Companies which sell to older, wealthier individuals can offer investors protection against the economic cycle, says the manager of Lombard Odier Investment Managers Golden Age fund, Johan Utterman.
With more wealth, confirmed buying habits and predictable needs in terms of health, the older generation use products and services that are often proofed against a downturn.
The US$772m fund plays the ageing population as a powerful megatrend offering opportunities especially in health care, financials and consumer goods.
In developed markets, the over-65 age group is growing around three-times faster than younger generations, while baby boomers and seniors can own from two thirds to as much as three-quarters of the wealth in many countries.
The 60-plus generation worldwide may have as much US$16trillion spending power by next year.
In the US alone, 10,000 baby boomers retire each day while by 2050, an estimated 2 billion people across the globe will be aged over 60.
Utterman says that firms serving this silver generation are likely to see their customer base expand year on year as a result.
As part of the process, Utterman considers whether a company is playing the long-term trend to support his secular or structural growth conviction.
A firm must have exposure to two age cohorts – those aged from 55 to 65 i.e. the baby boomers and 65 plus seniors.
He quantifies this exposure, ranking it from one to four – one deriving 75% of revenues from an ageing customer base to rank four that might include a firm such as Nestle which spends a lot on health and wellness R&D and may have an exposure to older generations at around 30 per cent.
The fund is also seeking stocks with a sustainable financial model i.e. companies looking for big returns on equity and invested capital, high cash flow yield and with limited dependence on external financing.
It also brings in environmental, social and governance factors which help mitigate risk and allows the fund to avoid companies facing controversies and reputational risks.
Healthcare cost pressures
Discussing the rationale for investing in healthcare Utterman says: “In healthcare, one of the biggest issues is that costs are spiralling out of control. We invest in companies that help control those costs through innovative medicines, technology or life science tools.
“Robotic surgery can make surgery more reproduceable and lower the error rate. A robot might have more dexterity and a wider range of motion than a surgeon’s hand. It can make a very small incision, and therefore the patient can recover more quickly and go home earlier. Staying in the hospital is very expensive, so it saves the system money.
“It can involve precision medicine using biomarkers or telehealth where the patient has received a pacemaker, but they can go home and if anything looks askew, the hospital can call the patient back to the hospital.”
Healthcare also demonstrates how Utterman will sometimes take public policy into account.
“With the negative rhetoric on drug pricing, it has been easier to invest in medical technology and devices and lifecare sciences.”
Money to invest
Utterman says that in financial services in the UK, St James’s Place is taking advantage of the advice gap noting that there are reportedly 50,000 dentists in the UK, but only 30,000 advisers. But it also plays on the fact that around 65 per cent of total UK personal wealth is concentrated in the hands of savers aged 55+.
Luxury in later life
It also plays the luxury trend, though it is important to select brands which genuinely serve older people so that means LMVH but probably not Gucci.
Indeed, brands can have exposure across several different market segments.
LMVH includes the Belmond Group featuring high end hotels such as Venice’s Cipriani and travel experiences such as the Orient Express.
Beauty for the ages
Another significant area is anti-aging skin lotions.
“Elderly ladies spend three times as much as younger women. Prestige beauty grows faster than mass market beauty.
“The demand is more resilient and economically strong,” he says. “Take Botox. In the midst of the crisis, demand was still positive. It was the last thing people cut out.”
Investments can range from domestically orientated stocks particularly in larger markets such as US insurance and health care firm Humana to multi-nationals.
In terms of regions, he says he likes the US as there is so much innovation. The market also has depth so that in terms of accommodation investments can range from a senior living operator with residents over 80 to REITs that specialise in 55 plus communities some with affordable housing so you can cover different parts of the population.
He views Japan almost as a thinktank for ideas given its population pyramid is significantly older – highlighting a hotel and golf course operator that targeted members who were 70 years old and where they offered skilled nursing.
Other developments in Japan such as the move to robotics may be taking place within very large conglomerates, but he still maintains a watching brief.
The fund also invests in Japan’s Pola Orbis which with its anti-ageing skin serums with a salesforce of women in their 60s and which is basically a pure play on the trend.