Has Space gone too far?

What happened

On 18 July, after a strong performance (+28% YTD, +58% since the April lows), we rebalanced our Security & Space strategy. We took profits on several high-flying space and cybersecurity stocks, reallocating toward Physical Security names where valuations appear more reasonable. 

Impact on our Investment Case

The Space locomotive

Space remains one of our strongest convictions. We recently reviewed what we see as the key catalysts set to drive the sector forward. At its core, we have long supported the segment, which we believe is on the verge of explosive growth, driven by breakthrough services made possible by a new generation of cost-efficient rockets developed by a new breed of companies. We believe these catalysts still stand.

Within the Security & Space strategy, our target allocation to the segment is 40%. However, recent outperformance pushed exposure above 45%. While there is no strict rule to trigger rebalancing, such a threshold naturally prompts a reassessment of current opportunities.

Some conclusions were clear. Two stocks, Rocket Lab and AST SpaceMobile, accounted for nearly half of this year's strategy performance. Rocket Lab's impressive rally (+102% as of 18 July) made it the top holding, with a portfolio weight exceeding 10%. More concerning, these two stocks represented around 40% of the portfolio’s total risk, with Rocket Lab alone contributing approximately 25%.

These figures alone justified a portfolio adjustment. The only remaining question was where to reallocate.

Even for Space, sky is not the limit

Simply reducing exposure to 40% would not have been enough to significantly lower portfolio risk, making deeper adjustments necessary. However, a quick scan of our investment universe showed that reallocation would be anything but straightforward. Most stocks had already surged: "New Space" players on turnaround hopes, and legacy names due to their strong ties with the booming defense sector. Despite compelling catalysts, the sector showed clear signs of overheating.

This view was reinforced by a look at the forward valuation multiples of our investment universe. Both P/S and P/E ratios are well above their historical averages. In our view, current prices are unsustainable without a major upgrade in earnings expectations - a scenario we consider unlikely in the short term, despite our continued confidence in the sector’s long-term potential.

A similar situation in Cybersecurity 

The Cybersecurity segment told a similar story, though for different reasons. As of 18 July, our strategy delivered a +25% performance, driven by strong structural growth and solid visibility. These factors helped the sector weather the market volatility triggered by "Liberation Day." That said, this favorable setup comes at a cost, with valuations now standing well above their long-term averages. 

While we remain positive on the sector's outlook and expect analysts to revise their estimates upward this earnings season, we saw limited opportunity to add exposure at the prevailing valuation levels. As a result, we maintained our overall allocation (~37% of the strategy Security & Space) but took some profits, resulting in a turnover of approximately 6% in the stand-alone strategy. We reduced the largest positions to more balanced exposure levels.

Physical Security as a haven

Physical Security, therefore, emerged as an attractive option to help weather potential turbulence. While P/S multiples are above their historical average, they remain below all-time highs, and P/E multiples are still comfortably below historical norms. 

It would be a mistake to view this move as a default choice. We believe the sector is undergoing a meaningful transformation, as new technologies gradually reshape traditional businesses, even if the pace is slower than we'd prefer. Axon, our top holding in the space, exemplifies this shift. Its transition toward a software-first model triggered a major growth cycle which enabled the company to join the S&P 500 last year. The sector also stands to benefit from increased security-related spending in the U.S., driven by the administration’s strict immigration stance. 

A more balanced approach

The chart below illustrates the impact of the recent shift, comparing the new allocation with the previous one. Valuations have decreased significantly, while maintaining strong exposure to the underlying structural growth drivers - in essence, more an evolution than a revolution, something corroborated by the limited turnover (~13%).

Our Takeaway

Our conviction in the space sector remains strong. However, the recent rally has raised risk levels, making some adjustments necessary - mainly as a matter of prudent risk management. As noted, this is far from a total shake-up: Rocket Lab remains our top holding. We will continue to monitor the segment closely and stand ready to increase our exposure back toward the target allocation once the risk/reward profile improves.