The Cyber Security Threat

On May 20^th, Brown Advisory held its biennial client conference, entitled Navigating Our World, or NOW. As before, NOW 2010 brought together a collection of outside speakers to explore some of the secular trends that are shaping our world and influencing our investment thinking. Over the course of the day, we immersed ourselves and our clients in topics around three themes: emerging markets, sustainable solutions and the technology horizon. The full agenda can be downloaded here:

NOW 2010 agenda

Security was not a top priority when the Internet was designed decades ago as a small research network.  Today nearly 2 billion people access the web, benefiting from enhanced productivity, automation and communication of an interconnected world.  With computing networks continuing to scale and deliver new information services, Dr. Rubin was quick to point out that security vulnerabilities remain prevalent in our software and systems.

For a little perspective, it is important to note that software applications are inherently complex, yet highly essential.  It’s the intricacy of a software program that, on the one hand, enables us to be more resourceful in our everyday lives.  However, on the other hand, every line of software code is a potential bug, and every bug is a potential security flaw.  Take Microsoft’s Windows for example – with tens of million lines of code, it is virtually impossible not to have errors in the programming language.  The more lines of code, the more complicated the software, and thus the greater the number of vulnerable end points.  Malware and cyber-attacks are aimed at ferreting these weak links to corrupt our machines.  The best way to corrupt data is not to delete it, but constantly modify it, rendering even backups of data useless over time.

Although we can take some preventive measures to protect PCs, chances are that every machine is likely already infected by some unwanted element.  Security software can help protect  PCs against known malicious code, but it will not protect against zero-day attacks — threats of lurking malware that have yet been identified.  Some computers, while appearing to operate normally, can be taken over by a Botnet without your knowledge.  Botnets, or robot networks, are a set of computers that once infected can be controlled by a single person.  Cyber-gangs can launch attacks using dark space, or unallocated IP addresses, to look for hosts to compromise.  One of the largest botnets in history, Mariposa, infected more than 11 million PCs in over 190 countries.  The malware was found in personal, government and corporate IP addresses, including more than one-half of Fortune 1000 companies and 40 major banks.  It spread like a butterfly (Mariposa in Spanish) using instant messages, USB drives, peer-to-peer networks and Internet Explorer 6 flaws.  Millions of zombie PCs infected by Mariposa connected as one network, stealing usernames, passwords, banking credentials and credit card information on an unprecedented scale, and communicated the sensitive data back to malicious attackers.

In addition to botnets, perhaps the fastest growing type of malicious activity on the web is known as Cross Site Request Forgery. CSRF exploits your online connection with a trusted site, perhaps your Facebook page or bank website, by issuing unauthorized commands masquerading as the legitimate user.  Yet the greatest security threat according to Dr. Rubin may lie in the underlying Internet infrastructure itself.  Border Gateway Protocol (BGP), the standard exterior gateway-routing protocol used in the global Internet, is the format used to exchange information across the Internet.  Data traffic may be intercepted, modified or rerouted before reaching its intended destination.  Such internet “hijacking” does not arise from software bugs or errors, but from manipulating the very interconnectivity and complexity that’s needed to keep today’s networks up and running.

Could “messing up” routing numbers cause the Internet to crash?  Nobody’s sure.  Could cyber-criminals bring down a utility grid?  Perhaps.  Nevertheless, many of our critical infrastructure systems such as power grids, water plants and information networks, including electronic medical records (Dr. Rubin’s current area of research), rely on underlying IP-based networks that are potentially vulnerable.  Dr. Rubin is credited with having exposed security flaws in electronic voting machines, and he wonders less about whether systems can be tampered with or brought down, but more about whether we would be able to restore systems back up to their original state.

How can we best protect ourselves?  Unfortunately there isn’t a silver bullet solution.  Hackers and malware generators are clever, aggressive and enjoy a first-mover advantage.  There are some precautions we can take. For example, Dr. Rubin, only uses Apple Macs in his home.  However, for the record, vulnerabilities have been found in all major operating systems including Windows, Mac OS and Linux.  That being said, Microsoft is the most exposed operating system to targeted attacks given its large installed base. For hackers, that’s where the money and the most havoc lies.

In addition to working on a Mac, Dr. Rubin also works behind a firewall, monitors his logs and encrypts all his files.  At the programming level, Dr. Rubin advocates cryptography, better code audit trails and software development process improvements to deliver higher quality, less vulnerable products. For average users, this option is probably a little above their pay grade.  Interestingly enough, perhaps the best place to secure our information may be placing it out in the cloud.  Cloud computing uses the scalability of the Internet and central remote servers to deliver IT capability to any device with Internet access.  Remotely sourced computing capacity begins with infrastructure as a service. IaaS allows individuals and enterprises to more or less rent raw computing and storage services on demand through massive server farms housed in one centralized location. Dr. Rubin dismisses the conventional notion that data is more secure within the physical walls of our office or home.  With larger engineering teams and more resources on hand than company IT departments, companies like Google and other major cloud computing providers are likely better equipped to tackle ongoing security threats.

Doron Eisenberg
Equity Analyst

Cyber Security Threat Slide Presentation (PPT)

Conservation for the 21st Century

On May 20^th, Brown Advisory held its biennial client conference, entitled Navigating Our World, or NOW. As before, NOW 2010 brought together a collection of outside speakers to explore some of the secular trends that are shaping our world and influencing our investment thinking. Over the course of the day, we immersed ourselves and our clients in topics around three themes: emerging markets, sustainable solutions and the technology horizon. The full agenda can be downloaded here:

NOW 2010 agenda

The Nature Conservancy’s M. Sanjayan was a stimulating and high-energy luncheon speaker who treated the audience to a fascinating talk about some of the journeys he has taken with TNC, apparently along with some very skilled photographers, illustrating the nexus between the environment and local societies, between conservation and poverty alleviation.

A frequent criticism of the conservation movement is that well-meaning Westerners dream up grand plans that look good on paper in the halls of think tanks in Washington or London, but fall flat in villages outside of Kinshasa or Jakarta.  Using trips to Namibia, Indonesia and the Solomon Islands to illustrate his point, Sanjayan described how his work helps bridge the gap between local societies and conservation efforts to hopefully create better outcomes.  His Solomon Island example illustrated how TNC worked with local communities to set up a “fish bank”— a Marine Conservation Area between two islands where no fishing was allowed.   Because this area was protected, fish and other marine species were able to flourish both in and around the protected area, returning a once-depleted source of income to the villages. He showed a picture of a young girl in a boat harvesting enough giant, strange looking sea cucumbers to pay her school fees for the next year.  And he described the return of the trochus snail in the area, whose shells are prized for use in mother-of-pearl buttons and provide a livelihood for the villagers.

What we took away from the talk was the point that any conservation project, or really any other kind of environmental or development work sponsored by a nongovernmental or aid organization, needs to consider the after effects of the project. What happens when the conservationists leave?  How will the local community sustain the project?  Were benefits one-time or lasting?  Is there local capital — physical, human and monetary — to carry on the project?  Short-term benefits supported by donor dollars are nice while they are around, but meaningful change needs to be self sustaining and internally driven.  In the Solomon Islands examples, the villagers were left with new sources of income and an incentive to sustain the fish bank and fish populations.

And in this lesson, we were reminded of many of the environmental technologies we look into as potential investment ideas.  We see lots of presentations from companies with huge, potentially world changing ideas but no clear pathway for the product to be able to succeed without outside capital or government subsidies.    But like a conservation project that relies on outside funding, the coolest new alternative energy technology or company that can’t support itself won’t have as much of an impact as a slightly less cool one that is affordable.

Liz Levy
Winslow Green Large Cap Portfolio Manager

Portfolio Manager Perspective on NOW 2010: Hutch Vernon, Brown Advisory Flexible Value

 

The securities identified and described do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable.

Investing in Africa: Myth vs. Reality

On May 20^th, Brown Advisory held its biennial client conference, entitled Navigating Our World, or NOW. As before, NOW 2010 brought together a collection of outside speakers to explore some of the secular trends that are shaping our world and influencing our investment thinking. Over the course of the day, we immersed ourselves and our clients in topics around three themes: emerging markets, sustainable solutions and the technology horizon.  The full agenda can be downloaded here:

NOW 2010 agenda

When people think of Africa, investing there is probably not the first thing that comes to mind.  But Ritesh Anand, who spoke at NOW 2010 about investing in Africa, tried to debunk some of the myths and misperceptions about the continent.

Africa is big.  Really big.  In fact, you could fit the US, China, India, and Europe inside of Africa, and still have room for Argentina.  It’s rich in natural resources – among other things, it has 90% of the world’s diamonds, and 50% of its gold.  Its economic growth has been strong.  Over the last 15 years, Africa has one of the highest GDP growth rates in the world.  And its equity returns have outperformed the emerging markets, and Asia in particular, over the last 10 years.

Anand refuted the common criticisms on Africa – that it’s a constant underachiever, too small and poor to matter to the rest of the world – without minimizing the challenges it faces.  He noted that it’s a continent full of diverse economies and countries; and despite conventional wisdom, not one monolithic bloc.

So, is Africa today similar to Asia in 1980, poised to embark on a path of long-term sustainable growth?  Anand wasn’t ready to go that far, but he did say that many influential factors, from demographics to politics, are now heading in the right direction, and that Africa represents vast opportunity investors shouldn’t ignore.

Ryland Sumner
Open Architecture Analyst

Ritesh Anand, Founder & CEO, Invictus Investment Management

Investing in Africa: Myth vs. Reality Slide Presentation (PPT)

Clean Tech Public Policy: Global Success, U.S. Failure?

On May 20^th, Brown Advisory held its biennial client conference, entitled Navigating Our World, or NOW. As before, NOW 2010 brought together a collection of outside speakers to explore some of the secular trends that are shaping our world and influencing our investment thinking. Over the course of the day, we immersed ourselves and our clients in topics around three themes: emerging markets, sustainable solutions and the technology horizon.  The full agenda can be downloaded here:

NOW 2010 agenda

We were fortunate to have a terrific panel of clean technology experts to help us kick off the Sustainable Solutions track of NOW 2010.  The panel included the president of a leading clean energy trade association, a former energy commissioner of California, a policy director for General Electric, and an expert sustainability consultant.  Not surprisingly, we were able to enjoy a wide variety of perspectives, and a few friendly disagreements, on the topic of clean energy policy in the U.S. and around the world.

Moderator Karina Funk of Winslow Management guided the discussion with a series of pointed questions about the track record of policies to encourage clean energy development in Europe; the opportunity available if similar policies are enacted in the U.S.; the prognosis for such policies gaining traction in the near future; and the implications for U.S. competitive positioning in the global marketplace.

The panelists all foresaw continued rapid growth in the clean technology sector, although they felt that policies to encourage that growth needed to be managed carefully.  One of the more interesting anecdotes was the cautionary tale of Spain’s attempts to encourage a solar industry with a subsidy program that in retrospect was far too generous and did not include enough in the way of quality or efficiency standards.  The result was a far more rapid deployment of solar plants than expected, often from foreign manufacturers prepared to jump on the generous subsidies.  Spain subsequently had to readjust its program, which in the end has allowed low-cost technology from China to continue to succeed without enabling a robust Spanish solar industry.  The panelists agreed on two conclusions from this story –  that U.S. policy should try to encourage a strong U.S. renewables industry, and that China is very likely to be the primary industrial beneficiary of U.S. Policy.

The discussion concluded with an interesting separation: while the U.S. desperately needs clean energy for long-term energy security and progress on carbon emission reduction, it may not be in a strong position to claim the lion’s share of the market for building out that infrastructure.  One panelist was still optimistic, however; he noted that the U.S. may not be able to grab a large share of the clean tech manufacturing industry, but it is still likely to be a leader in both the R&D and financing segments of the sector.

Unfortunately, the panel did not offer significant hope for a meaningful global agreement on climate change. In particular, the panelists pointedly reiterated the wide gap between the interests of the U.S. and China and the continuing difficulties that negotiators will face in bridging that gap.  Bluntly, the U.S. wants China and India to slow down development of carbon-intensive energy and industry; and those nations want the developed world to fund their efforts to do so.  The panel pointed us toward the upcoming Cancun climate conference at year’s end. If the U.S. makes good on its promise from the Copenhagen conference to gather $30 billion in climate aid for developing nations, it would go a long way toward building momentum toward further international cooperation.

We’ll have to wait and see.

Ethan Berkwits
Director of Marketing
Winslow Management

Moderator: Karina Funk, Winslow Management

Panelists: Michael T. Eckhart, President of the American Council On Renewable Energy
(ACORE); John Geesman, Former California Energy Commissioner; Tim Richards, Managing
Director for International Affairs, General Electric; and Truman Semans, Principal, Green Order

China Rising

On May 20^th, Brown Advisory held its biennial client conference, entitled Navigating Our World, or NOW. As before, NOW 2010 brought together a collection of outside speakers to explore some of the secular trends that are shaping our world and influencing our investment thinking. Over the course of the day, we immersed ourselves and our clients in topics around three themes: emerging markets, sustainable solutions and the technology horizon.  The full agenda can be downloaded here:

NOW 2010 Agenda

James Fallows — a national correspondent for The Atlantic for more than 25 years who lived in China for over two years and traveled extensively within the country – delivered an insightful talk.

His key message to the audience was that China is often misunderstood.   Some, including those in the media, tend to paint China with a broad brush, leading many to quickly arrive at extreme or simplistic positions.

We shouldn’t fear China as some would suggest.   Images from the opening ceremony of the 2008 Olympics and associated events lead many to believe that China is one, well coordinated machine.  On the contrary, post-Olympics, there was a sigh of relief within China, and many Chinese citizens were surprised that the government was able to pull off such a well-orchestrated Olympics.  Mr. Fallows emphasized that China is the most internally diverse country he has ever seen.  It is far more focused today due to many domestic challenges (e.g., high unemployment), and its international ambitions are a result of its desire to secure its future (e.g., insatiable need for commodities for sustainable growth) rather than purely to flex its muscle.

Some other interesting takeaways from his talk:

• The property bubble in China is confined to the tier 1 cities (Shanghai, Beijing), and the ensuing correction is unlikely to bring the world economy down.  The government has a vested interest and enough resources to prevent an economic disaster.
• China is well aware of the trade imbalance and feels it is held hostage to the large reserves and its outsized investment in U.S. debt rather than the other way around.
• It will likely adjust currency at its own behest, and any pressure from the outside will only delay any adjustment.
• Its higher education system is broken, with a majority of funding  directed towards elite schools.  Academic corruption is widespread and will need to be addressed.
• The role and familiarity with English language is growing.  However, business dealings will be in Chinese in the foreseeable future.
• The environment is of grave concern and should be a growing focus for the Chinese.  In many areas, the after-effects of environmental pollution are quite evident due to a significantly higher incidence of cancer and birth defects.

In Mr. Fallows’ opinion, the widely held view that “China is a problem” is a misperception.  We and the rest of the world will be better off if we work with China and try to manage any disagreements.   We should feel comfortable with China and not feel threatened.  Also, we should be careful about imposing our value system, as an average Chinese person is interested in liberty but only mildly interested in democracy.

Maneesh Bajaj
Equity Analyst

James Fallows

NOW What? An Investment Roundtable

On May 20^th, Brown Advisory held its biennial client conference, entitled Navigating Our World, or NOW. As before, NOW 2010 brought together a collection of outside speakers to explore some of the secular trends that are shaping our world and influencing our investment thinking. Over the course of the day, we immersed ourselves and our clients in topics around three themes: emerging markets, sustainable solutions and the technology horizon.  The full agenda can be downloaded here:

NOW 2010 agenda

Sometimes, it makes sense to save the best for last. Sometimes not. In the case of our wrap-up panel discussion at NOW 2010, entitled NOW What?, we didn’t want to wait to share it with you – even though the panel took place at the end of the conference. The panel, which I moderated, featured Terry Beaty, senior client advisor and portfolio manager; Paul Chew, head of Investment Strategies; and Liz Levy, co-portfolio manager of our Green Large Cap strategy, and was an opportunity for these investment professionals to offer their perspectives on some of the day’s themes and discussions. The substantive presentations and discussions that we all heard throughout the day will percolate during the days and months ahead – and provide a framework for how we think about some of the secular trends that are driving our society and our investment thinking.

Bill Paternotte, Senior Client Advisor

Moderator: Bill Paternotte

Panelists: Liz Levy, Terry Beaty, Paul Chew

Video & Commentary from NOW 2010

On May 20^th, Brown Advisory held its biennial client conference, entitled Navigating Our World, or NOW. As before, NOW 2010 brought together a collection of outside speakers to explore some of the secular trends that are shaping our world and influencing our investment thinking. Over the course of the day, we immersed ourselves and our clients in topics around three themes: emerging markets, sustainable solutions and the technology horizon.  The full agenda can be downloaded here:

NOW 2010 agenda

We also invite you to watch Brown Advisory CEO Michael D. Hankin’s introductory remarks.

We are pleased to share with you NOW 2010 video highlights and commentary from our investment professionals. Please check back often for new posts – and, of course, we look forward to receiving your comments.