Why ageing matters to portfolios

We believe healthcare is a long term theme that investors should incorporate in their portfolios to take advantage of global demographic trends.

In 1950, the average person worldwide could expect to live until the age of 46. By 2019, this had risen to 73.

In Italy, which has the lowest birth rate in Europe, one in five people is above the age of 65. Ageing is an enormously powerful force that has a long way to go yet.

In thirty years' time two billion people will be over 65. They will spend more and more on healthcare, meaning the long term dynamics of the sector are highly favourable. 

Politicians spend heavily on the elderly and would not dare alienate them for fear of punishment at the ballot box.

Many of the major companies in the sector look reasonably valued, providing an opportunity to get exposure at fair prices.

We believe that healthcare companies will perform well for a long time yet and a chunk of our US equity exposure is in healthcare, across most portfolios.

Of course, various shorter-term events can impact the sector. Healthcare valuations have suffered in recent years due to politics, particularly in the US.

But while prices might be choppy as the election cycle gets going again, we don’t think the election outcome will affect stocks much. 

Healthcare companies have also underperformed because they didn’t invest enough in research. But many are now developing technology and treatments that are customised and targeted at a greyer population. 

The healthcare theme will become even stronger as emerging markets mature. Healthcare spending is already rising in the world’s rich countries, but poorer countries are beginning to spend more on healthcare too. 

We are seeing rising demand for healthcare from the middle classes in countries like China, India and Indonesia. They also want high-quality drugs, nursing homes and health insurance products.

More people going into retirement will become aware of the need to save for healthcare as they age.

More and more people will save for healthcare and later life care through solutions like Centralised Retirement Propositions (CRPs).

Advisers are increasingly working on enhanced retirement plans for their clients, which includes making sure they have enough money in their pensions to cover these kinds of costs.

Financial services in developed countries are coming round to the idea that it’s essential for them to help their clients through later life.

More people going into retirement will become aware of the need to save for healthcare as they age. This will provide yet more money for the sector.

A range of specialist strategies can be used to invest in the themes of healthcare and ageing. A core position in the 7IM range of funds is its newest active healthcare manager, from Alliance Bernstein.

The group’s International Healthcare Portfolio, run by Vinay Thapar, slots into 7IM’s portfolios nicely. 

Mr Thapar leads a team that looks for companies that will grow, invest sensibly and pay dividends.

Concentrating our allocation also means we end up putting more money with a specific manager, which allows us to negotiate a better fee deal and gives our clients better value for money.

Demographic trends have various other implications for our portfolios. For example, elderly voters loathe inflation and they turn out at the polls.

This is one of the reasons we expect inflation in the developed markets to remain low for the foreseeable future. 

Politicians spend heavily on the elderly and would not dare alienate them for fear of punishment at the ballot box.

There are notable UK warnings along these lines, such as Theresa May’s ill-fated attempt to reform how people pay for care, and the ongoing expensive policy of state pension triple lock. 

With inflation subdued, a big spike in interest rates is unlikely. Bond yields are so low at present, though, that we regard them as poor investments for long run investors.

Terence Moll is head of investment  strategy at 7IM