How to profit from the war on obesity

As more countries join the ‘developed’ world, obesity is becoming a global problem. That presents a huge opportunity for canny investors, says Matthew Partridge. Here, he picks one of the best ways to profit.

It's been called the silent epidemic'. Experts believe that it may result in many children having a lower life expectancy than their parents.

I'm talking about obesity.

In the US more than a third of all adults are obese. Another third are overweight. In Britain, more than a fifth of adults have serious problems with their weight.

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It's not just a problem in developed countries. As developing nations become wealthier, their citizens adopt more sedentary lifestyles and more fattening diets. Two-thirds of the world's population now lives in countries where being overweight is a bigger problem than malnutrition.

It's a huge and growing problem which also means a huge opportunity for canny investors

Making food less fattening

As well as threatening to reduce lifespans, obesity is leading to soaring medical bills, as conditions like diabetes become more common. This means that governments are keen to find ways to tackle the problem too.

There are all sorts of ways to invest in the sector, from the search for an effective anti-fat' pill, to treatments for the side-effects of obesity. But one particular area looks interesting to us superfoods'.

The trouble is, it's very hard to get people to eat less. So one idea is to make the foods they eat less fattening. This is obviously not a new idea. Diet' drinks have been around for over 60 years. Indeed, Diet Coke is now the second biggest selling brand in the US.

However, as more and more people find that they have to watch their weight, sugar substitutes are being used in a greater range of products. This makes it increasingly big business.

Market research firm Global Industry Analysts estimates that the size of the global market will soar to $1.5bn by 2015. Concerns about the health impact of eating too much salt are also driving sales of salt substitutes.

This market could expand even more rapidly if some of the drawbacks with the current crop of sugar substitutes were overcome. Most experts agree that they help to keep weight under control. However, some think that this is offset by the fact that they also boost appetite, so you end up drinking and eating more to compensate.

Attempts to find a way to cut down on salt have also floundered on the fact that the unique structure of salt plays a large role in the taste process. Many of the popular substitutes also have an aftertaste that puts people off.

How to profit from superfoods

So how can you profit from this trend towards superfoods? Should you invest in some small up and coming biotech company? Actually, no.

It may surprise you, but FTSE 100 blue-chip Tate & Lyle (TATE) is in a great position to benefit from this trend. Two years ago it made the bold decision to sell off its sugar refining operations (though BlackRock's Nick McLeod-Clarke notes that it is still makes a lot of money from other agricultural commodities). It instead shifted focus to artificial sweeteners, such as the wildly successful Splenda. Sales of these products grew by 15% in the first half of 2012 compared with the same time last year, and now account for over a third of the company's revenue.

And now the company has developed three "game-changing" products that could be a solution to the drawbacks of conventional sugar and salt substitutes: Tasteva, Purefruit and Soda-Lo.

Unlike virtually all other substitutes, which are man-made, Tasteva and Purefruit are in part directly derived from plant extracts. Tasteva comes from the stevia plant while Purefruit comes from the monk fruit, which is found in Asia. Both allow for a reduction in the amount of sugar used, and therefore calories consumed, while cutting the risk of side effects.

While there are other companies working on similar products, they all have an aftertaste than some people find bitter. Analysts believe that Tasteva and Purefruit's advantages will mean that they eventually take over, and even surpass, Splenda.

Soda-Lo Tate & Lyle's salt substitute - works by changing the structure of salt crystals so that they are smaller and don't clump together. This fools the mouth and taste buds into thinking that a dish or food is saltier than it actually is.

This means that the amount of salt used can be reduced by up to half without losing any taste. And the fact that it is chemically identical to ordinary salt means that there are no side effects.

Despite excellent prospects, Tate & Lyle shares are still reasonably priced, trading on a price/earnings ratio of 13.5, and offering a yield of 3.3%. My colleague Phil Oakley recently examined Tate & Lyle in depth. (If you're not already a subscriber to MoneyWeek magazine, subscribe to MoneyWeek magazine.)

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Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri