Next Generation Strategy
By 2050, 48 countries around the world will have smaller populations than they do today. In addition, fewer workers will have to support an increasingly large number of dependents; straining government finances with shocking implications for the wealth of many nations, especially those already burdened by high debt loads.
Some countries are ageing more rapidly than others, but almost all countries are expected to see an increase in the average age of their populations over the next few decades. Japan, which is widely known to have had an ageing population will see the country’s average age increase from 47 to 53 by 2050. However, by 2050 Japan will be surpassed by South Korea as the country with the oldest population in the world with an average age of 54.
Chart 1: Median age of selected countries 2015 – 2050
However, the ageing of populations is only part of the story. More importantly, changes in the size of the working age population can have a significant impact on economic growth. In Europe, the decline in working age populations is particularly challenging.
Chart 2: Change in Working Age Population (excluding migration) 2015 – 2050
As an example, Germany had a working age population of 54 million in 2015, but this will shrink to just 37 million workers by 2050. However, Germany benefits from the fact that it has amassed substantial assets abroad, which on a net basis equates to around 55% of GDP. This means that Germany can draw down on its overseas investments to supplement its loss of income resulting from a reduction in the working age population.
Other countries in Europe are not so fortunate, with many countries experiencing both a shrinking working age population and net foreign liabilities to foreigners of more than 50% of GDP; a threshold that has been associated with heightened economic risks.
However, whilst there are numerous countries with shrinking working age populations, there are also a large number of countries with growing working age populations. As a continent, Africa is expected to have by far the most rapid population growth with the working age population expected to grow by 139% by 2050 from the levels of 2015. Most of those countries do not have hard currency bonds and so are excluded from our investable universe. Nevertheless, there are plenty of countries with outstanding hard currency bonds which also have rapid population growth.
Chart 3: Change in Working Age Population (excluding migration) 2015 – 2050
Population changes are not an emerging market versus developed market phenomena though. Many countries that are considered to be in the emerging universe have positive net foreign assets whilst many developed market countries are heavily indebted. In our view the distinction between EM & DM is a false one, and instead we prefer to consider the world as being divided between creditors and debtors. Other things being equal, the countries which are highly indebted and have shrinking working age populations are in a very difficult position versus the countries that are both wealthier and have more rapidly growing populations as well.
Population growth is an important driver of economic growth and inflation, thus, bond yields and population growth are inextricably linked. Using forecasts of population growth rates and projections for net foreign assets to measure the wealth of nations, we hope to identify the winners and losers as the world population ages. This approach is very different to most fund managers who often follow indices which give the biggest weights to the most heavily indebted companies and countries which take no account of future trends. Fund management involves making judgements about the future, which is why Stratton Street Capital decided to launch the Next Generation Global Bond Fund (NGGBF) a year ago. *
* The AIF structure launched in July 2016 and UCITS launched in December 2016
What is the Next Generation Strategy?
Available in AIF or UCITS structures with a combined AUM of USD 170m Aimed at providing high income and a superior overall return from both DM and EM bonds over market cycles Targets undervalued investments which amplify capital appreciation while reducing downside risks Potential to invest up to 20% in sub-investment grade credit and can take currency exposure up to 25%
Why invest in the Next Generation Strategy?
NFA analysis and macro forecasts optimise the country and credit quality positioning throughout the cycle Unconstrained by indices so proprietary global pricing model allows selection of undervalued credits The currency exposure is based on Stratton Street’s proprietary models. Use of NFA analysis & primary focus on IG space to allow better downside capital protection & lower volatility Actively managed duration to manage the interest rate exposure as the Fed tightens monetary policy Benign global inflation remains supportive for fixed income
High, single A rated portfolio (this varies depending on the stage of economic cycle). Gross redemption yield of circa ~ 4%