How the City is making money from fat people
Could the nation’s growing waistline lead to supersize profits on pensions and investments?
One leading investment bank thinks so. This week, Bank of America Merill Lynch identified the “global fight against obesity” as a “mega-investment theme”.
Over the coming decades this obesity epidemic will shape thinking by policy makers and in boardrooms around the world, according to Sarbjit Nahal, at equity strategist at BoA Merrill Lynch Global Research.
Tougher regulation could present problems for some companies – in particular those who now make their millions selling high-fat high-sugar foods. But it could present opportunities for others, particularly those selling pills, weight-loss programmes or health foods to Governments looking to cut health care costs, and individuals encouraged to fight the flab.
According to he World Health Organization, 500m people worldwide are obese, with a further 1.4bn classified as “overweight”. Obesity levels has doubled in the past 30 years, and tripled over this period in Western economies, like Europe.
If current trends continue 65m Americans will be obese by 2030. But numbers are also rising in many emerging markets, as diets westernise. In Brazil for example 16pc of the population is obese, is on track to match US obesity levels by the 2020s.
Few would dispute that obesity is a growing social problem. But there is a less agreement on what the knock-on effects will be for corporate profits.
The BoA Merrill Lynch report suggests investors should look at company in four key areas.
The first is pharmaceuticals and health care. It isn’t just companies developing weight loss pills would could benefit. BoA Merrill Lynch said companies tackling related medical conditions, including diabetes, kidney failure, and knee implants are likely to see greater demand for their products. It adds that those who are manufacturing products for a larger population – be it patient lifts, bigger beds and wider ambulance doors could also benefit.
The second key area is food companies. Those that alter their food lines to tap into the $663bn “health ad wellness” market should benefit the most, as they are less likely to be hit “fat taxes” in future, according to Mr Nahal.
The last two areas are the firms that operate in the “diet management” industry – which is now a $4bn market in the US – as well as those making sports clothing and equipment.
So should UK investors be stuffing their Sipps with biotech firms and sports manufacturers?
Adrian Lowcock, a senior investment analyst with Bestinvest urges caution. “These mega-themes look at what will influence society over the next 50 years. But this has to be balanced against a shorter-term view, looking at how the current economic situation for example, could affect such stocks.”
Darius McDermott, the managing director of Chelsea Financial Services agrees. He said an investment strategy that relies on just one “theme” is inherently more risky. “All it takes is a change of policy, some type of scandal or scare, or a new competitor to have a negative effect on all stocks within your portfolio.”
He points out that these trends often go out of fashion, and there are likely to be some “very rough patches” before the potential is realised.
Those who want exposure to these sectors should look at funds, rather than buying individual stocks.
While there isn’t – yet – a global obesity fund, there are health care and biotech funds.
Tim Cockerill of Rowan Dartington says Axa Framlington Healthcare Fund is would fit the bill well: its covers drugs, technology, biotech, pharmaceuticals and medical devices. Launched in 1987, it is up 119pc over 10 years, and 66pc over the last three.
Mr McDermott also recommends Polar Capital Global Healthcare investment trust. This has only been around for just over a year, and over this period has increased investors money by 10.6pc.
Axa Framlington also has its own biotech fund, which concentrates on firms developing new drugs, rather than selling existing ones. This is up 27pc over the past year.
There has been frenzied speculation around a “wonder-drug” for obesity; In the US the share price of Arena Pharmaceuticals went up 500pc when it received approval for its new anti-obesity drug. However, Damien Fahy of FundExpert.co.uk pointed out firms such as these don’t typically make drugs for other conditions, and many of these “pipeline drugs” never see the light of day.
“It only needs a spate of negative reviews to hit the companies share price or worse make them bankrupt. The litigation bill for Wyeth, whose diet pills were linked to heart problems in the 1990s, was over $13bn.”
This is why most advisers prefer larger health care funds, where investment in riskier biotech firms is balanced by companies manufacturing syringes, artificial hips and supersize hospital beds.
But advisers admit second-guessing which food companies will profit is harder. Global food conglomerates are adapt at changing to circumstances. Companies like Nestle, Unilever, Proctor & Gamble, Kraft, and Tesco, manufacture and sell a wide range of products, so while one product line might lose sales if a “fat tax” is ever introduced, this is likely to be balanced by a marketing push of its more “healthy” lines. McDonalds, for example, previously owned a stake in Pret a Manger.
Mr Lowcock added that many global food companies will simply concentrate sales of less healthy products in emerging markets. “Look at the cigarette companies,” he said. “Despite regulation and lawsuits, most are still making handsome profits.”
But Philippa Gee, who runs her own investment advisers, said she would avoid such specialist funds. If this does prove a “mega-trends” then a decent fund manager should be looking at such this when selecting stock. “Most fund managers have teams of research and analysts feeding information through, to miss a trend of this type would be an epic fail.”
Investing in a good global fund should give you adequate exposure to companies who will benefit from the obesity crisis, as well as other ” “mega-trends” – be it our ageing population or the need for clean energy.
She recommends Fundsmith Equity, Artemis Global Select and Jupiter Merlin Worldwide, all run by highly experienced managers considering all equity options available around the globe. Investment trusts such as Ruffer Investment Company or Alliance Trust are also worth a look she adds.