Young funds bet big on free-spending seniors

Wed Jun 26, 2013 5:26am EDT

* Age-related funds say they're outperforming indexes

* Investing in health, leisure, savings stocks

* Critics say thematic funds restrict investor choice

By Christian Plumb and Sinead Cruise

PARIS/LONDON, June 26 (Reuters) - Their birth heralded the longest phase of economic growth in living memory. Now, 65 years on, wealthy "Baby Boomers" are doing the feeble global economy another good turn, according to some fund managers.

Millions of newly-retired Europeans, North Americans and Japanese are breaking open bulging pension pots, spelling big profits for investors who can spot the companies best placed to cater to their spending habits.

A small but fast-growing class of mutual funds is buying shares in firms with most to gain from ageing populations, from drugmaker Roche and Norwegian Cruise Line to funeral operator Service Corporation International.

While the subject may not be racy, the returns can be, with two of Europe's biggest such funds, Lombard Odier's Golden Age fund and CPR Asset Management's Silver Age fund, achieving respective returns about double and four times the equivalent 13 percent of the Eurostoxx index since their 2009 launch.

"The over-65s tend to have much higher disposable income and part of the reason for that is because they had money invested in the stock market during the 1980s and 1990s when shares were doing exceptionally well," said Johan Utterman, portfolio manager of the Lombard Odier Golden Age Fund.

Golden Age returned 34 percent from its inception in November 2009 through the end of May while Silver Age had gained nearly 50 percent since it kicked off activities a month later. Both have, however, lost ground in the equity markets rout in recent weeks - roughly 5 percent and 6 percent respectively.

Similar funds in Europe include Schroder International Selection Fund Global Demographic Opportunities and, in Asia, the somewhat more broadly themed Chang Xin Jinli Equity Fund, which has some $900 million under management.

CPR, while investing only in European equities, says the old age theme is broad enough to allow a diverse portfolio. The fund has considered buying some Japanese stocks - given that Japan is the country whose population has the highest proportion of old people - though it has shied away from doing so thus far.

"Other funds have attempted this, but they typically had too narrow a way of looking at ageing," said Vafa Ahmadi, head of thematic and sector allocation funds at CPR Asset Management. "They didn't consider ageing except through health care in the larger sense, whether drugs or retirement homes."

Widening the net to the early retirement years allowed the fund to make leisure and savings stocks key portfolio themes along with pharmaceuticals, healthcare equipment and wellbeing - which includes cosmetics companies such as France's L'Oreal and Germany's Beiersdorf.

Beiersdorf, the maker of Nivea face and body lotions, "understood as well as L'Oreal and perhaps better that they needed to provide something that was less top of the range in terms of price and which was focused on men," Ahmadi said.

"This is what we like, when (the ageing trend) impacts the business model - you find real deposits of growth," he said.

FADS AND PHENOMENA

Demographically-focused investments are a key test of demand for thematic funds, many of which have struggled to attract U.S. investors since the bursting of the dotcom bubble crushed various Internet-themed funds.

But while the dotcom boom was a product of a particular period in time, the ageing process and the specific consumption patterns it promotes, are here to stay, fund managers argue.

"The UN has published several statistics that demonstrate how powerful the theme is," said Utterman, adding the population of people 65 or older was expected to rise at triple the pace of those aged 20 to 64.

The increasing popularity of ageing-related funds in Asia and Europe - albeit from a small base - also demonstrate the lure of a good narrative in selling funds, experts say.

This is especially true in an era when actively managed funds based on specific economic trends face growing competition from low-cost index tracker funds.

Assets under management at CPR's Silver Age have jumped to 152 million euros ($199 million) from 93 million at the end of 2012, while Golden Age runs around $300 million.

Sceptics, however, say limiting funds to a theme leaves managers' hands tied if, for example, pharma stocks fall out of favour or oil drillers and utilities - which have no age bias - rally.

"While the economic or social shift might be very important and be reflected in stock prices and asset values, one can box oneself in by creating a fund dedicated to such a theme," said Nicholas Lyster, CEO of Principal Global Investors (Europe), a subsidiary of Principal Financial Group.

"There is a danger that one is slave to the theme and buys a stock at any price," said Lyster.

Popular wisdom counts death, and thus the ageing process, as one of the few certainties in life, but there are no guarantees that future retirees will enjoy the same kind of spending power flexed by the "Baby Boomers".

Savings rates have dwindled as living costs have increased, and the financial investments that make up the lion's share of a retirement savings pot have been badly hurt by years of financial crisis and global recession, experts say.

Data from the Washington D.C-based Investment Company Institute suggests U.S. retirees were broadly better off than younger members of the population in 2011, with 22 percent of citizens aged 18 or younger living in poverty compared with just 9 percent for those aged 65 or older.

But unless economic portents improve quickly, the opportunity to cash in on wealthy retirees may come and go within a generation, rendering some of these targeted business models obsolete.

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