The developed world’s life expectancy surged by 30 years over the course of the 20th century and continues on an upward trend. This, coupled with declining birth rates, means that the average age is move steadily up - with implications for investors.A common argument goes that stock markets will start to fall as older investors sell their shares to fund retirement.
At the same time, the younger generations will fail to act as a support for markets as they save less and pour less cash into riskier assets such as stocks.
Stephen Lamacraft, a fund manager at Woodford Investment Management, said: “Most academics agree that an ageing population lowers the long-term structural growth rate of an economy, citing Japan as a real-life example of this phenomenon at work.”
“Demographics are undoubtedly an important and enduring influence on long-term stock market returns and we would suggest that investors should be conservative in their expectations for equity market returns and, indeed, returns from other asset classes.”
“All else being equal, one would expect a lower economic growth rate to translate into slower stock market growth. All else never is equal, however, and valuation will remain the most important determinant of stock market returns. This brings us neatly on to the opportunities that the silver economy presents.”
Healthcare
Lamacraft points out that the most obvious area to benefit from an ageing population will be the healthcare sector.
The £2.6bn CF Woodford Equity Income fund has about one-third of its portfolio in the healthcare sector, owing to the view pharmaceuticals are set to make “further significant advances” in coming years.
Performance of indices over 7yrs
Source: FE Analytics
“We have become better at allowing people to live longer but there are still many significant areas of unmet medical need. Diseases of the central nervous system, for example, have proven difficult to combat.”
“But companies such as AstraZeneca and Roche are working on new treatments for Alzheimer’s disease and have seen some promising results in early clinical trials.”
AstraZeneca is the fund’s largest holding with a weighting of 7.85 per cent and Roche is the ninth biggest position at 3.28 per cent.
Both were stocks owned by Woodford when he ran his giant UK equity income portfolios at Invesco Perpetual, which he departed earlier this year to launch his own venture.
CF Woodford Equity Income is also invested in smaller companies exploring early-stage treatments for Parkinson’s and other diseases associated with old age.
Clinical stage biotechnology company Prothena is the 28th largest holding with a 1.14 per cent weighting and development stage biotech firm Vernalis is the 43rd biggest at 0.53 per cent.
Early-stage technology
Lamacraft added: “Prothena and Vernalis are just two examples of the early-stage biotechnology businesses that we have backed.”
“There are others from the life and environmental science fields, which are capable of delivering eye-catching returns to patient long-term investors if they fulfill their potential.”
“Most of these opportunities emanate from the great intellectual property that is being developed in British universities all the time.”
The CF Woodford Equity Income fund has 2.84 per cent of its portfolio in Allied Minds, 2.50 per cent in Imperial Innovations and 0.64 per cent in IP Group.
All three names work in the areas of intellectual property commercialisation, with the latter two focusing on the UK.
“Not only can they deliver long-term returns to investors, they can also help to rebalance the economy in the longer term,” Lamacraft said.
“The commercialisation of the best in British intellectual property can create high-value jobs, and investing in this area plays to one of the UK’s greatest strengths: its world-class universities and their cutting-edge research.”
“By backing fledgling technology firms, investors can potentially gain from the ‘knowledge economy’ and see wider long-term economic benefits.”
Outsourcing
The fund is also positioned to benefit from the positive impact of an ageing population on the outsourcing industry, with business process management and outsourcing solutions provider Capita being its sixth largest position at 3.88 per cent.
Performance of stock vs index over 7yrs
Source: FE Analytics
Lamacraft said: “With its budget already under considerable strain, the UK government must continue to embrace the private sector for outsourced solutions. This is positive for companies such as Capita which offer solutions which can deliver a better service at a much lower cost than the civil service has been able to.”
“The fiscal deficit problem will only deteriorate as the dependency ratio worsens, which we believe will result in profitable long-term growth opportunities for Capita and others.”
Capita has performed strongly of the seven years of the past market cycle with a return of 82.89 per cent - some 20 percentage points higher than the FTSE All Share’s climb over the same period.
The firm has fared well because of its strong international business and a fairly even split of revenues from the public and private sectors.
Lamacraft concludes: “An ageing population may subdue the performance of the broad stock market in the years ahead. But it also presents sufficiently exciting opportunities that perceptive investors shouldn’t worry about going grey prematurely. For those prepared to take a patient approach, the silver economy should have a silver lining.”
Performance of fund vs sector and index since launch
Source: FE Analytics
CF Woodford Equity Income only launched on 14 July 2014 so its track record is extremely short.
Since inception, the fund is up almost 3 per cent, compared with a fall of 1.37 per cent in its FTSE All Share benchmark and a decline of 1.83 per cent by the average fund in the IMA UK Equity Income sector.
The fund has clean ongoing charges of 0.75 per cent and a yield of 4 per cent.
