Golden opportunity

February Retirement Strategy

Rising life expectancy and falling fertility rates across the world have produced an aging population and many businesses are looking to capitalise on changing demographics.

The baby boomers born in the aftermath of World War Two are entering their sixties and these so-called golden agers are expected to spend a growing part of income on remaining in good health.

By 2050, this generation will account for more than two billion people and the ratio of workers to retired is shifting heavily toward the former.

As ever, investors are seeking ways to exploit this and a recent fund launch from Lombard Odier taps into the golden age theme.

Head of equity management Aziz Nahas says ageing has a huge impact on society - affecting consumer habits and demand - with healthcare stocks the most likely short-term beneficiary. He says: “Mature technologies, such as hip replacements and pacemakers, will benefit from the growing population of over-60s. Meanwhile, advances in technology and molecular biology will help combat the degenerative diseases typical of ageing.”

Healthcare manager John Bowler, who runs Schroder medical discovery, sets out a convincing case for investing in the sector, not least its defensive characteristics from the non-cyclical nature of illness and ageing.

Bowler says: “An ageing world population means demands on the pharmaceutical industry and medical technology and medical services companies are going to multiply. Increased longevity brings the requirement for new treatments to maintain and improve quality of life. Meanwhile, rising prosperity generally brings with it higher spending on healthcare and this will be most apparent in the most populous developing economies.”

With people living longer, they need to factor this into retirement planning, throwing up the intriguing possibility of golden agers investing in the very stocks benefiting from their own behaviour.

Despite a strong demographic case, however, there remain very few specialist healthcare vehicles available onshore in the UK, with five including two biotech-nology offerings.

In total, these funds only have around £300m under management, with the well established Axa Framlington health by far the biggest at £242m.

Chelsea Financial Services managing director Darius McDermott says he recently picked out healthcare as the theme of this coming decade but also did so back in 2000.

He says: “The ageing population theme is not a new one in the West and the demographic story behind healthcare is well documented. But emerging markets turned out to be the story of the last decade, plus the commodities driven by their growth, and investors seeking a health-care play still have a fairly limited choice.”

McDermott notes the Schroders and Axa portfolios, saying the latter produced 57 per cent growth in the 2000-2010 period against a 22 per cent decline in the FTSE.

He says: “That is clearly a decent return and if the few existing healthcare funds start to take in money, we might see more launches over the coming years. But there is nothing to suggest that an explosion of new product in this area in imminent and anything like that would always be cause for concern after the TMT situation.”

McDermott highlights that healthcare is a specialist area and he would be worried if several global equity managers started running sector vehicles, as happened during the tech bubble.

He says: “The successful healthcare funds are run by genuine specialists and we would want to see a manager’s stock picks in this area consistently beating the sector benchmark to give launches any credibility.”

For investors wary of sector funds, healthcare and phar-maceutical stocks have many fans among the best-known equity managers, including Neil Woodford and Tony Nutt in the UK.

Jupiter’s Nutt starting taking in the sector again in 2008 - after 12 years of avoiding it - believing that many companies have altered poor business models.

Nutt says: “After a long period of declining returns, stocks are now developing successful products again but valuations remain very low as they had previously failed to do so for over a decade.

“We see real value in many companies, with a stock like AstraZeneca scheduled to have a third of its market cap in cash by 2015.”
But despite the current pharmaceutical bias in many funds, McDermott says many bearish income managers are buying these stocks simply as defensive and high-yielding positions.

He says: “There is no guarantee that these funds will be holding healthcare stocks in a year’s time as the background may have changed. There are risks with single sector funds but if people like healthcare as a long-term bet - a view supported by demographics - it may prove worthwhile including a satellite play in your portfolio.”

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