How to Pocket the Grey Pound

As seen in the latest issue of Master Investor Magazine

It is estimated that the number of older people in the world – defined as those aged 60 or over – will increase from 901 million to more than 1.4 billion over the fifteen years to 2030. By the end of this period they will be more common than children under 9, while those in the 80 plus bracket will have passed the 200 million mark. 

The ageing population will create many challenges, especially for governments who will have to pay for the pension and medical needs of the growing number of retirees out of the taxes generated by a smaller workforce, but there will also be opportunities.

In many countries older people own up to three-quarters of net financial wealth, which means that companies that can successfully market products and services to them may be able to grow faster than the market as a whole. Businesses operating in the healthcare, pensions, insurance and leisure industries could all be major beneficiaries.

One way to take advantage is to invest in a fund that specifically aims to make money out of this trend. A good example is Lombard Odier Golden Age, which was launched in March 2003 and has attracted $638 million in assets under management.

Johan Utterman, the fund manager, has put together a concentrated portfolio of 48 stocks from around the world with 85% of the exposure divided between the US and Developed Europe. His largest sector weighting is the 47% allocation to Healthcare that includes major positions in Medtronic, Thermo Fisher Scientific, Allergan – the maker of Botox − and Roche.

The portfolio has been built from the bottom up and reflects the best investment opportunities that Utterman and his team can come up with. These include the providers of consumer goods and services, as well as financial stocks, which could all benefit from the wealth of older people. Over the last five years the sterling hedged share class has risen by 40.6%.

Another option is the £1 billion CPR Silver Age fund, which was launched in December 2009 and is domiciled in France. This is almost entirely invested in Europe and the UK, but provides exposure to the same sort of sectors as the Lombard Odier fund. The largest holdings include Roche, Sky and Renault, although the performance has been modest with a five-year return of just 9%. You may need to speak to a financial advisor if you want to invest as it is not directly available to private investors.

More discretion

Niche mandates can be a bit hit or miss, so it might be better to invest in a fund that has a higher than average exposure to Healthcare stocks so as to benefit from the general trend while giving the manager more leeway when looking for opportunities.

The highest profile example is the £8.9bn Woodford Equity Income fund where Neil Woodford has consistently maintained a large overweight position in the sector. At the end of May, Healthcare stocks accounted for 36.49% of the portfolio, well ahead of their 8.68% weighting in the FTSE All-Share benchmark. This was largely due to significant positions in companies such as AstraZeneca, GlaxoSmithKline, Roche and AbbVie.

Since it was created in June 2014 the Woodford Equity Income fund has returned 20.95%, which is significantly better than the 1.26% increase in the benchmark. The performance in the last few months has been fairly lacklustre, but nobody can doubt Woodford’s long-term record.

The Artemis Global Select fund has more of a thematic approach with ‘rising healthcare costs’ and ‘retiree spending power’ each accounting for 11% to 13% of the portfolio. It has a decent long-term track record and is one of the better performing funds in the Global Sector with a three-year return of 32.8%.

The idea behind the healthcare theme is that companies that can make treatments more affordable, such as generic drug manufacturers and distributors, should benefit from the growing demand from the emerging markets and from the debt laden governments in the developed world.

‘Retiree spending power’ is slightly different. This targets businesses that the managers think will benefit from the increasing number of healthier and wealthier retirees who have the resources to enjoy holidays and other leisure activities.

Specialist healthcare funds

There are also a number of specialist Healthcare funds. These are not specifically designed to benefit from the ageing population, but the companies they invest in should do well from the extra demand from older people.

The most successful open-ended examples include Polar Capital Healthcare Opportunities, AXA Framlington Health and Pictet Health, which are all near the top of the Specialist sector with five-year returns of 170.6%, 111.5% and 89.5% respectively.

The Polar Capital fund is managed by Daniel Mahony and Gareth Powell, who have put together a concentrated global portfolio of 40 to 45 stocks based on the underlying fundamentals. These provide exposure to all aspects of the Healthcare sector, including equipment, services, drugs, pharmaceuticals and biotech.

It was launched in December 2007 and by the end of May 2016 had generated a cumulative return of 148%, which was well ahead of the 70% produced by its MSCI All Country World Index/Healthcare benchmark. The impressive performance has enabled the fund to attract $921 million of assets under management.

AXA Framlington Health has a longer track record having been created in February 1987, but it is only about half the size of the Polar Capital fund. Over the last five years the gain of 108.7% has failed to keep up with the 121.9% return from the MSCI World Healthcare index.

At the end of April it had a 25.7% exposure to biotech stocks. This was much larger than the 14.4% weighting in the Polar Capital fund and is where many of the strongest returns have come from with the major holdings including Amgen, Celgene and Gilead Sciences.

Closed-ended options

There are two specialist healthcare investment trusts that provide a general exposure to the sector, with the best performer being Worldwide Healthcare Trust (LON:WWH), which can boast a share price gain of 157.3% in the last five years. Polar Capital Global Healthcare Growth and Income (LON:PCGH) has lagged significantly behind with a return of just 74.6%, although this could be partly due to its greater emphasis on income.

WWH is managed by Frostrow Capital, which has appointed the specialist team at OrbiMed Capital to run the portfolio. They currently have 62 separate holdings with the top 10 including stocks such as the ONO Pharmaceutical Company, Allergan, Bristol-Myers Squibb and AbbVie.

The managers expect the Healthcare sector to benefit from the greater demand for medication and treatment from the ageing population, as well as the huge amount of innovation around areas such as gene therapy. There should also be a significant level of M&A activity as the large pharmaceutical companies expand their drug pipelines by buying smaller rivals.

Worldwide Healthcare Trust has had a difficult 12 months, with the shares down around 5% and the discount to net asset value (NAV) widening to 8%, but this shouldn’t detract from its long-term track record, which has been excellent since it was created more than 20 years ago.

Healthcare property funds

You may also want to consider the two specialist property funds that invest in this area. Age UK estimates that the number of people that are over 85 in this country will double in the next 20 years and treble in the next 30. This should result in a massive increase in the demand for care homes and other medical facilities.

The £270 million Target Healthcare Real-Estate Investment Trust (LON:THRL) aims to provide an attractive level of income, with capital and income growth, by investing in a diversified portfolio of freehold and long leasehold care homes and other healthcare assets in the UK.

At the end of 2015 the fund owned 31 properties valued at £167.2m and it has since bought a further three. These are typically let out to specialist care home providers and generate a high and reliable source of income. THRL has been paying quarterly dividends of 1.545 pence per share, which gives it a yield of 5.67% and explains why the shares are trading at an 8.7% premium to NAV. It has been a fairly volatile performer but is up 23.89% in the last three years.

The other option is the MedicX Fund Limited (LON:MXF). This aims to achieve rising rental income and capital growth by investing in a portfolio of modern, purpose built primary healthcare properties. The £327 million fund owns 148 different buildings of which 143 have been let out with the other five under construction.

Investors have been receiving quarterly dividends of 1.4875 pence per share, which based on the latest share price is equivalent to a yield of 7.21%. They have also enjoyed a decent capital gain with the shares up 27% over three years and 49% over five years. The main problem is that the shares trade on a massive 48% premium to NAV because of the solid government-backed revenue, which could make the share price extremely vulnerable.