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The emagazine for Advance Investors

Issue 5   |   January 2016

Advancement

Welcome to Advancement, January 2016

Inside this issue, you can:

  • Find out how investing in old age can be rewarding.
  • Hear from Estia, an aged care operator about how it is planning for the future.
  • Learn about different ways to generate an income from investments
  • Discover how a sustainable approach can be taken when investing

We would love to hear your views on this issue and what you would like to see from us next. Let us know

Funding the
Golden Years Not just about superannuation

BY TIM ROCKS | Head of Market Strategy and Research, Advance Asset Management The Lucky Country

Growing old brings a variety of associations – retirement, downsizing the family home, grandchildren… But it also has practical associations, like managing the physical and mental concerns of age. When you consider that by 2040, 6.8 million Australians will be over 65, representing 20% of the population, and all accessing a variety of aged care services like retirement villages, nursing homes and hospitals, catering to this demographic provides wide opportunities for investment.

The Australian population age structure

Source: ABS

A global issue

An ageing population is not just unique to Australia. The effect is most stark in Japan where almost 10% of the population are projected to be over 85 years by 2040. United Nations’ population projections estimate that by 2040 there will be 320 million people over the age of 65 years in developed countries, up from 200 million in 2010.

Proportion of population over 85 by country

Source: United Nations

Healthcare

The healthcare sector is the largest beneficiary of an ageing population. It will come as no surprise that medical care and health expenses become a greater proportion of weekly expenditure with age.

There are many types of listed companies that will likely benefit in this sector.

  • GPs and Diagnostic companies should see an increase in volumes, given that the frequency of visits to GPs and use of diagnostic testing increases with age. Governments typically spend 2.5 times more per person on the over 65s than on the rest of the population. Primary Health Care and Sonic Healthcare Limited, both have exposure here.
  • Private hospitals such as Ramsay Health Care and Healthscope would also benefit from rising hospital demand.
  • Medical device companies should also benefit such as Cochlear (deafness), Resmed and Fisher & Paykel Healthcare (sleep apnoea) and Lifehealthcare (hospital supplies).
  • Medical research companies that are focused on chronic diseases such as dementia, arthritis, cancer and diabetes are also likely to benefit. Some smaller, speculative companies in this space include Bionomics (drugs for cancer, anxiety and dementia), Mesoblast (developing stem cells to treat diabetes, kidney disease and arthritis) and Sirtex Medical (treatment for liver cancer).

Housing

Demand for retirement villages, residential aged care and home care should also rise as a result of an ageing population. Favourable demographics and the increase in prevalence of dementia will drive the demand for high-care places over the coming decades. Over the next five years, 225 new residential aged care beds will need to open each week to meet projected demand. Under the current ABS projections, this number increases to 270 beds per week by 2050.

The lifecycle of housing demand during retirement years can be split into three distinct stages.

  • Retirement villages. Several listed Australian companies run villages using different models. Some, like Lifestyle Communities and Aveo Group manage villages, while others, like Ingenia Communities Group, are converting several caravan parks into retirement communities.
  • High-care centres. There is rapid development in this section of the market at present. Examples of companies operating residential aged high-care facilities include Estia Health, Japara Healthcare and Regis Healthcare.
  • Post-life. Operators of cemetaries, crematoria and funeral parlours, like InvoCare, will need to accommodate the increased demand for their services.

Financial services

Demand for a range of financial products changes with age.

  • Investment managers and financial advisers will benefit from providing services to households as they switch from strategies to grow their money to drawing down on their nest egg. Banks may benefit from this as they already offer these services.
  • Annuities providers will benefit from greater demand for their products, as people look to extend the longevity of their assets so they have enough to live on in retirement.

However, the ageing effect is negative for life and health insurers. Many retirees let their life and health insurance policies lapse. As a result the proportion of the population that holds life and health insurance declines significantly after 65. This decline in use of health insurance also has implications for state healthcare which will need to expand considerably to manage the growth of the retiree population.

Consumption

Consumer expenditure generally declines substantially with age, presenting headwinds for consumer stocks. Instead, the 65+ age group spends the greatest proportion of their weekly budget on recreation and this has increased steadily over the past two decades. This supports the outlook for tourism and gaming. Flight and airport companies like Qantas, Virgin and Sydney Airport or accommodation companies like Mantra stand to benefit, while gaming beneficiaries would be betting companies like Tabcorp Holdings or Tatts Group, and casinos like The Star Entertainment Group, Skycity Entertainment Group and Crown Resorts.

Proportion of weekly expenditure on recreation by age group

Source: ABS
Note: Data from the latest household expenditure survey (2009-10)

Though an ageing population may be a concern for governments, many companies have recognised the value of servicing this group. As the population continues to grow, companies that have positioned themselves to manage this and cater to their needs stand to benefit from these demographic changes. So investing in those companies in an investment portfolio could be an interesting opportunity – and on a lighter note, with age, one of life’s few certainties, you could consider it an investment for your own golden years.


For more information about investing in age and where such companies are incorporated in the Advance portfolios, please contact us on 1800 819 935.

Buying
into
the Future

You recycle, minimise your electricity and buy locally-made goods to support a better and ongoing future for everyone – but do you know whether you are doing the same in your investments? Advance believes in sustainable investing – both for the world but also for your returns.

You might be hearing the word sustainable in a lot of places at the moment and it means different things depending on the context. For Advance, it means considering Environment, Social and Governance (ESG) risks and opportunities in investment analysis and decisions.

In practice, this might mean investing in a medical company focused on managing illnesses like dementia that will increase in prevalence as a population ages. Or maybe ending an investment when there are signs of misconduct at a Board level. It could mean considering whether a company’s sources of return come from activities that will continue to be required long into the future. Or it can mean a responsible approach to investing, like exercising a proxy vote on behalf of, and in the best interests of, investors – you can see the proxy voting on all the Australian investments in our funds at advance.com.au.

Examples of ESG considerations


Environmental


  • Climate change
  • Natural resource use
  • Water scarcity
  • Waste and pollution
  • Environmental services
  • Environmental products

  • Changing demographics
  • Health/pandemics
  • Labour standards and workforce management
  • Human rights issues
  • Workplace health and safety


Governance


  • Corporate conduct
  • Corporate structures
  • Board structures and accountability
  • Legal compliance
  • Management of corruption
  • Negligence
  • Fraud and bribery issues
  • Executive compensation


How Advance integrates ESG into its investment process

Advance is part of BT Financial Group, which is a signatory to the United Nations Principles of Responsible Investment. These principles form a key component of how we integrate ESG factors into our investment portfolios. For us, responsible investment is about providing long-term value for our customers. There are three key ways we apply ESG principles.


Manager assessment

We formally assess the investment managers for their approach to sustainability before investing with them and on an ongoing basis.


Engagement

We seek to encourage and influence the companies we invest in to follow good governance procedures, sustainable business practices and transparency in their activities.


Voting

Using a proxy vote on behalf of our investors at Company General and Extraordinary Meetings helps to protect their interests over time.


Your investments

This means your investments are managed according to Advance’s ESG principles with an eye on the future.

For more information on ESG principles and how they apply in the Advance portfolios, visit advance.com.au or contact us on 1800 819 935.


The
retirement
home run

With an ageing population, servicing demand for retirement homes is just one of many opportunities to grow a company’s value and returns. We spoke to Paul Gregerson, CEO at Estia Health, the second largest residential aged care operator in Australia, about Estia’s strategy to provide homes for Australia’s elderly population.

What is the projected need for aged care facilities as Australia’s population ages?

The industry requires an additional 69,000 aged care beds to be created by FY2022. According to UBS research, that equates to 4–5% of underlying volume growth across the industry to meet the required demand. The for-profit sector has been a key driver of that growth.

Independent research has identified that single rooms are the most important factor when selecting aged care facilities. During the second half of FY2015, Estia further consolidated its industry leading position as a provider of single room operating places, increasing this to 94% of our portfolio. More recently, Estia acquired Kennedy Health Care Group which reduced its proportion of single rooms to 90%. This demand for single room facilities will continue to underpin future growth, with part of this including redevelopment of several of the Kennedy facilities to be 100% single room offerings.

Quick facts about Estia

66 facilities with 5,690 beds
95% of residents receive high care subsidies
90% proportion of single rooms, which is the highest in the industry
93% Total occupancy above 93%

71% consider the #1 factor in choosing an aged care facility is room type

Followed by

Payment options
12%
Environment
9%
Location
8%

What are the growth opportunities for aged care operators in light of this?

There are two main growth opportunities for aged care operators – the development of new beds or the acquisition of existing beds. The key difference is that a development strategy will take approximately three years to become fully operational, whereas an acquisition strategy takes an already operating facility and optimises it within a year, while also contributing to earnings from the time of settlement. Estia has taken a combination of these approaches, with plans not only to acquire existing facilities but also a joint partnership to develop new facilities.

How did the Government’s ‘Living Longer, Living Better’ reforms support residents as well as aged care providers?

Under this system, residents can either pay a bond (Refundable Accommodation Deposit/Payment or “RADs”), a daily accommodation payment (DAP) or a combination of the two. The bulk of new entrants to aged care facilities prefer RADs as a form of payment – in fact about 75-80%. For example, single room facilities located in metropolitan areas are more likely to attract RAD paying residents as much of their wealth is tied up in their homes.

This also benefits aged care providers, opening a significant new source of funding to increase the number and quality of aged care beds available in the market. Estia saw $88.5 million in cash inflow from RAD receipts, 170% ahead of our prospectus forecast. As we carry out our growth plans and become larger, we can take advantage of scale benefits that actually drive improved returns.

What are the challenges for aged care providers in meeting the needs of elderly Australians?

The industry is highly fragmented, with two-thirds of the 2,800 aged care homes in Australia run by single facility operators. There is considerable opportunity for consolidating the sector to meet the growing level of demand for better facilities and higher quality service delivery. For example, the recent acquisition of Kennedy Health Care Group, one of the largest private operators in Australia, provides an opportunity to redevelop to meet client needs.

Increasing scale can bring both financial and strategic benefits. As we grow, we are able to benchmark and share best practice and resources, essential in the delivery of quality services to meet the specialised healthcare needs of our residents and support to their families.

Research from the Australian Institute of Health and Welfare points to an ageing population with increasing prevalence of chronic conditions, which is forecast to require a 37% increase in places between now and FY2022. The increasing age of residents, and the need for specialised care, will drive the future of care requirements.

The Living Longer, Living Better reforms were the first step in making the sector more customer-centric. This, coupled with a rise in the average wealth of older Australians, means that funding for the sector is likely to shift from a supply driven model to a consumer demand driven model. So consumers will eventually be expected to subsidise their own care.

How does Estia plan to grow to meet the needs of elderly Australians?

Estia’s goal is to grow the number of beds from single site acquisitions by 500–1,000 per annum, until FY2020 (bringing Estia to a total 10,000 beds). Following the Kennedy acquisition, we may also consider another larger multifacility deal. We are also targeting one or more larger, multi-facility acquisitions during this period, together with 500–1,000 places from developing new greenfield facilities and an additional 300 beds from expanding existing facilities. As part of this plan, in June 2015, we entered into a strategic partnership with Living Choice Australia to develop 500 new greenfield places by FY2019.


For more information about aged care providers like Estia and how these are included in the Advance portfolios, please contact Advance on 1800 819 935.

The
colour of
your money Using your investments for income

Whether you are retired, or perhaps in need of extra cash to support the kids, your investments can play a role in helping you with a regular source of income. There are a range of ways to access income from bonds to managed funds.

When planning to use your investments for income, there are many things to consider.

  • What level of income you are seeking.
  • Whether you still need to generate growth from your investments (and therefore may consider only allocation a portion of your investment to income-generating investments).
  • The level of risk you can afford to take, which may vary based on your stage of life, the value of your investments, your lifestyle or even your personal preferences.
Some investors might consider using a financial planner to help them with this stage and the options that might suit them.

A world of options

Fixed interest is one of the traditional tools people use for income and can be as simple as using a cash account, or more sophisticated, like using bonds. Less traditional options include shares or real estate investment trusts (REITs) which invest in a variety of commercial and industrial properties. Some people also consider using products that include these different options, but are managed by professionals on their behalf. Some of the different investments you can use for income are covered below.

Cash
Bonds
Shares
REITs

Cash accounts

The standard Australian bank account offers interest payments on your money, which you could use as an income. Many institutions also offer higher interest rate accounts when you invest for an agreed period of time (like a term deposit) or add to your balance by a certain amount each month. Whether this type of account would work for you as an income tool will be influenced by your balance and income needs.

Bonds

Many bonds provide regular yield payments, which can be based on a fixed interest rate or on a floating rate which periodically resets to market value until the bond matures at which time the original value of the bond is returned to you.

Bonds can be issued by governments or by corporations and can range in quality and risk. In a country like Australia where there is a strong regulatory environment and a reasonably stable economy, government bonds are generally viewed as being the highest quality and most secure. The quality and risk involved in using corporate bonds tends to reflect the quality of each company issuing them. Another thing to consider when using bonds is whether you think you might need to sell them before they reach maturity, as you might not necessarily receive back the full value of your original investment, depending on the market environment at the time.

Shares

Investing in shares that offer a consistent dividend stream can offer a source of income for investors willing to take on more risk in their portfolio. With interest rates globally at historical lows, dividends may offer higher returns compared to fixed interest payments on bonds, although this will depend on the company. Not all company shares offer dividends as some may choose to reinvest their profit into continued development of their business instead. Dividends can also vary within the one company over time, depending on its performance and outlook. Shares as a whole tend to be a riskier investment than fixed interest given prices typically move with the market as well as with the performance of each company, so there is also the potential for loss of capital and its suitability will depend on your individual needs.

REITs

Some REITs offer dividends and these tend to be like shares in terms of variation across the level of risk involved or the potential dividend payments that may be on offer. As with shares, there is still the potential for loss of capital so your individual needs will influence whether this is appropriate for you.

If investing directly is not for you, there are also products that can invest across any of these options on your behalf and target an income stream such as annuities, managed funds, managed accounts or managed portfolios. For example, managed funds, managed accounts or managed portfolios might offer some growth of capital along with targeting income. Using these products may be suitable for those preferring not to manage and monitor their individual investments and seeking diversification across assets with a lower capital balance.

Whatever your income needs, there are a variety of ways to invest for income beyond those specifically covered in this article and choosing the right option will depend on your individual circumstances. For information on what income style investments are used in the Advance portfolios, please contact us on 1800 819 935.