343. The longevity factor: how aging is transforming financial planning

12 December 2024 (pre-recorded 10 December 2024)

Below is a transcript of the episode, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors. Please remember we’ve been discussing individual companies to bring investing to life for you. It’s not a recommendation to buy or sell. The fund may or may not still hold these companies at your time of listening. For more information on the people and ideas in the episode, see the links at the bottom of the post.

[INTRODUCTION]

Darius McDermott (DM): I’m Darius McDermott from FundCalibre, and this is the Investing on the go podcast. Today I’m delighted to be talking to an old industry friend, Carl Stick, who is manager of the Elite Rated Rathbone Income fund.

Now, we’re gonna take a slightly different tack, rather than just talking about the fund, we’re gonna talk a bit about longevity and you know, the fact that we’re all living a little bit longer. What sort of impact does that have for our investing goals, our investing timelines? And if there’s any useful tips that we can potentially try and offer over our chat this morning. So, Carl, good morning. How are you mate?

Carl Stick (CS): I’m very well, thank you, how are you?

[INTERVIEW]

DM: Yes. Also pretty chipper only a week or so up until a little bit of a break, so I’m sure we’re all looking forward to that. So we’re focusing on longevity impact on long-term investing. So let’s start with workforce. You and I have been doing this for a few years, so, we we ought to be coming to the end of our working careers, but I think the general direction of travel is that the people are gonna have to work for longer. What sort of impact could, can you initially see and had, you know, from an investment point of view?

CS: Well, I think, I mean, I come at this from a quite a personal point because I’m 55 and I’m thinking, oh, you know, how much longer am I gonna work for? There was a time, I think years ago and I thought, oh, I’d love to retire early. But as you get old, you start thinking, you know what, oh, I don’t mind doing this. I’m quite happy. I’m physically active, I like to carry on doing it.

But the whole question around longevity workforce living longer, staying healthy for longer, it is massively, massively complex. And we do know that it’s an issue that most western economies actually, not just western economies, most global economies are thinking about. Workforces are getting, people are getting older. It puts a stress on workforces. If you have more people retiring and fewer people working, it has a big impact on pension schemes. It has a big impact on healthcare systems and so on and so forth.

Tax take goes down as fewer people work. It is very, very important on a system level. And then when you come down to the personal level, it’s just the understanding that there is no, there is no generalisation you can make. Every individual has got a different story to tell and whether or not it’s down to physical wellbeing, desire, purpose economic necessity, you know, the argument about whether you carry on working what you are doing, how long you work for is a massively complex one that we’re all having to think about and deal with.

DM: Yeah. And as you say, it’s not just developed markets. I mean, this is very prevalent, obviously in Japan and well known about the aging demographics there and very much now in China as well, where to borrow a stat I heard recently, about 20 years ago, there were a vast number of working Chinese to retired and well over 10 and now that’s down to two to one.

So as you say, it’s about supporting the economy as much as our own individual journeys within that. So let, let talk about Halfords. I noticed recently they’re actually actively recruiting older workers. Do you think this journey into working longer potentially is likely to see companies actively seeking older, more experienced workers and encourage them to work well into their sixties?

CS: I think so. I mean, again, I think there’s a broader question here around the overall sort of ecosystem of the workforce and what people are doing. I do think it’s instructive that a business like Halford’s will look to offer apprenticeships to older people. It recognises that there are individuals out there who want to carry on working. It recognises that just because you get to a certain age doesn’t mean to say you can’t participate in the workforce.

It’s not just Halford’s. I have a very close friend who retired but wanted to carry on participating being relevant getting up and going out. So he two or three days a week acts as a delivery driver for Waitrose and absolutely adores it. And there’s a physical aspect to that. He’s lifting boxes all day, he’s meeting people, he’s getting out and he’s participating.

I had no idea until, I was doing a little bit of research recently that Barclay’s Bank actually have an apprenticeship scheme for the over 50s, which they started in 2015. So that’s the financial services. And I think we should encourage people to think about doing different types of work if they can as they get older. I think we need to look at society and recognise that just because you get to a certain age doesn’t mean say you are no longer relevant. You are absolutely relevant and you have a lot to give. And I think you need to look at companies and get them thinking about how they can use that workforce. So there’s a lot of potential in people above the age of 40, 50, 60.

DM: Yeah, no, I totally agree. And, you know, sort of anecdotally, one of my good friends also during Covid did the Waitrose thing and recently made redundant. And he’s actually just gone being seasonal to do some temporary work for the post office just because of that. You know, he’s not an old man, but just want to do something to get up, to have a purpose at the start of each day rather than, you know, just playing golf, which maybe some of us might like to do when we retire.

CS: No, I think, no, I think there’s that, and I think when it, when it comes down, I mean, I’m a very, I am very conscious about making generalisations because when you talk to people, somebody will turn around and say, it’s all very well you saying that. But if you are of a certain age and you are not physically, well, it’s not open to you or it’s all very well you saying that and saying you want to carry on working or do different things, but you’ve got the financial wherewithal to make those choices. There are other people who have to carry on working because it’s an economic necessity. So I think we’ve gotta be very careful that we’re not too general, but if we are gonna talk about generalities, I do think this, this general, this philosophy around giving people purpose, giving people a reason to get up in the morning and be of value to society is hugely important.

It’s funny you mentioned Japan, you know, they have a long history of… it’s called Ikigai… is giving people purpose. It’s a reason to get out of bed in the morning. And that is massively powerful. It’s something that I’m very passionate about. So whoever it is trying to give somebody, it doesn’t matter what age they are to be honest with you, but we’re talking about people approaching and around retirement age, giving them a purpose, giving them a responsibility, a reason to get up because the benefits are way beyond the economic their personal, their spiritual, that they, it goes into many, many facets of life. And it’s something that I that, that really drives me.

DM: Yeah. And you rightly point out, there’s no generic answer to any of the stuff we’re discussing, but one of the key issues to when you financially have to work through does of course then come into our world of financial planning, investing, saving. And, you know, I don’t think there’s an easier, I don’t think this is necessarily super complicated, but the more you can invest and save for, the longer that you do that, then clearly you may have that optionality once that, and you are an equity income manager, is that sort of role of dividends in the long term accumulation part. Now we all know what dividends can mean in the de-accumulation. You know, you want an income to live from your investments, but I don’t know if the numbers have changed with a sort of very long US bull market that we are currently enjoying. But dividends are a big part of properly long term equity returns, aren’t they? You know, sort of over 50 to a hundred years. It’s a huge contributor in the growth part.

CS: Oh no, absolutely. And especially when you’re looking at the UK market now and the dividend yield you’re getting from UK businesses and UK stocks it is a very important part of your total return and that ability to compound year after year after year. The reinvestment, the roll up of that dividend flow is what generates the total returns that we are looking for.

I think your point is really well made because, I mean, there’s…sorry, we’re getting very Oriental in this discussion very, very Eastern, but you know, a Chinese proverb, you know, when’s the best time to plant a tree, 20 years ago when the second best time to plant tree now, and this whole idea is when’s the best time to start saving as early as possible?

You know but if you can’t start, you haven’t started to saving, then start saving. Now there’s that rolling up and trying to create a a capital pot that in future years you can fall back on to, you know, when you need it, but also if you can, if necessary, turn on and off the income.

Because I think if people work for longer and work beyond retirement you are going to need to have that flexibility of income. So, you know, I think dividend investing, you’ve got the roll up bit, the compounding bit, and then the ability to be a little bit more flexible in the income requirements that you need.

And one final point is when you think about our working lives, it is decades ago when you might leave school, work in the same place for 40 years, retire on a pension and then depart your mortal coil a few years later. I think what we’re talking about now is a working life, which needs to be more flexible. You will be in and out of work, you will need to retrain. And there may be a point in time in the future when you decide, you know, I want to carry on working, but you know, I need to be able to sort of turn on that income tap when I need it. And that is where we have argued that sort of income strategies are very important.

DM: Well, I think there’s two key things you’ve touched on there. Firstly, is compounding, you know, compounding is that key word for long term investing. You know, cash is now at a rate where you can actually even, you know, if you are a low risk, you can’t get to that equity risk bucket compound, the cash saving. I’m much rather people did that did nothing.

And your other, I think really insightful observation about your Chinese proverb. One of my best friends, you know, he’s hasn’t begun the savings journey as early as he might have done, but he’s now saying, is it too late? Well, saying, you may well work for another 20 years if you start saving now. And if you can set the more you can save, you actually can still build a reasonably handsome investment pot rather than just going, oh, it’s too late, I’ve missed the boat.

So I think there’s some key messages there that it, I don’t think it’s ever too late to start to save. And, you know, that, that compounding effect of long term, you know, I look, but what I’ve saved for my kids who are sort of now in the mid teens, you know, that small monthly amount that I’ve done since they were born that they don’t know about. So hopefully they’re not listening to this podcast because it’s for their university sort of fees, et cetera. You know, it really can grow.

And I think that potentially with this longevity, so is a key part of the investment part of it. And, you know, we are looking at what sort of opportunities are you seeing within your investing side now for your equity income side where society or companies are focusing on levity and is there any sort of themes where you can actually make some really powerful investment returns?

CS: Yes, I’m a little bit reticent about the same specific investment themes because I think that there’s a lot that we have to look at when we’re making an investment decision, but I certainly think you can look at certain industries and recognise the role that they’re gonna play in this argument.

So I mean, the obvious area is the pharmaceutical sector and the healthcare sector. So you know, we talk about financial health, but physical health is just as important here. So thinking about pharmaceutical companies, obviously there’s been a lot of discussion, a lot of interest over the last couple of years, a lot of media coverage about weight loss drugs. And they have been a game changer. They are important because they treat a very clear medical need that’s global.

What I think is interesting now is not just the first and second wave of these weight loss drugs and these obesity drugs, but looking at how they can be partnered with other treatments to deal with the co-morbidities that go alongside obesity and diabetes. So lung disease, heart failure, chronic kidney disease, all of these things that actually have a massive impact on people’s health as they get older. So that is an area of interest. And you know, we have always had quite a large exposure to the pharmaceutical sector. So that’s one area.

But also looking at pharmaceutical companies, especially in the vaccines area that are looking to preventative medicine, I think it’s gonna be fascinating looking ahead and the extent to which pharmaceutical companies are incentivised to reduce preventative rather than medicines that actually just cure symptoms. Because in the end we just don’t wanna get in the first place. But that’s a different financial model. So for the pharmaceutical sector is interesting broader healthcare is interesting. What happens if we do live for longer and we are active for longer the general wear and tear of our bodies, what does that mean in terms of what we require from the healthcare system?

DM: Probably when we look at it, in my case.

CS: Well, I mean, I don’t, I mean that is not a question that I can answer to be honest with you at the moment, but I mean, I think we do have to, it’s something which we definitely bear in mind when we are looking at the broader space looking at consumption, recognising that again this isn’t for everyone, but there will be, there’s a lot of wealth in that older cohort. How do they spend that money? What is that money spent on looking at the financial sector and thinking about the way that financial businesses think about those individuals and what it means for pension planning, what it means for inheritance planning, so on and so forth.

And you can go on, I mean, you can start to extrapolate into many sectors and try and understand what it means if we have an aging population that is living longer hopefully more healthy for longer, and actually participating in the workforce for longer. So again, I think there are lots of ways we can think about it, but we are, I will emphasise that we’re a little bit reticent about saying, oh, there is an investment theme that we are following. It’s just part and parcel of any investments analysis that we do.

DM: Yeah, I mean, absolutely right. I think, you know, and thankfully for yourself, those sectors that you’ve already just touched on, there’re also generally good dividend paying companies, good dividend paying sectors, so a natural fishing pond for you.

Maybe if we could just touch a little bit on, the old adage of you should always have your sort of age in bonds. So if you’re 50, you should be 50% in bonds and 50% in equities. And as you get to 60, clearly that goes 60/40. I think it’s fairly easy for us to say that’s probably not the correct model. That was the sort of thing that was said when I entered the industry 29 years ago or something. But as people are living longer, that needs to keep their investment pot growing as well as potentially even taking income from it. And that if you’re gonna live to 85, you want to retire at 70, that’s 15 years, you need your pot to provide, you surely don’t want to be too cautious of 50 or 55.

CS: Yeah. Oh, no, I think that’s it. And obviously it’s your job to be giving the advice than mine. But I do think that’s the general point, isn’t it that, I mean, as I said to you before we started this conversation I am 55 and if my adult life started at 18 and if I am, I’m touching wood here, fortunate to live till I’m at 90, I’m only halfway through my adult life. There’s a long time potentially ahead of me. So the idea of de-risking investments now is a bit of a nonsense.

Now I don’t think you go out and start hitting sixes with your investments and just taking on too much risk because obviously the older you get the less opportunity you have to recoup any losses. The flip side is, I certainly do think that the risk you should be taking if you are in a position and if you do, if people are living longer the profile of your investments at our age I think does need to change. I think you can, you do need to think about having a little bit more risk in your portfolio because if you are gonna live for another 30 years, you need to inflation proof your savings and you’re not necessarily gonna do, you’re not gonna be doing that buying fixed income. You do need to have that compounding and that growth, and you do that by equity investment, but the level of risk that you’re willing to take needs to be appropriate as well.

DM: Yes, of course. So let’s then just touch on an income strategy, which fortunately you are, you run an income strategy. What sort of role do you think that can pay for both income seekers and on the capital side, as you say, we want our capital to grow as well as potentially taking some income from our investments. Where does the likes of Rathbone Income fit into that?

CS: I mean, I’m not an unbiased observer here. I’ve got a particular act of mind…

DM: I’ll allow you a little bit of bias, Carl, I think that’s fair.

CS: But I think the way we will, well the way we try and present the fund and actually let’s just say extend it to all income strategies is I think we’re all looking at certain outcomes. So I think we look at any if an individual business is generating the cash returns on investment, then enable it to reinvest back into the business so it can grow its earnings, but at the same time give us an income return. If we can have a portfolio of those companies, then hopefully we provide a vehicle which is producing capital returns over time through that growth and also the potential for income return. Now, when you are accumulating, when you are in the position to save, you can reinvest that income back into the product. The accumulation units that allows you to build up that capital pot.

And I said, is that capital pot that you are going to need as you get older, there’s a point of time when you may choose, you know, what I need? And then you switch to taking income out that capital pot hopefully will continue to grow because the underlying businesses are growing, but we also provide you with an income stream that we like to call a, you know, that provides you with a pay rise every year. So you have an income stream that hopefully sort of supplementing your income or your pension or whatever it may be. You go back to work, you decide, you know what, we’ll re-investing again. So it is that balance between capital growth, that’s nest egg and the income provision supplementing whatever income you’ve got. And I think that’s always been irrespective of your age, to be honest with you. The powerful argument for income funds is that is that level of compounding.

DM: Yeah. And maybe I’ll make an observation about your funds particularly is, and I know this hasn’t applied every single year, but the vast majority of years you’ve actually been able to increase the income from your fund, which of course is at least some hedge on inflation. So you’re actually getting, not just paying an income and getting income from your companies, you’re actually getting dividend growth at a fund level, which of course allows us to have that little bit of a pay rise. As the income per share or per unit increases over time as well.

CS: Oh no, absolutely. So I say, you know, the pay rise every year is not meant to be the tail wagging the dog. It is a very valuable outcome. It’s something we need to do to actually differentiate ourselves. But as that’s why I made those initial comments around the types of businesses we’re looking for, we’re hoping that it’s a fundamental output from the underlying investments, not something that we’re contriving. And that is what gives it a sustainability. Now there have been years, I mean two years, the global financial crisis and covid when, when we did have to reduce, but I think there was, there’s some very, very specific circumstances there. But generally we have managed to sort of certainly outperform the wider income from the index. I think something which is a fundamental selling point for the fund.

DM: Yeah, and I think that’s a great point about the sort of the dividend growth. Carl, thank you very much for taking the time to have this chat. As I say it’s slightly different than just drilling into the fund and your favourite stocks and all that sort of stuff, but really, you know, talking about the longevity of compounding both dividends and capital and earnings growth and the role that actually income strategies can play in both the accumulation side and the de-accumulation side. So Carl, thank you very much.

CS: Thank you. Well, it’s half past 10. I’m due my mid-morning nap <Laugh> Well listen, thank you very much Darius for your time.

DM: And thank you for your time, Carl. Listen, if our listeners would like any more information on the Rathbone Income fund, please do visit fundcalibre.com and if you would be good enough to like and subscribe to our podcast if you manage to find this interesting. Thank you very much.