Investing for a rapidly changing world

July 5, 2013 6:51 pm

Investing for a rapidly changing world

By Norma Cohen, Demography Correspondent

The news on the population front often could not appear more grim – longer working lives, less spending and more saving, higher taxes, and a greater likelihood of chronic or degenerative diseases, such as Alzheimer’s. But there is a silver lining. There is a way to profit from the current unprecedented pace of population change and several large fund management groups are turning their collective hands to doing just that.Fund managers Fidelity and Schroders, the insurer Allianz, and private bank Lombard-Odier are among the companies offering investment products aimed at capturing the profits that the most far-sighted businesses are likely to attract as the world’s population ages, migrates to cities and developing nations grow both larger and richer.

“What we discovered is that companies are refocusing their strategies to take account of population change,” says Nicola Stafford, portfolio manager at Fidelity’s Global Demographics Fund, a product launched in 2009. “The leading edge of industries realise that the world is changing. They said ‘Let’s step back and think about what the world is going to look like in 20 years’.”

Fund managers caution that this approach to investment is not geared for quick returns. Population change happens over decades. “Demography is a slow-moving trend,” says Christian Schneider, fund manager at Allianz Demographic Trends. “It’s not like mining or agriculture, where by the time you’ve started writing about it, the trend is over.”

So what will the world look like decades from today? According to the UN’s Population Division, the world population will surpass 9bn people by 2050 and exceed 10bn in 2100.

But that growth is unevenly spread. Most of those additional people will come from what are now the world’s developing economies, with the population of these rising from 5.7bn today to 8bn by 2050 and to 8.8bn by 2100. In contrast, population in the industrialised world will rise by a mere 100m to 1.34bn by 2050, and even that growth is mostly due to immigration.

The shape of populations will change, too. Currently, nearly half the population of the developing world is under the age of 25. Among industrialised countries, that percentage is only 30 per cent, and not one of these countries is producing enough babies to keep the population level. That means that the size of the workforce in Europe, the US and even some developing economies such as China and Iran will begin to fall by 2050.

Moreover, life expectancy is rising at an unprecedented pace as citizens sail through benchmarks once considered the maximum extent of human lifespan. The world’s population over age 60 is expected to rise by more than 50 per cent by 2050 (see graphic). Among the 34 nations of the Organisation for Economic Cooperation and Development, the number of people aged 65 and over is expected to rise by an average of 67 per cent.

But “old” no longer means “poor”, particularly in developed nations. Generous pensions, equity bull markets and swiftly rising house prices over the past few decades have made older adults the wealthiest group in many economies. Analysts at McKinsey estimate that by 2020, the group aged 55 and over will own roughly two-thirds of financial assets in the US. Jessica Alsford, a research analyst at Morgan Stanley, who is tracking how population change alters business prospects, notes that in the US, over-65s now outspend the under-45s. “Data from the US and the UK shows that, per person, 65 to 74-year-olds are the second-highest spending age group,” Ms Alsford wrote in a recent report.

Figuring out how this growing and increasingly wealthy group want to spend their money is key to understanding which sectors and stocks are likely to be good long-term investments. Look at the portfolios of demography funds and holdings such as Norwegian Cruise Line are as likely as GlaxoSmithKline.

But understanding ageing economies is not enough. The developing world has a young, growing population and it, too, is getting richer. According a report from McKinsey’s Global Cities Project, per capita GDP and incomes are rising at an unprecedented pace.

Per capita GDP in India and China have doubled in 16 and 12 years respectively, an achievement that Britain took 153 years to accomplish. McKinsey is forecasting, for example, that São Paulo in Brazil will be the fastest-growing market for laundry products, while Mumbai will lead in demand for municipal water supplies.

Those people are also on the move, off the land and into the cities. “Just think about urbanisation,” says Hilary Natoff, fund manager at the Fidelity fund. “That’s 65m people moving to the cities over the next few decades. That is twice the population of Australia.” The potential impact on consumption, she added, is huge.

Picking winners from very long-term trends is not easy. “There are two main themes of demographics,” Allianz’s Mr Schneider says, explaining his general stockpicking approach. “On the one hand, there are ageing societies – and these are not just developed economies like Germany but also places like Taiwan and Korea.” The other, he says, is the rapidly growing economies displaying the opposite trend in Africa and parts of Asia. At Fidelity, the fund managers have tried to reduce their stock picks to those falling into one of five big themes, Ms Stafford says. The first is rising demand for resources as the world’s population grows. Another is a growing urban middle-class in emerging economies. A third is that the population in those economies will experience lifestyle changes, such as increased consumption of prepared food. Fourth, there will be more online shopping everywhere and fifth, the percentage of the world’s population that is over the age of 60 will be a third bigger by 2050 than it is today.

Not surprisingly, healthcare forms a big chunk of many portfolios – partly because greater life expectancy creates more demand for medicines and medical devices, and partly because as countries develop, more citizens gain access to healthcare.

However, healthcare isn’t a one-way bet – and illustrates the risks of demographics-based investing. Ms Natoff points out that profitability in key areas will be limited by the reluctance of governments and private insurers to pay for expensive treatments as the numbers of elderly grow. “Healthcare costs are spiralling out of control,” says Mr Utterman, at Lombard Odier.

The recent slump in the share price of Fresenius Medical Care, a company where Warren Buffett is a 14 per cent shareholder, was triggered by a US government decision to reduce payments for dialysis treatment next year.

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Populating your portfolio

Analysts and fund managers looking to pick stocks based on demographic trends have, unsurprisingly, homed in on companies in the healthcare and financial services sectors, with selected choices in leisure.

The fund managers are all looking for something similar: a degree of farsightedness that will allow management to evolve products and distribution that capitalise on population change. Many medical picks (see table) are geared to ageing, and include makers of hearing aids, spectacles, adult nappies and ostomy bags. Endologix, for example, has pioneered a non-invasive treatment for abdominal aortic aneurysm, a condition mostly affecting men over the age of 55. Philips develops MRI equipment.

The pressures on healthcare spending mean that managers have to tread carefully in this area.

Mr Utterman has tried to avoid cmpanies exposed to expensive surgical procedures such as hip and knee replacements, which might be vulnerable to spending squeezes. Instead, he prefers companies like Varian, which is developing a method of delivering radiation to treat cancers via linear accelerators, potentially a cheaper way of attacking cancers; and Catamaran, a pharmacy benefit manager that helps health plans manage their pharmaceutical costs.

Christian Schneider, fund manager at Allianz Demographic Trends, has gone for companies that are fairly resistant to pricing pressure, such as Allergan, whose treatment for glaucoma is far cheaper than caring for the blindness that glaucoma will eventually cause. He also has some “discretionary spend” holdings like L’Oréal, the cosmetics products company, some of whose best-known goods are targeted at older women.

Fund managers’ selected picks
Company What it does Exchange Mkt val £
Roche Drug development Zurich 139.6bn
GN Store Nord Hearing aids Copenhagen 2.2bn
Luxottica Spectacles maker Milan 16.4bn
Philips Medical equipment Euronext 17.6bn
Invocare Care homes Australia 0.74bn
Coloplast Ostomy bags Copenhagen 7.4bn
Endologix Non-invasive surgery Nasdaq 582m
Varian Medical Systems Cancer treatments New York 4.8bn
Davita Dialysis equipment New York 8.4bn
Catamaran Pharma services Toronto/Nasdaq 6.4bn
Unicharm Adult nappies Tokyo 7.7bn
Allergan Eyecare products New York 16.3bn
Fresenius Medical Dialysis equipment New York 14.1bn
L’Oréal Cosmetics Euronext 66.0bn
Bangkok Bank Public Banking Bangkok 8.2bn
OCBC Banking Singapore 17.4bn
UBS Banking Zurich 43.4bn
Colgate-Palmolive Consumer goods New York 35.4bn
Diageo Beverages London 48.5bn
Nigerian Breweries Beverages Lagos 4.8bn
 Source: FT.com; XE.com; Fidelity; Allianz; Lombard Odier

Financial stocks also figure prominently in demography portfolios – either to reflect increased demand for financial planning and pensions, or to reflect the growth in developing consumer societies. One of Fidelity’s top 10 holdings is in Bangkok Bank, a strategic play that hopes to gain on Thailand’s growing middle-class, while Mr Schneider’s fund has shares in Overseas China Banking Corp, based in Singapore. “Wealthy Chinese people like to have their wealth managed, not necessarily in China, but nearby,” he says.

Portfolios are also heavy on companies that profit from rising consumer spending in developing countries. One of Fidelity’s biggest holdings is Colgate-Palmolive whose toothpastes, deodorants, laundry products and pet foods are rapidly making inroads into middle-class homes in emerging markets.

Another pick is Heineken-controlled Nigerian Breweries, one of only two beer distributors in Nigeria. Beer is a luxury in many developing markets – Ms Stafford points out that a beer costs the equivalent of three hours’ labour in the developing world, compared to about 20 minutes in the west. No surprise, then, that consumption in developing countries is a fraction of European levels.

Allianz’s Mr Schneider has shares in Diageo, the drinks company whose strongest growth is in Asia, despite its UK listing. Jessica Alsford of Morgan Stanley recommends SCANestléReckitt Benckiser and Danone.

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Demography funds

Several actively managed funds seek to exploit opportunities created by population change, though they are all offshore.

Fidelity’s Global Demographics fund, run as a pilot from 2009 until 2012, is now available to UK investors, though it is domiciled in Luxembourg and is priced in euros. A sterling share class may be launched in future.

German insurer Allianz set up its Demographic Trends fund following studies into population change that it undertook to forecast its core business. It is not currently registered for sale in the UK.

Swiss private bank Lombard Odier launched its LO Golden Age fund in 2009 after studying the needs of senior citizens whose demographics resembled those of its own clients. The fund is structured as a Sicav (the Luxembourg equivalent of an open-ended investment company) and is quoted in dollars, euros or Swiss francs. About two-thirds of its investors are wealthy private clients.

All three funds are heavily exposed to the US market – 60 per cent of the LO fund, 46 per cent of the Allianz fund and 40 per cent of the Fidelity fund.

Schroders runs a Global Demographic Opportunities fund, also domiciled in Luxembourg. Only the dollar share class is open to private investors – the euro-denominated units have a minimum investment of €500,000.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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