Cash in on population growth
Investment managers are increasingly interested in tapping into long-term global trends, from the impact of climate change to the growing consumerism of emerging markets.
But few trends offer such statistical certainty as the global demographic movements now working their way through both Western and developing nation populations.
The significance of these population shifts for investors shouldn't be underestimated, says Tim Bond, head of asset allocation at Barclays Capital, in the 2010 Barclays Capital Equity Gilt Study.
"The ageing of the populations of the developed world and the rising prosperity of the populous developing nations are the crucial themes that will shape economic and market behaviour over the next few years," he believes.
The first theme hinges on the fact that the population 'bulge' of people born in the aftermath of World War II is approaching retirement age. Japan leads the way, with the prospect that 50% of its population will be aged over 65 by 2020.
This broad trend has some pretty worrying implications for the proportion of workers to retirees, as the latter are generally not earning, paying less tax and making greater use of social and health services.
Indeed, the vexed question of how to fund care for the growing ranks of elderly people has been centre stage in recent UK parliamentary debates.
According to the Office for National Statistics, almost 10 million people (one sixth of the UK population) are now aged 65 or over, and by 2031 that figure will have risen by 60%.
Meanwhile, the US is on the brink of a 'silver tsunami' of 80 million baby boomers retiring in the coming years, yet being supported by only 65 million Generation X (born between 1964 and 1980) workers.
In the words of hedge fund trader John Thomas on seekingalpha.com: "Boomers better not count on the next generation to buy them out of their homes at nice premiums."
Thomas recommends that investors should focus on the youthful populations of Vietnam, China, India, Brazil and other emerging markets with similar pyramid-shaped demographic profiles, where the high birth rate is producing rising numbers of consumers and there is relatively little drag on the state from retirees.
However, the fact is that although older people may buy less furniture, electronic gizmos and shoes, for example, they consume more of certain other products and services; and stockpicking fund managers are just beginning to pick up on the potential impact that those pockets of demand could have on their portfolios.
At boutique investment house WHEB Asset Management, Clare Brook is manager of the IM WHEB Sustainability fund, which launched last summer. It focuses on three themes: climate change, water and demographics; in particular the ageing population.
"The first two themes are very much influenced by other major demographic trends such as global population growth and urbanisation, so really the whole fund is demographics-driven," she says.
But while the first two are the focus of various rival funds, the ageing population theme has so far been largely overlooked by managers.
Mark Dampier, head of research at broker Hargreaves Lansdown, agrees. "Firms like Sarasin and Newton have an eye on it because they are theme-driven investors, but this demographic trend hasn't really raised its head in a big way yet."
He suggests that investors are likely to start taking more notice when those born at the start of the baby boom in 1946 start to retire en masse around 2011 or 2012.
So, given that their lifestyles may change substantially when they stop working, and that their health is likely to deteriorate over time, what do older people tend to do with their money?
"If they live into their eighties, they tend to run down their savings, buy annuities, down-trade in the housing market and maybe go into retirement accommodation, and spend on domiciliary care and nursing homes," says investment writer Peter Temple.
"Along the way they will probably spend more on leisure activities and holidays, and they may also spend on financial, legal and tax advice to ensure their estates are inherited tax-efficiently."
Therefore, it might make sense to consider investing in care home firms, specialist homebuilders, annuity and equity release providers, cruise operators and specialist drug companies, for example.
Private versus public
But there is a problem: good quality UK-listed companies in many of these sectors are not easy to find. As Temple explains, of the companies that deal with the elderly's needs – care homes, for example – the good ones tend to be privately run.
The publicly owned ones are 'locked into a cycle of profitless prosperity' because of their reliance on the public sector.
Brook is able to sidestep this issue, as she has a global mandate and can pick and choose from more than 400 shares worldwide (only 10% of this universe are UK-based companies).
She is particularly interested in the broad healthcare angle of the ageing population story partly because, as she explains, "we aim to invest in companies that are providing solutions, not simply exploiting the ageing situation".
But she also likes the fact that healthcare stocks are good defensive plays and will help to counterbalance the climate change holdings in her fund, which tend to be badly hit in a market downturn.
She cites a number of related trends to back her focus.
For a start, elderly people require much greater levels of healthcare. From the age of 65 onwards we need, on average, six times the level of medical services and products required by the rest of the population, and beyond the age of 85 that ratio rises to nine times.
Secondly, due to the decline of extended family households, elderly people can no longer rely on family support as they used to.
Finally, people of all ages are increasingly aware of the need to eat healthily and keep fit, and retired people are prepared to spend money in the hope of a longer and healthier life.
Brook has identified various healthcare subsectors where sales are benefiting from the demographic shift.
These include manufacturers of orthopaedics as the demand for joint replacements rises; dialysis care companies, as kidney failure is increasing rapidly, exacerbated by rising levels of diabetes and poor diet as well as age; care home operators; eye care and hearing aid companies; and companies producing dental implants.
"A lot of it is about propping up the deteriorating body," she says.
To that end, the Sustainability fund's international portfolio includes shares such as Swiss walking frame company Zimmer; US dialysis company DaVita, which "consistently posts results ahead of expectations"; and major hearing aid specialist Sonova.
Brook also holds a couple of European care homes: French specialist Korian and German firm Rhoen-Klinikum. "The French and Germans have a more advanced model, involving larger institutions with hospitals integrated into them," she explains.
The fitness/healthy living angle is also covered, with such holdings as bike gear manufacturer Shimano, on the back of a growing interest in leisure cycling, and WeightWatchers.
All this leads to the question: is this fund just another addition to the ranks of funds for socially responsible investors? Not really, says Brook.
"So far, we're just focusing on making money, and we see huge potential in these areas of pretty certain growth." Since launch, the Sustainablity fund as a whole has gained around 11%.
The many aspects of global population growth, especially the rise of consumerism in emerging markets, where population growth is concentrated, have been more widely picked up by theme-oriented fund managers, including Premier and Newton.
At JPMorgan, fund manager Peter Kirkman's $30 million (£20.05 million) Global Consumer Trends (GCT) fund concentrates on the shifting patterns of global consumer demand and winning and losing companies over time.
Demographics, including the ageing population, and urbanisation is one of the GCT fund's three themes, alongside health and wellness, and growing aspirational demand in emerging markets, although there is clearly considerable overlap between them.
"I see a strong link between demographics and urbanisation," Kirkman says. "The UN forecasts that the number of people living in cities will have increased by two thirds by 2030, and it's young people in emerging markets who'll be moving there."
City life, in turn, means higher productivity and a higher standard of living.
Kirkman is keen on Western-branded goods companies such as Nestle and Unilever, which have been particularly effective in tapping into this ever-expanding sea of emerging markets demand for everyday products from Coca-Cola to washing powder.
As he points out: "Nestle has two billion customers around the world, but it could easily be four billion."
Healthcare is another sector offering huge potential in the face of global population growth as well as the ageing population.
Kirkman likes generic drug companies such as the Israeli company Teva Pharmaceutical Industries, which identifies branded drugs coming to the end of their patents and manufactures cheap unbranded versions.
"There's tremendous pressure in the US for doctors to prescribe generic drugs, which cost a small fraction of the price of branded equivalents, but Japan and Europe have a long way to go yet," he explains.
Other demographics-led sector choices include annuities, where demand is bound to rise as growing numbers of retirees use their pensions to buy a lifetime income, and the digital revolution, which is not only shaping the requirements and expectations of young people who have never known anything else, but also steadily seducing older, more resistant converts.
But, generally, beyond the offices of thematic investment houses and specialist funds, are mainstream fund managers taking any notice of these population trends?
"Although the ageing population certainly isn't automatically factored into other funds, managers do talk about it in regard to specific companies – P&O, for example," says Dampier.
"Demographic trends are filtering through, but only through the back door so far. But it's only a matter of time."
Older people have different investment requirements from younger investors. Baby boomers have built up substantial savings, particularly in middle age, but as they stop earning their habits change.
As Tim Bond points out in the 2010 Barclays Capital Equity Gilt Study: "The ageing of the developed world's boomer generation into retirement will reduce net savings balances in these economies."
That could affect financial markets, for example, making demand-fuelled stockmarket bubbles like that of the late 1990s less likely, and raise demand for particular investments and strategies, says Peter Temple. He cites:
- Selling rather than buying property and investments to release cash;
- Switching out of equities into less risky investments such as bonds;
- Increasing reliance on equity income – currently 70% of people reinvest income from their equity income fund, but Mark Dampier suggests this percentage will decline as more retire;
- A wider range of income funds looking beyond the UK (for example, Neptune has just launched a China Income fund);
- Rising demand for annuities.
The population explosion
With finite reserves and the world's population growing by 54 million each year, other managers are homing in on the need for effective resource management and new solutions to the rising pressure on basic resources.
Sam Liddle, a director at Miton Asset Management, believes "water is one of the most compelling supply and demand investment stories for the long term" and it is a core theme for the CF Miton Global Growth and Income funds.
He points out that around a third of the global population has water shortages and poor quality drinking water.
In China, less than 15% of the population has safe drinking water from a tap. "Water is one of the biggest factors that could hold India and China back in their quests to become economic superpowers," says Liddle.
But the fact China will spend more than $125 billion on water infrastructure over the next five years opens great opportunities for investors.
This article was originally published in Money Observer - Moneywise's sister publication - in April 2010
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