There are clear opportunities for investors created by an ageing population, but, as Lynn Strongin Dodds discovers, for the best returns it pays to look beyond the obvious.
“We know the global trends of ageing, but we believe you need to dig deeper into these areas and identify opportunities not just in public equities, but also real estate, infrastructure and private equity.”
Michael Garcia, Willis Towers Watson
The UN report on ageing has been welldocumented. It estimates that the number of people over the age of 60 globally will more than double by 2050 and triple by the end of the century.
While that may send shivers up and down the collective spine of governments across the developed world, there are also silver linings – especially when it comes to investments.
Healthcare – including pharmaceuticals, biotechnology and medical devices – is the most obvious destination for institutions, along with senior residential care and nursing housing. With the former, there is a wide selection as spending rises exponentially as people age. However, although life expectancy is increasing, so too is the rate of chronic illness, according to a recent study by PGIM. It shows Americans over 85 purchase twice as much health care as those aged 65 to 84, who in turn spend double the amount of 45 to 64-year-olds.
These positive trends have sent healthcare stocks to lofty levels over recent years, although the froth has come off during the Presidential campaign as both Hillary Clinton and Donald Trump have threatened to implement stricter drug price control legislation.
“In the run up to the Presidential election the sector has been hit by talk of regulation and tax-driven M&A with some companies trying to get a European listing,” says Dylan Ball, senior vice president and fund manager at Franklin Templeton. “However, investors should focus on the long-term fundamentals and not the shortterm sentiment. We took the opportunity in the sell-off to raise our exposure because we see significant structural growth across the board – oncology, diabetes, cardiovascular diseases and immunology.”
A long-term horizon however is a pre-requisite, but investors will be rewarded if they have patience. Data from FE Analytics shows that the MSCI ACWI Healthcare index was up 59.3% over three years to June 29 2016, while the Nasdaq Biotechnology index generated a healthy 67% gain.
As for accommodation, there are also a range of options including real estate investment trusts catering to the growing demand for independent or assisted living communities as well as nursing homes.
“There is particular value in French-based Orpea and the UK’s retirement builder Stone and McCarthy”, according to Ross Mathison, investment director at Standard Life Investments. “Post Brexit, we saw a huge sell-off in the house builder sector in the UK, but Stone and McCarthy has strong structural growth due to demographics and its focus on building apartments for the over 55s,” he adds.
Opportunities also abound in travel, l eisure, luxury goods and other consumer discretionary sectors as retirees in the developed world are living longer, healthier and wealthier lives than their predecessors. Studies show that in the US alone, 70% of disposable income is in the pockets of the over-50s while baby boomers, unlike their earlier thriftier predecessors, revel in consumer culture and will continue to spend as they age. As for the UK, the grey pound is worth over £320bn a year according to Saga, one of the biggest beneficiaries with more than 2.7 million older customers.
Given the different lifestyle choices, some fund managers are delving deeper into the mainstream sectors when looking for optimal assets and ways to gain exposure. They may not be the usual suspects, according to Michael Garcia, director at Willis Towers Watson.
“It all comes down to mispricing and valuations,” he says. “We know the global trends of ageing but we believe you need to dig deeper into these areas and identify opportunities not just in public equities but also real estate, infrastructure and private equity.”
Garcia believes that the focus should be in terms of primary, secondary and tertiary effects of the theme. Take healthcare: it may not be the world’s major pharmaceutical companies that are the most attractive but rather biotech firms backed by venture capital or private equity that are conducting research that will lead to major breakthroughs. This could also mean that distribution centres, third party logistics or transportation groups are competitively positioned relative to theme dynamics while in the private markets, companies that provide the linen and bedding to the senior care facilities could be the better bets, according to Garcia.
Johan Utterman, portfolio manager for the $640m LO Funds – Golden Age at Lombard Odier Investment Managers, which was launched in 2009, also advocates a well- diversified portfolio beyond the traditional stomping grounds. Although the fund has a chunk in healthcare, its holdings range from dental supply and distributor firm Henry Schein (since people need more dentistry as they age) to VCA Antech, a US chain of animal hospitals whose stock ticker is ‘WOOF’.
“VCA Antech is enjoying phenomenal growth because when people retire they often buy a pet and will spend more money on animals than almost anything else,” says Utterman, whose fund outperformed the MSCI World index by 9.5% over the last four and a half years. “We are also invested in cruise liners, cosmetic companies such as Estee Lauder and Allergen, the manufacturer of Botox as well as Daimler, owner of Mercedes where the average age of an S class car buyer is 62. Other stocks in our portfolio that have had phenomenal growth rates include Vail Resorts, which run ski resorts across the US, and boat group Brunswick.”
Other fund managers are also taking advantage of the baby boomers’ sense of adventure and desire to keep fit. Statistics by the US Sporting Goods Association shows an increase in this generation (51 to 69 year-olds) taking part in running and cycling, while a report by the Association of British Travel Agents last year found they were the only age group to have increased the average number of holidays they take every year.
This has led to established baby boomer favourites such as iconic motorcycle manufacturer, Harley-Davidson adjusting its product range accordingly. Older people can now ride into the retirement sunset with heated seats and handlebars, a three-wheeled motorcycle as well as gear shift that can be moved with the foot, so the riding position is less hard on the knees.
Artemis Global Select fund also analyses how older people spend their money on fitness in the developed world to better target the right sectors.
“We have found that that there are a number of stocks in the retiree spending theme that are attractive,” says Simon Edelsten, fund manager of the five-year-old fund. “For example, we like Japanese-based Shimano, the leader in cycle brakes and gears, and Asics running shoes for the jogging market – again, Japanese quoted.”
Artemis also does its homework when it comes to its other main focus – healthcare.
“We have a different approach to many in that we look at companies that deliver solutions effectively and cheaply to both the developing and developed word,” says Edelsten. These include Medtronic which has become one of the largest manufacturers of medical devices in the US. In the past, each doctor would decide what brand to use, but today the company is benefitting from a move towards a more centralised purchasing system to help to reduce costs.
Also on the list is IMS Health, “the Bloomberg of the healthcare sector.” The company, which tracks prescriptions, medical claims and electronic records and sells the data, recently acquired Quintiles, a firm that offers a range of services focused on product development, including advice on clinical-trial design.
Another area on their radar is the wave of new treatments in oncology that aim to tackle cancer with a much better outcome than the traditional treatments such as chemotherapies. Overall, global oncology drug spending reached $107bn in 2015, an 11.5% hike over the prior year and up from $90bn in 2011, as around 70 new cancer treatments for over 20 tumour types entered the market over the past five years, according to a report by IMS Health Holdings.
Moreover, worldwide spending on these cancer medicines is set to rise sharply, exceeding $150bn by 2020, driven by the emergence of expensive new therapies that help the immune system to attack the disease. This represents an annual global growth rate of 7.5% to 10.5 % through 2020, up from last year’s IMS forecast of 6% to 8% growth through 2018.
Bristol-Myers Squibb and Merck have been leaders in the field, while Roche Holding recently won US approval for an immunotherapy that became the first new treatment for advanced bladder cancer in 30 years.
Genomics which allows biotech companies to customise drugs to a patient’s genetic make-up is also one of the fastest growing and interesting segments. Only three years ago it cost $95m to sequence a human genetic code while today the price tag is $4,000 and that is expected to decrease every year. The hope is that it will yield more precise treatments with fewer side effects.
Henk Grootveld, who runs the trends- investing equity team at Robeco, believes these new innovations will offer investors some of the best opportunities in the future.
“The challenge is finding the right companies but we have a choice – we can either muddle along with these bazooka meds and hope for the best, or we massively increase productivity through digitalisation, medical breakthroughs, robotics, artificial intelligence etc. We have no choice but to choose the latter path.”
