Finding gold amid the silver

According to the United Nations’ (UN) World Population Ageing 2020 report, there were 727 million persons aged 65 or over last year. This number is seen to more than double to reach 1.5 billion come 2050. Global life expectancy has also increased: From 66.8 years in 2000, it has now reached 73.4 years in 2019.

This demographic shift will have a significant impact on the demand for healthcare, insurance and funding solutions, among other industries, says Henk Grootveld, portfolio manager of the Golden Age fund at Lombard Odier Investment Managers. He also explains that from last year onwards, the working population in the northern hemisphere has started shrinking, taking along with it the four-decade-long “demographic dividend” generated by the baby boomer generation, or those born between 1946 and 1964.

As the population ages, the number and proportion of retirees will increase, with the biggest swing happening in Asia. The economic tailwind from what was a large, young, working age population both earning income and driving consumption will lose more momentum, as they now transition into retirement where they are spending and living off their own savings.

Grootveld and his colleagues have calculated that the working population will shrink from 4%–5% per year for the next two decades. “If you combine the economies of China, Japan, Britain, Europe and the US together, 2020 is the point where the working population will start to shrink,” he says.

Rob Powell, director of product strategy for thematic investing at BlackRock, says one of the misconceptions when it comes to ageing population is that it is only an issue in developed markets. “That could not be more wrong — the population of Asia Pacific as we know is large and growing and there are more seniors there than anywhere else in the world — particularly China, where birth rates are especially low. The UN, for instance, projects that the number of elderly people in China will reach 120 million by 2050, compared to the 20 million today.”

Demographics and social change

BlackRock has identified ageing as part of demographics and social change — one of the five megatrends that has shaped the fund management giant’s investment thinking. Defined as powerful, transformative forces that could change the global economy, business and society, other megatrends are technological breakthrough, rapid urbanisation, shifting economic power, as well as climate change and resource scarcity.

The firm expects healthcare spending to become a bigger share of household and government spending as economies age. This means that firms that address age-related diseases are poised to benefit from the changes, as well as companies that can provide technologies and ways to provide better care more efficiently.

There will also be a substantial shift in consumer spending. For example, people over 60 accounts for about half of all household spending in Japan versus about 13% for people under 40, BlackRock found. As spending power shifts to older households in western economies, companies seeking growth will need to cater to their unique demands.

The older population is slated to become the biggest spender as consumers aged 65 and above will clock the fastest rate of spending growth compared with other age groups in advanced economies, said a recent Citi report. This generation is able to do so because they have the benefit of holding a higher concentration of wealth among them in the form of financial and real estate assets.

Naturally, this will lead to a sustained growth in elderly care products and services. This market, which encompasses everything from assisted living, nursing care and hospice care is expected to grow at a CAGR of 3.9% from 2020 to 2025, boosted by upsurge in technological advancement and support from various government organisations. According to insights provider ResearchandMarkets, the elderly care products and services market size was US$832.8 billion in 2019.

Silver economy opportunities

Capitalising on the opportunities arising from the growth of the silver economy, Lombard Odier established the LO Golden Age strategy in 2009 to invest in companies that benefit from the changing demographics. The fund focuses on four key areas: Baby boomer brands, healthy ageing, pension providers and eHealth.

The first refers to the companies whose products and services are favoured by the elderly with their large disposable income. The next theme — healthy ageing — refers to companies selling tools and devices to elderly to help them stay active in society, such as hearing aids and adult diapers.

Also, Lombard Odier invests in pension providers, as governments strain to provide for all pensioners. Grootveld explains that “the pay-as-you-go” pension financing schemes commonly used as a first and sometimes only pension pillar, worked “pretty well” when the demographics shifts were stable. With the ratio of workers versus retirees no longer as favourable, that is where the problems started to manifest and new schemes got to be implemented. “We believe that saving for your own pension will become the norm.”

The last focus is eHealth, which refers to the combination of connected patients and digital tools which increases efficiency while lowering costs. According to the market insights provider MarketsandMarkets, the global eHealth market size is projected to reach US$193.8 billion ($265 billion) by 2025 from US$69.5 billion in 2020, growing at a CAGR of 22.8%.

The performance of the healthcare sector largely contributed to the strong performance of the LO Golden Age strategy last year, says Grootveld. In the 2020 calendar year, the fund performed well at 7% ahead of the world index.

Interestingly, the pandemic has pushed the healthcare sector to digitalise faster. “It is now normal for patients to wear oximeters, remote monitoring and telehealth became more prominent, and going on virtual calls with doctors became the norm. The system has become more efficient and consumer friendly and we think this is a long-term trend,” he adds.

The pandemic also brought to light the importance of healthcare over economic growth. “In an effort to ensure the well-being of the population, especially the elderly who were the most vulnerable to the virus, countries shut down their borders and focused on sourcing vaccines. This is a clear sign that healthcare is more important than economic growth, which we think is great.”

eHealth solutions

Recognising the benefits of eHealth solutions, various federal bodies are now supporting the deployment of eHealth solutions in outpatient care settings. For instance, in Australia, the Government of New South Wales (NSW) has introduced the eHealth Strategy for NSW Health 2016-2026, a 10-year programme of innovation, investment and implementation identifying key eHealth goals. This has boosted the adoption of eHealth solutions among stakeholders in outpatient care facilities to deliver better health services and help enhance patient outcomes.

In its most recent budget, NSW announced an allocation of A$500 million ($492 million) to digital health initiatives, looking to scale telehealth innovations from Covid-19 and turning them into a “longer-term strategic transformation”.

The Lombard Odier’s Golden Age strategy also benefited from the baby boomer brands focus. In the pre-pandemic world, baby boomers typically spend their money travelling the world and going on cruises. However, the pandemic has greatly impacted the international travel and tourism sector, which meant that baby boomers spent a lot of money travelling within their own countries.

In response to this consumption change, the LO Golden Age strategy invested in a lot of staycation-themed companies, such as producers of gardening equipment and caravans, which proved to enjoy the consumption of those in their golden years.

Meanwhile, BlackRock launched the iShares Ageing Population UCITS ETF (AGED) in 2016. The ETF tracks the performance of the STOXX Global Ageing Population Index, which is composed of developed and emerging market companies which are generating significant revenues from the growing needs of the world’s ageing population.

Making a case for passive fund management, Powell says there is a misconception that ETF providers would effectively just go to an index provider and track an index that already exists. “With the systematic indexes that BlackRock tracks, we do a huge amount of work before they’re launched to ensure that the indexes reflect our view on these themes. We have done a lot of research into the ageing population theme, looking beyond statistics to seek investment opportunities that our clients can benefit from” he claims.

Similar to the LO Golden Age strategy, the AGED ETF is focused in four key areas: Healthcare, aged care, finance and leisure. The healthcare sector, which comprises about 30% of the ETF, is focused on companies that are treating chronic diseases, geriatric devices and drug developments. Aged care, which comprises 20% of the fund, includes specialist pharmacies, laboratories, retirement villages and specialist care facilities.

Finance comprises the lion share of the fund at around 40%. It includes pension providers, wealth and asset managers such as speciality insurers, says Powell. “This is quite an interesting area, as there aren’t that many disruptive thematic funds where you get exposure to financials. Therefore, our clients use this as a more cyclical and more economically-sensitive theme than some of the other themes.” The last 10% is allocated to leisure, considering that people in retirement have more time to spend on leisure than they ever did before. Powell says this allocation focuses on travel and leisure equipment companies like golf course operators.

The AGED ETF has been disproportionately hit by the pandemic, similar to how the elderly were more affected compared to other age groups, leading to more muted performance. However, the ETF has shown signs of rebounding this year, adds Powell. The ETF has provided an annualised return of 8.05% on the net asset value (NAV) as at Nov 11.

That said, Powell says the theme has gotten an increasing interest from clients who are looking for an economic restart play, having raised over US$574 million ytd. As at Oct 31, the total net assets of the fund is US$980 million.

Golden age investing

According to its September fund fact sheet, the top holdings of the LO Golden Age strategy include asset manager Amundi (3%), contract research organisation IQVIA Holdings (2.9%), scientific instrument provider Thermo Fisher Scientific Inc (2.9%), funeral services provider Service Corporation International (2.5%) and medical technology company Hologic Inc (2.5%).

Grootveld explains that the strategy has a large holding in Amundi as it is a large and cheap asset manager out of Europe with a strong growth angle in China. Its joint venture with the Bank of China is the first foreign majority-owned company in the country to be allowed to design and offer wealth management products, which is interesting given the opening up of the Chinese pension market, he adds.

Service Corp is a US provider of funeral goods and services as well as cemetery property and services. The company operates more than 1,500 funeral homes and 400 cemeteries in 43 states, eight Canadian provinces and the US territory of Puerto Rico.

“This is a typical ageing play for us. What we think is interesting is that a lot of Roman Catholics buy their family grave with their 401k retirement plan, well before they reach the end of their life expectancy. This means that the company is caring for something that has already been paid for and they are providing their services to the entire family. It is a huge growing business,” adds Grootveld.

IQVIA provides advanced analytics, technology solutions and clinical research services to the life sciences industry. The contract research organisation provided the fund with a good outsourcing play for the fund, says Grootveld. Last year, IQVIA collaborated with AstraZeneca for the Operation Warp Speed project, which is of a broader strategy to accelerate the development, manufacturing and distribution of Covid-19 vaccines.

Meanwhile, the AGED ETF’s top five holdings are retirement services company Athene Holding Class A at 0.57%, clinical-stage biopharmaceutical company Biohaven Pharmaceutical at 0.56%, global precision therapy company Blueprint Medicines Corp at 0.54%, financial solutions provider AON PLC Class A at 0.52% and stockbroker Avanza Bank at 0.52%.

Aside from the AGED ETF, there are also several other thematic ETFs targeting the ageing population theme. This includes the Global X Aging Population ETF, which tracks the performance of the Indxx Aging Population Thematic Index and the Hartford Longevity Economy ETF which tracks the Hartford Longevity Economy Index.

The top holdings of the ETFs include pharmaceutical companies such as Novo Nordisk, Eli Lilly and Co and Edwards Lifesciences Corp. Novo Nordisk develops, produces and markets pharmaceutical products. The company focuses on diabetes care and offers insulin delivery systems and other diabetes products. Novo Nordisk also works in areas such as haemostasis management, growth disorders and hormone replacement therapy.

Eli Lilly and Co discovers, develops, manufactures and sells pharmaceutical products for humans and animals. Its products include neuroscience, endocrine, anti-infectives, cardiovascular agents, oncology and animal health products.

Meanwhile, Edwards Lifesciences Corp designs, develops, manufactures and markets products and services to treat late-stage cardiovascular disease. The company offers products such as tissue replacement heart valves, heart valve repair, hemodynamic monitoring devices, angioscopy equipment and oxygenators.

Apart from pharmaceuticals, the ETFs also invest in healthcare services companies like IHH Healthcare. The company operates hospitals, medical centres, clinics and ancillary healthcare businesses across multiple countries including Singapore, Malaysia, Turkey, China, India, Hong Kong, Vietnam, Macedonia and Brunei.

The ETFs also invest in REITs like Welltower Inc, which invests in senior housing and healthcare real estate properties; Ventas Inc which owns seniors housing communities, skilled nursing facilities, hospitals and medical office buildings in the US and Canada; and Healthpeak Properties Inc which invests in senior housing, life sciences, medical offices, hospitals and skilled nursing homes.

Thematic investing

Investing in the silver economy is one of the thematic universes that Lombard Odier focuses on, aside from global health tech, consumer trends, FinTech, climate transition and natural capital. The firm believes that these structural trends can provide rich and varied sources of potential outperformance.

Other firms like BlackRock also offer a range of thematic investing products, as the firm has funds focusing on digital security, electric vehicles and global clean energy, to name a few.

Thematic investing typically stems from the idea of identifying future drivers of returns which could potentially provide investors with the chance to outperform traditional broad indexes. However, critics have pointed out that while new themes appear all the time, many are quickly forgotten, especially those that did not deliver investors with the expected returns.

For investing in the silver economy, the Global X Aging Population ETF has provided an annualised return of 4.36% on the NAV as at Sept 30, while the Hartford Longevity Economy ETF, which was launched in March, has delivered annualised returns of 9.67% since its inception.

The LO Golden Age strategy, on the other hand, has provided investors with 2% to 3% returns ahead of the world index over the past three years. Grootveld describes this as decent and steady, suitable for investors looking for something to complement their retirement fund. “Many investors avoid thematic funds because they think it is too narrow or too specific. They might even think that the silver economy theme is boring, even though it is growing in performance at a steady pace.”

To the critics, Powell says not all thematic funds are created equal. BlackRock, for instance, invests heavily in research to ensure that the firm has a robust construction process for all its ETFs.

“As an index product, there’s no person picking stocks, so we do a lot of work to give our ETFs and the indexes they track the best chance to deliver for clients. We are not just going to launch lots of funds in the hope that some of them stick. I believe that around 70% of our themes have outperformed global equities over the last three years.”

He also notes that the firm had seen an increase in the client’s demand for thematic products over the last couple of years. “The perception that these thematic products are only used by less sophisticated investors could not be further from the truth. We are having conversations with some of the largest institutional investors seeking to use thematic funds to have exposure to disruption.”

Moving forward, Grootveld says he will be looking out for the interest rates movements as it would affect LO Golden Age strategy which has a 27% allocation in the financial sector. “Most of the companies that have sold or are still selling pension products like annuities benefit from rising interest rates,” he adds.

“In the event of continually rising interest rates, growth-oriented funds will suffer while the companies we invest in on average trade on earnings multiple lower than the index and most of the companies pay dividends. So yes, the theme might not be sexy to some investors, but we are steadily growing and I think it will continue to be an interesting theme to invest in.”

From left: Henk Grootveld, portfolio manager of the Golden Age fund at Lombard Odier Investment Managers and Rob Powell, director of product strategy for thematic investing at BlackRock

Financial planning in the golden years

In an ideal world, retirees would have more than enough money saved up to sustain their golden years. However, many Singaporeans end up not having enough — an AIA Singapore survey found that 54% will be “14 years short” when it comes to the adequacy of their retirement savings.

Running out of money in retirement — also known as the longevity risk — is a very real concern in Singapore, says Louis Chin, a financial representative at insurer Great Eastern. He says the baby boomer generation, which is a sizeable segment of the population, have either retired or are retiring in the next five years. Many retirement surveys conducted with this group cited “outliving their own resources” as a main concern.

“In the course of my work, I’ve seen my fair share of customers who are in their late 50s to 60s and are not able to retire anytime soon because of this. On a personal note, my parents were hawkers for a large part of their lives. My dad passed away early this year and as a result, my mother unwillingly retired. Both were in their 60s,” he says.

Chin adds that his father never enjoyed “retirement”, while his mother had to fall back on the “little savings” she had left as they were bearing a significant financial burden taking care of their children while caring for their own aged parents. “These personal circumstances have in turn ingrained in me the importance of early financial planning and this is what I always share with my customers and prospects.”

Even those who accumulated a significant amount for their retirement savings can end up not having enough, says Loh Yong Cheng, lead of advisory at wealth advisery firm Providend. He knows of clients — mainly high-net worth individuals — also run into longevity risk, market risk, inflation risk and withdrawal risk. This is especially the case with those of a certain standard of living, who need to ensure that they can still generate income in their retirement to maintain that standard of living.

“They may not have the money when they need it due to market volatility. They could also be ‘stuck’, as they have invested in many illiquid assets such as properties which may only provide them with rental income. Legacy issues are also a concern — for instance, they may have the option to live off of selling their assets but they ultimately want to pass the assets down to their children. These are the reasons why it is important for those in their retirement age to plan their retirement and continue investing instead of letting their money sit in deposit accounts,” Loh adds.

Strategies to implement

CPF Life and CPF Minimum Sum Scheme are usually used by Singaporeans to provide them funds for their retirements. However, Chin advises investors to supplement these schemes with other investments. Those with lower risk appetite and a shorter investment horizon should consider products or asset classes that have moderate yield with low to no risk, short-term with flexibility of withdrawal and if possible, capital guarantee.

“People of retirement age typically look at relatively safe options like fixed deposits with banks, Singapore Saving Bonds, the Singapore Government Securities Bonds, or short-term single premium non-par plans like the ones that Great Eastern launch from time to time like the Great Single Premium Series. They can also look at other annuity solutions to supplement what they currently have. These plans can be surrendered to receive a portion of their money back in the event of future emergencies,” says Chin.

At Providend, clients that are past their accumulation stage and are currently in the withdrawal phase are presented with RetireWell, the firm’s proprietary methodology which involves splitting the clients’ assets into buckets of five years from the time they stop working.

The first bucket is also known as the “income bucket”, which consists of conservative income stream including CPF Life, rental income and employment income that they derive from working part time. This bucket will be used to fund their first five years in retirement.

The funds in the other buckets will only be needed from the next five years onwards, which means longer investment horizons. These funds can be put into higher risk asset classes such as equity funds and fixed income instruments to help them to beat inflation, says Loh.

In recent years, alternative investments such as art and fine wine have become more popular. However, Chin says investors should never dive into any asset classes out of fear of missing out. “More importantly, one needs to have an understanding of how each asset works and where possible, learn about the asset class or investment which you are about to make. After all, even a few hundred is no small sum of your hard-earned money. Let’s look at alternative investments. I’m not a wine drinker nor a wine lover, so asking me to invest in wine is like gambling. You need to know what you are getting yourself into before taking the plunge.”

Finding the right investment

Providend’s Loh notes that some of his clients in their golden years may want to try buying trending stocks, participate in cryptocurrency investing or other alternative assets that may be considered high risk. However, he would typically suggest limiting such investments into a small percentage of their overall portfolio.

In Singapore, property is a major contributor to household wealth, accounting for nearly 42% of household assets. The asset has worked well so far as a strategy for older generations to grow their personal wealth, as the value of homes and property investments appreciate by multiple folds through the years.

However, buying a new private property may no longer be “that pot of gold” that Singaporeans can solely rely on as their retirement nest egg, according to DBS’s latest NAV Financial Health Series research report. This is due to several factors, including property prices outpacing salary growth and evolving home demographics which have weighed on price appreciation for homes.

Derek Tan, head of property research at DBS, says there are several investment alternatives which have comparable, if not superior, returns that investors can consider as part of maintaining a well-diversified investment portfolio.

This is in line with Loh’s recommendation: Generally, older Singaporeans like to invest in properties because it does not come with the psychological factor that comes with being affected by the day to day market movements.

“We are increasingly seeing more clients, especially the younger ones, who do not see property as the main driver of wealth in the future anymore. In the past, it would make a lot more sense to treat it as such, but buying properties today would take up a huge percentage of the wealth,” says Loh.

The younger generation is also increasingly aware of the different options available to them to generate attractive returns, compared to the past when investment products and instruments may be limited, he adds.

Know the risks

Aside from the general investment strategies, those in their retirement age should also ensure that they have a comprehensive will, which is a vital part of one’s legacy planning. Not having a will may lead to contentious challenges on the asset allocation by intestate succession act, with key family members possibly missing out, says Chin.

Agreeing, Loh says that reviewing wills is one of the key checklist items that he conducts on an annual basis with the clients. “We want them to start thinking about the major changes in their lives at least on an annual basis to determine whether their wishes are still being reflected in the wills.”

Retirees should also be wary of financial frauds and scams, which unfortunately target them as they are considered vulnerable and more trusting than the younger population.

Says Chin: “Over the years, we have read in numerous news reports of scams which sound similar in nature, a promise of sky-high yield spread across three years, delivering back capital on the fourth year. Just when payment is due, the company or the person goes missing. Sounds familiar? When an unknown investment opportunity promises something too good to be true, it shouldn’t be embarked upon.”

Ultimately, investors should always do their own due diligence. He adds: “Seek advice only from trusted and credible sources and not from people who recommended the opportunity to you. Look online for potential Ponzi schemes, and don’t be too eager to commit.”

From left: Loh Yong Cheng, lead of advisory at wealth advisery firm Providend and Louis Chin, a financial representative at insurer Great Eastern

Cover photo: Shutterstock