News & Views

17th March 2015

Benefitting from demographics: The search for true alternatives and income

By Oliver Harris, Managing Partner, Montreux Capital Management

The global financial crisis created a paradigm shift in the perception of risk. The unprecedented collapse of most traditional asset classes prompted investors to look further afield for truly alternative forms of investment, immune from the short term impact of market movements. Additionally, the subsequent low interest rate environment of today has also resulted in a major quest for income – driving the prices of many yielding assets well above fair value.

As investors seek to address these issues, the nets have been cast far and wide. However, the care home sector, a relatively unknown but growing space, remains the preserve of a small band of investors. But it is now being increasingly recognised for its low correlation to other assets, its low volatility characteristics, as well as its high and sustainable level of income.

Benefitting from demographics
The care home sector’s emergence as an alternative form of investment is underpinned by attractive and undisputable demographic trends, such as longevity and an ageing population. The provision of residential care is not subject to market forces and the payers for such services are not directly affected by short-term sentiment

The macro demographics are irrefutable. The number of people in the UK aged 85 and over was 1.6 million in 2013, and this is set to double over the next 20 years. From 2012 to 2032, the populations of 65 to 84 year olds and the over 85s are set to increase by 39% and 106% respectively. Based on government actuary projections, the number of people living in residential care in the UK will increase to 1.25 million in 2056, compared to 419,000 in 2009. It is difficult to find a more invariable and global tailwind than the aging population.

At the very time when the requirement for residential care provision is being driven upward by demographic change, the total capacity in residential care homes has actually declined over the last decade. For example, mental health capacity has shrunk by 24.8% over the period. The supply/demand imbalance offers unrealised investment opportunities and significantly underpins the asset class, helping it to exhibit low correlations to both traditional and alternative forms of investment

High and sustainable income
The sweet spot for investing in care is with the operating companies, which are both the providers of care and owners of the real estate. The leading operators are creating profit levels in the region of 25%-28% for care provision, with gross fees being linked to RPI. In addition, the requirements to provide the capital and have the appropriate specialist regulatory experience have created high barriers to entry in the sector. This supports such high return levels

Such a solid level of return helps to provide a high and inflation proofed income stream for investors, which is currently producing a running yield in the region of 8%. In the current low interest rate environment, high and predictable income levels are a rare commodity. It is especially favourable when compared to other alternative assets, the majority of which produce no income at all.

Uncorrelated returns
The valuation of care homes is driven by the net fees generated by each bed, rather than property market dynamics, thus insulating returns from a property market, bond market or stock market correction. However, there remains a real estate value underpin to any portfolio, which acts as embedded risk support.

Consequently, the return stream from the care home sector looks very different to any equity, bond or alternative asset and more closely resembles an inflation-linked, high yielding liability – such as a pension or endowment. The chart below illustrates the low level of correlation between a care home operating fund and key equity, bond and property indices.

The ageing population and the increasing requirement for residential care provides a degree of predictability not afforded to other asset classes. Care sector dynamics are unlike any other form of investment – demonstrating that alternatives can not only provide uncorrelated returns, but can also provide a high and sustainable level of income. While it is not on every investor’s radar, this sector is being increasingly recognised as a credible portfolio diversifier and can provide a solution in the continued quest for truly alternative assets and income.




The information on this site is intended only for the use of Independent Financial Advisors (IFAs) and other professionally recognised financial intermediaries & institutions.. Should you proceed to access this site, you will be representing and warranting that you are an IFA or other professionally recognised financial intermediary . What follows is not an offer or invitation to acquire an investment and should therefore not be relied upon by, any person in any jurisdiction where such an offer or invitation would be unlawful. Persons in respect of whom such prohibitions apply must not access this web site. None of the information contained on this site constitutes personal recommendations nor advice. Product details should always be read in conjunction with the appropriate offering documents. An application for any of the investment products on this page should be made having fully read not only the relevant application form, but also the relevant terms and conditions and offering documents. If you are unsure about the meaning of any information provided on this web page, then please consult your financial or other professional adviser. We do not offer investment advice.

This web site may contain or be linked to advice or statements of third parties. We make no representation as to the accuracy, completeness, timeliness or suitability of such information, and we have not and will not review or update such information and caution you that any use made of such information is at your own risk. Some of the information contained on this web site may also have been prepared or provided by third parties and may not have been verified by us. We hereby exclude any liability arising out of any preparation or provision of such information for the web site and makes no warranty as to the accuracy, suitability or completeness of any such information.

I agree, Continue

Information on this webpage relates to and is provided by Montreux Capital Management (UK) Limited

The content of this webpage should not be construed as financial advice. Any decision to invest should be made only on the basis of the relevant documentation for each investment. Past performance is not necessarily a guide to future performance. The value of an investment may go down as well as up and investors may not get back the full amount invested. Investments in small unquoted companies carry an above-average level of risk. These investments are highly illiquid and as such, there may not be a readily available market to sell such an investment. Montreux Capital Management (UK) Limited and Sapia Partners LLP (together "the Sponsors," or "Sponsor) do not provide specific individual advice on the suitability of investments with regard to a potential investor's individual circumstances, risk tolerance or investment objectives and investors should seek independent financial advice if they are in any doubt whether a product is suitable for them.

Montreux Capital Management (UK) Limited is an Appointed Representative of Sapia Partners LLP which is authorised and regulated by the Financial Conduct Authority.

I agree, Continue