Profit from the elderly

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Johan Utterman, manager, Golden Age fund, Lombard Odier Investment Managers.

Over the next 15 years, the number of over-65s in Europe, the US and China is expected to grow three times more rapidly than the number of 20- to 64-year-olds. After benefiting from buoyant stock markets throughout the 1980s and 1990s, today’s elderly tend to be wealthier, save less and spend more than both their predecessors and younger generations.

This is good news for companies who sell goods and services to this age group, which is less vulnerable to the economic cycle than most others. By focusing on this ageing population trend, investors can spot companies that should grow faster than the market. The recent market weakness offers a buying opportunity for all three of the companies listed below.

Brookdale Senior Living (NYSE: BKD) is the largest operator of housing for the elderly in the US, catering mainly to the over-80s. It’s the leader in a fragmented, capacity-constrained industry, which is supported by demographics in both the short and the long-term. Occupancy rates and pricing are rising, which is driving operating leverage. Meanwhile, new construction in the sector is at historically low levels despite growth in the target age group. Currently, there is only enough specialised accommodation for 1.9 million people of the 12 million who are over 80.

The recovering US housing market is increasing the prosperity of elderly property owners, many of whom have paid off their mortgages, making them better able to afford specialised housing. In addition to this demand, we believe there is value in Brookdale’s large real-estate portfolio.

A second and less obvious way of tapping into the aging population’s spending is via Sotheby’s (NYSE: BID), one of the world’s leading art auction houses. Sotheby’s has access to the world’s wealthiest, and often elderly, people. Art itself has a track record of investment longevity and financial performance. The Mei Moses Fine Art Index shows, for example, that art has significantly outperformed stocks over the last five and ten-year periods. Sotheby’s stands to benefit from an increase in art auction volumes and prices, especially after its recent increase in commissions.

With 13% market share, Service Corporation International (NYSE: SCI) is the leading funeral services and cemetery operator in the US. We see some extra life in the shares from the company’s recently announced acquisition of Stewart Enterprises.

Consolidation in a highly fragmented industry makes for more efficient administration and economies of scale. Service Corp may well beat its own estimates over the next two years, as it did in the past with a previous acquisition. We like the company as the ageing baby-boomer generation is increasingly paying for its own funeral services as part of its estate planning. You can see that in Service Corp’s pre-paid future revenues of $7.5bn, which amounts to three times annual revenues.

Someone with a morbid sense of humour might say that Service Corp is the perfect hedge to Brookdale. Or to put it another way, even once the elderly have finished buying art and paying for care, there are still companies set to benefit from their wealth.