Investing in the ageing population: A conversation with Giulia Culot from Sycomore AM

Giulia Culot, Fund Manager at Sycomore AM (part of Generali Investments) and fund manager of GIS SRI Ageing Population.

As the global population undergoes a profound demographic shift, the implications for investors and society as a whole are substantial. With India poised to overtake China as the most populous country, and a clear trend towards an aging population worldwide, it becomes crucial to explore the investment opportunities and challenges arising from this paradigm shift.

In this exclusive interview, we speak with Giulia Culot, Fund Manager at Sycomore AM, and the driving force behind the GIS SRI Ageing Population fund. With her expertise in sustainable investments, Giulia sheds light on the evolving global demographic trends and how her fund navigates this landscape.

India is imminent to overtake China in terms of population, due to a slowdown in China's growth trend. What trends are you seeing in global demographic trends?

The projections contained in the latest United Nations publication on global trends, "World Population Prospects 2022", indicate that the world population will grow to approximately 8.5 billion in 2030 and 9.7 billion in 2050. Within this growth, the trend that emerges most clearly is the growing aging of the population: according to United Nations forecasts, the share of the world population aged 65 or over will go from 10% in 2022 to 16% in 2050. The number of people aged 65 and over worldwide will be more than double the number of children under 5 and roughly equal to the number of people under 12. It is a consolidated and visible trend that governments on a global level will have to increasingly manage by investing in services, solutions, and infrastructures designed for the elderly.

At a geographical level, in recent weeks China has ceded the primacy of the most populous country in the world to India. In all likelihood, the Indian population will continue to grow for several decades, while the Chinese population has reached its peak and will continue to decline in the coming years, falling below the threshold of one billion inhabitants before the end of the century. Albeit at different rates, both countries are experiencing a shift in their populations toward older age groups.

What specific sectors does the fund intend to leverage to invest in aging populations? Which, in particular, are more attractive today?

The sub-fund is invested in three themes: Health, Pensions & Savings, Consumption. The health segment is the most important in the portfolio today, at 44% at the end of May 2023. I am particularly positive about this segment. The reasons? On the one hand, pharmaceutical companies, offer a good mix of defensive profile and catalyst events throughout the year thanks to the publication of clinical trial results. On the other hand, MedTech companies, which were massacred in 2022 due to rising government yields, today allow us to invest in companies with unique growth dynamics (5 to 15% organic growth per year) at relatively attractive valuations. The Pensions & Savings pillar accounts for approximately 17% of the portfolio and mainly includes life insurers and asset management companies. These companies are traded 'cheap' despite the fact that especially insurers, historically have fewer negative reviews than those of the market in recessionary phases. Furthermore, the solidity of the financial statements and solvency ratios, which allow treasury share purchase plans, represent elements in favor of the sector. The risk linked to an exit from the insurance plans in favor of direct investments seems contained to us for the securities in the portfolio (given their business mix and geographical profile). Finally, the companies in the Consumer pillar (39% of the portfolio) have a diversified profile, which includes more defensive and more cyclical segments, in which we have the flexibility to act in the event of a more marked deterioration of the economy or, on the contrary, a more positive than expected.

What are the perceived risks to the financial sustainability of social security and healthcare systems globally, and how are these risks expected to impact companies involved in the aging issue? Are there other risks that you take into consideration?

The need to rethink social security systems, from my point of view, represents more of an opportunity than a risk for companies in the private sector. In developed countries, the ever-decreasing number of workers in relation to retirees makes long-term pension systems unsustainable. In emerging countries, social protection is not developed (we speak of the "protection gap"). This pushes individuals to have to look for compensation solutions, through life insurance plans or managed savings. An example of an investment in this segment is Prudential, a company listed in London but exposed to the pension and savings market in Asia and Africa. As far as health systems are concerned, I think there will be winners and losers. We have clearly seen, in the debate on medicine prices that has animated the United States for several years, that there is no room for prices or high inflation where there is no innovation and therapeutic advantage for patients. Therapeutic advantage must also materialize in an advantage for the system, which finances innovation if it allows reduced costs in the aggregate (the concept of "value-based pricing"). An example is Novo Nordisk, which with the semaglutide molecule (used in the treatment of diabetes and obesity) tries to demonstrate a reduced cardiovascular risk, potentially justifying significant savings, if verified, for health systems. Other themes/risks that we consider in the portfolio are, for example, the consequences of the reduction of the active workforce (which implies a need for automation) and the need to age well, and therefore "fit" longevity (which implies a need sports and healthy nutrition).

How does the fund manage ESG issues in the context of aging-related investments?

Since its launch in 2015, GIS SRI Aging Population has been structured in the belief of the value of bringing together a thematic approach and ESG. The methodology applied to the sector is that of Sycomore AM, a reference management company in sustainable investments. In addition to the ESG analysis of the securities in the portfolio (based on SPICE, an acronym in English for Companies & Suppliers, Collaborators, Investors, Customers, and the Environment), the sub-fund applies as a selection filter one of the metrics developed internally by Sycomore, focused on the Social Contribution. This metric evaluates, on a scale from -100% to +100%, the usefulness of the products and services offered by companies in responding to society's needs, which obviously include health, well-being, and pensions. This allows us to "quantify" the contribution of the companies in the portfolio to today's and tomorrow's challenges, compared to that of the companies that make up a generalist European index.