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OPINION

The grey pound

The grey pound
April 17, 2014
The grey pound

Investors evidently found this reasonable enough: after a lukewarm initial reception, the shares had climbed from the 225p flotation price to about 270p by mid March. But then came George Osborne’s latest Budget, which removed the obligation on retirees with defined-contribution pension pots to buy an annuity. The shares are now at 152p.

This cautionary tale is a good illustration of both the appeal and the limits of demography as an investment theme. The appeal is sheer certainty. The reasons why the UK population is ageing - women started having fewer children in the 1960s, reducing the growth of younger generations, even as improvements in healthcare allowed older generations to live longer - stretch back more than half a century. This means demographers can make predictions with a great deal more accuracy than weather forecasters, economists or stock analysts.

We can be fairly sure, for example, that the global population of people aged 65 and over will double to 1bn by 2030. They will then make up 12 per cent of the total, up from 5 per cent in 1950. In the UK, over 65s are currently growing in number by about 1.4 per cent a year – double the growth rate of 20-64 year olds.

This level of certainty is so rare in the investment universe that such forecasts (from the UN) have been seized on as a route to riches. The theory goes that if companies are specifically serving the needs of the retired - if they are courting the so-called 'grey pound' - then their profits are likely to grow faster than those of other companies. Logically, their shares should then outperform the stock market. This is the rationale for a handful of specialist funds, notably one run by the private bank Lombard Odier.

But you only have to look at the stock positions of this fund, which is called Golden Age, to see that the demographic theme can only ever be a small part of the investment process. Its largest holding is in Danaher (US: DHR), a US conglomerate that describes itself as a "science and technology leader". Of its five "strategic segments", only two (life sciences & diagnostics and dental) seem likely to benefit from an ageing population.

Fund manager Johan Utterman, who used to be a healthcare analyst, also stresses the risks associated with investing in a sector subject to big funding changes in the US and cost pressures just about everywhere. "Health economics is ever more important," he explains. "Companies don’t just need clinical data now; they also need health-economic data" to prove they offer value for money.

There's an irony here. The ageing population may be a source of profits for investors, but it is a headache for governments, for which those profits are often costs. For younger taxpayers like me, the projected growth in unfunded pension liabilities, housing needs and the NHS budget as a result of Britain’s demographics makes uncomfortable reading. But this matters for investors too - governments may find ways to cut costs they see ballooning.

The point is that Just Retirement is no exception: the demographic case for investing in a stock is often overwhelmed by other factors. Newton, an investment house with a thematic approach, cites ‘geopolitics and demographics’ as one of its four ‘theme hubs’. But Richard Wilmot (no relation), who manages the Newton UK equity fund, says the ageing population is not in itself a reason to own a stock; instead it might come into his thought process as a potential tailwind or headwind. For example, he notes Standard Life (SL.) as a key holding likely to benefit from a population growing older and richer. Mr Utterman is keen on St James's Place (STJ) for similar reasons.

But here’s another thought: if the ageing population is a tailwind for healthcare companies and asset managers, it may be a headwind for stocks. In the US, the ratio of 30-59 year olds (who are likely to be savers) to those over 60 (who are likely to be spenders) bottomed out in about 1980 and peaked again at the turn of the millennium - in uncanny tandem with the stock market. Or was something else at play?