Longevity Economy strategy - September 2022

 Global demographics continue to shift day by day to a higher mix of older persons

• Global equity markets continued their fall in September
• The strategy outperformed the broader equity market
• Global populations continue to age likely driving gradual but meaningful changes in consumption patterns

What’s happening?

Global equities continued their fall in September, continuing a trend we have seen for much of the last 12 months after a brief hiatus in July. Macroeconomic concerns continue to be the biggest influence on investor sentiment although the exact macroeconomic concern driving markets continues to change on a regular basis. In this case there were concerns about the future path of the Federal Reserve’s funds rate in the US and concerns about the British Pound and murmurs about the risk of contagion after a hastily announced tax plan from the UK government invited a negative reaction from financial markets.

Against this backdrop, the longevity economy continues to develop. Global demographics continue to shift day by day to a higher mix of older persons. As Professor Andrew Scott, co-author of the book “the Hundred Year Life” once said to me “the average person has never been so old and has never had so long left to live”. And as these changes occur, we expect consumption patterns to change benefitting those companies exposed to the longevity economy.

Portfolio positioning and performance

The longevity economy strategy outperformed the broader equity market in September (as judged by the MSCI All Country World index). While all four themes of the strategy fell in absolute terms, longevity economy stocks generally held up better than the broader market. As we have previously identified, the longevity economy is not exposed to information technology (IT). While this has previously been a headwind to performance of the longevity economy strategy, in September the lack of exposure was a positive contributor to performance as investors continue to reassess some of the rosiest growth predictions of the IT sector.

An important element of the longevity economy is the concept that longevity is about whole of life, not just the end of life. For example, we save for our later years with pension contributions throughout our lives. Similarly, maintaining physical activity throughout our lives can improve whole of life fitness. For many years the longevity economy strategy has been exposed to fitness apparel producers such as Nike. During that time there has been an increased focus from consumers on athleisure wear and fitness. Sneaker/Trainer sales have also risen during this time as they have become more of a fashion item. These trends have increased investor interest in fitness apparel companies that produce the latest styles on a seasonal basis over companies that sell similar, continuity, product lines year after year. We have also seen increased sales for companies exposed to younger consumers following the latest fashion trends. The demand was so strong for many companies that gross margins improved as they could raise price and reduce discounting activities.

However, it was worth noting that basing business growth on regular new product launches aimed at a customer with less overall disposable income was likely to be risky if either consumer fashion trends changed and/or consumer budgets became more constrained. In September, Nike reported financial results that disappointed investors, with investors particularly focusing on weaker gross margin. For us, this was at least partial foreseeable and was the reason we reduced our exposure to fitness apparel names such as Nike several months ago.

Outlook

We are getting increasingly positive on the valuations we see in the market. For example, we can find companies selling for their lowest valuation in the last 10 years with businesses perfectly capable of weathering an economic downturn. Similarly, we are starting to see some companies selling for less than net tangible book value. While not all lowly valued stocks will turn out to be mispriced, the risk of overpaying for stocks seems lower now than it did 12 months ago. But in a market where investors are focused on macroeconomic concerns above everything else and feeling fearful, company fundamentals are not driving stock performance at present. While this should be a boon for fundamental investors over the long-term, in the short-term returns are likely unpredictable, increasing the risk that investment decisions made in the short-term may initially show losses.

The longevity economy strategy is tilted towards growth companies and we expect this to be beneficial over the long-term, but it does mean the strategy could lag the broader market during periods of volatility or when growth stocks are not favoured by investors.

The lingering impact of the COVID-19 pandemic continues to disrupt certain sectors, such as healthcare providers and medical device makers, while benefitting others, such as diagnostic test makers and vaccine developers. We continue to believe in the long-term trends driving healthcare demand (ageing populations and increasing prevalence of lifestyle diseases for example) but in the near term, some companies benefitting from these long-term trends may experience below trend growth.

Despite the market volatility, global populations continue to age likely driving gradual but meaningful changes in consumption patterns. And as an example of this trend, I am willing to wager that you, dear reader, are older now than you were when you started reading these monthly perspectives…although I hope not significantly so.

Examples are provided for informational purposes only and  should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.

No assurance can be given that the Longevity Economy Strategy will be successful. Investors can lose some or all of their capital invested. The Longevity Economy Strategy is subject to risks including: Equity; Currency; Global Investments; Emerging markets; Investments in small capitalisation universe and Investment in specific asset classes.