future, we shouldn't be asking how much we need to spend on the latest jet fighter or aircraft carrier, but what cybersecurity budget is needed to protect our infrastructure.

As it stands, we are probably only midway through a huge cyclical increase in spending on cybersecurity. Companies have been scared rigid by the ransomware attack, and although British Airways' recent problems had more to do with human error and power supply issues, the message is simple and terrifying break your IT system and the costs can add up to hundreds of millions of pounds.

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Look at the financial regulator's rule book on business conduct and operations, and you'll see that the watchdog now wants big financials to have robust plans to keep their clients' data and their business operations secure. This sort of thing means that the cycle favouring cybersecurity firms is likely to run and run, with heads of IT up and down the land figuring out how to spend more money to be safe.

That makes cybersecurity the single most compelling sector or theme-based idea for investing right now. I'm usually a bit wary of thematic funds, as they tend to capture all sorts of odds and ends that somehow fit the index criteria, but make no investment sense at all. The good news is that there is a relatively clean fund that gives you all the cybersecurity exposure you need. The ETFS ISE Cyber Security (LSE: ISPY) exchange-traded fund (ETF) is physically backed, which means it buys the stocks in the index rather than using a synthetic instrument to guarantee the payout.

Alternatively, investors could buy a broad technology fund that is partly invested in cybersecurity. I've always been a fan of the Polar Capital Technology investment trust (LSE: PCT), which has some fringe exposure to this theme. In the ETF world, iShares offers a tracker for the S&P 500 technology sector that invests in similar big tech stocks Apple, Facebook, Microsoft and Alphabet (Google). These broader funds have performed better than the ISE Cyber Security ETF over the last year the iShares ETF is up 54% against 42% for ISPY but the cybersecurity theme is very diluted.

By contrast, ISPY is tightly focused on either infrastructure providers (eg, Palo Alto and Juniper) or service providers (such as Sophos, Trend Micro, Check Point and Symantec). It also tracks an equally weighted index, which means that all 33 stocks in the index have the same weighting most of the time. This makes a big difference it focuses the ETF on smaller companies, so you'll disproportionately benefit from the rapid growth of smaller stocks (though this also increases volatility). For growth investors, this ETF is a long-term buy.

Activist watch

Two US activist investor funds have bought a 7.2% stake in Swiss chemicals group Clariant in an effort to derail its $30bn merger with rival Huntsman, says Conor Sullivan in the Financial Times. Corvex Management and 40 North Management have attacked the proposed deal for having "no strategic rationale" and called it a "value-destructive merger".

The merger has been criticised before, with the two companies having little overlap in their product portfolios and no crossover in manufacturing operations. Rather than closing factories, the two chemical giants say they will cut costs by reducing back-office functions, as well as procurement and logistics overheads.

In the news this week

The Financial Conduct Authority's (FCA) "stinging attack" on performance fees has caught asset managers by surprise, says Madison Marriage in the Financial Times. Performance fees are typically triggered when a fund manager outperforms a benchmark or beats a specified return target. They are often criticised for being "opaque, confusing and rarely beneficial for investors".

In its investigation into the asset-management industry, the regulator said that some fund managers claim that their objective is to beat an ambitious benchmark, but then charge a performance fee (usually 10% to 20% of any outperformance) against a much lower target. Other UK funds are taking a performance fee before costs (such as trading charges or stamp duty), which goes against FCA guidance that performance fees should be calculated after other payments are takeninto account.

The managers of the Ruffer Investment Company have apologised for missing "easy gains" in equities this year, says Laura Dew in Investment Week. The trio described their performance so far in 2017 as "marching on the spot" after strong results last year. Yet despite the fund returning just 0.4% over the last quarter, the managers wary of rising interest rates are still content to "remain on the sidelines" and have restricted equities to 40% of the portfolio.