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Six long-term economic themes investors must not ignore – and how to access them

23 August 2017

Investment veteran and multi-asset specialist Mike Pinggera highlights key investment themes and the best closed-end funds and listed companies exposed to them.

By Rob Langston,

News editor, FE Trustnet

The consequences of changing demographic trends are likely to present long-term economic themes that investors should not ignore, according to Sanlam FOUR’s Mike Pinggera.

Pinggera (pictured), senior multi-strategy manager on the £121.8m, three FE Crown-rated Sanlam FOUR Multi-Strategy fund, said there were a number of key issues that need to be addressed.

He said: “Life expectancy in developed economies has increased significantly over the last few generations and this growing and ageing population has many consequences.

“The challenges we face today will need to be addressed by governments and industries.”

Investment veteran Pinggera said there were many businesses investing in real assets to meet the needs of growing and more densely concentrated populations.

He said: “While much attention is given to the numerous near-term uncertainties – such as Brexit, Trump and tapering – we prefer to focus our attention on these ‘pillars of a functioning economy’.”

As such, Pinggera said the firm has increased its exposure to real assets over the past three years, with its allocation rising from 10 per cent to 25 per cent.

“Our chosen investments provide near-term income in the region of 4 per cent per year from long-term inflation-linked assets,” he said.

Below, Pinggera considers six themes that he believes will grow in importance over the coming years and some of the best closed-end funds and listed companies for gaining exposure to them.

 

Housing

The first theme identified by Pinggera is housing, noting that growing population and slowing home construction has led to a “significant imbalance of limited supply and increasing demand for housing”.

“Coupled with increasing unaffordability, this has led to a rise in renting – a trend set to persist,” he said. “The private rented sector [PRS] is now tackling this challenge by creating new purpose built rental homes.”

One company with exposure to this theme is UK Reit Grainger, which owns, rents and manages residential property assets worth £2.6bn across the UK.

Performance of Grainger over 5yrs

Source: FE Analytics

In its most recent set of results for the six months to the end of March, Grainger chief executive Helen Gordon announced that it had raised £439m of its £850m PRS investment target and was on target to complete a new building every two months over the next two years.


Education

A growing population inevitably will require greater investment in the education sector, and the higher education sector in particular, according to Pinggera.

The fund manager noted that higher tuition fees had not deterred new students from seeking university places – despite a recent fall in applicants last week attributed to fewer EU applicants following the Brexit result and a decline in the youth population.

“With some of the best education institutions in the world, the UK ranks second in attracting international students, who remain an important part of total student numbers – a population expected to double globally by 2025,” he said.

The fund manager said continued demand for university places was likely to be reflected in increased need for accommodation.

“There is a structural undersupply of purpose-built student accommodation in the UK and many providers are helping to meet the demand from all student types,” he said.

The Empiric Student Property Reit – investing in premium student accommodation residences – and Infared Capital Partners £2.9bn HICL Infrastructure – a more generic infrastructure fund – offered good exposure to the theme, he added.

 

Energy

Rising populations are likely to lead to increased energy needs with a greater focus on renewables to help offset the carbon impact of dirty energy sources.

“A larger global population has led to continuous increase in world energy consumption, but also heightened levels of pollution from energy sources such as coal, oil and natural gas,” said Pinggera.

“Consequently, the energy landscape is evolving to one where renewables are beginning to play a significant role in the generation of electricity.

“In the UK, onshore wind is the most mature renewable technology and the country has a naturally high wind resource over many other geographies.”

UK renewables generation as a per cent of total

Source: Sanlam FOUR

Pinggera recommended investment companies with a focus on renewable energy assets, such as: Greencoat UK Wind, Renewables Infrastructure Group, John Laing Environmental Assets and Brookfield Global Listed Infrastructure.


Water demand

“Water is arguably the most important resource,” said the manager. “As the global population grows and an increasing proportion lives in urban areas, the availability of water to meet regional demand becomes more challenging.

Global water use & population growth

Source: Sanlam FOUR

“Across many parts of the world, water scarcity is commonplace, yet existing freshwater shortages are expected to become further strained through climate change – as well as increased demands from agriculture, industry and domestic use.”

He added: “The pickup in urban growth has also resulted in increases in the generation of wastewater.

“This presents opportunities for treatment and recycling – an underexploited resource. Desalination facilities are another modern solution to help tackle shortages.”

As well as the previously-mentioned HICL Infrastructure fund, Pinggera also highlighted 3i Infrastructure, part-owned by listed private equity giant 3i Group, as a way to gain exposure to this theme.

 

Transport & travel

Pinggera said over the past two decades the combination of population growth and increased affordability has resulted in a surge in global air traffic, with revenue passenger kilometres growing at a compound annual growth rate of 5.8 per cent over the past dozen years.

Forecasts from the International Air Transport Association have forecast that demand for air travel will likely double again by 2030, said Pinggera.

“In order to meet demand growth, airlines have increasingly employed leasing,” he said. “Financing companies have been acquiring and leasing aircraft to facilitate airline fleet growth and capacity expansion.”

Investment opportunities to take advantage of this trend include 3i Infrastructure and listed aircraft maintenance company Amedeo.


E-commerce

Finally, Pinggera said e-commerce would remain a key trend in the years ahead with greater take-up by consumers around the world.

“Online purchasing has increased convenience and saved time for consumers, leading to rapid e-commerce growth globally,” he explained.

However, the growth in e-commerce poses logistical pressures for some online retailers as the demand for storage space grows.

“In conjunction with a larger population, retailers are faced with bigger strains on volumes and delivery expectations – driving businesses to pursue more warehouse space,” he said.

“Today, larger logistics facilities are being developed to provide the fundamental infrastructure to handle the continued expansion of e-commerce.”

One such company Pinggera highlighted with exposure to the domestic e-commerce theme is Tritax Big Box, a £2bn London-listed investment company dedicated to investing in very large logistics warehouses around the UK.

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