How to capture the long-term

opportunities in megatrends
Report
May 2011
 How to capture the long-term
opportunities in megatrends
We see three main megatrends that are going to shape the future: Chart 2: The global population is aging
demographic change, shortage of natural resources and increasing
10.000
environmental awareness. These developments are contributing to a 9.000
fourth issue that is starting to emerge: higher inflation. 8.000
7.000
Henk Grootveld, Head of Thematic Investing at Robeco, explains which

(* million)
6.000
investment strategies benefit from these megatrends. 5.000
4.000
1. Demographic change 3.000
2.000
a) Population growth 1.000
The demographic landscape is changing dramatically. The world’s 0

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population is forecast to grow from the current 6.9 billion to over 9
billion by 2050 (see chart 1). This growth will not be evenly spread 0-14 15-49 50+
across the globe: 98% will be in emerging markets. That change will be Source: UN Population Division, Robeco
accompanied by a shift in economic power. In the future, mature markets
with stable or declining populations will find it harder to expand their Not only are people living longer but they are also having fewer children.
economies than the emerging markets of Asia and Latin America, where These falling fertility rates will result in declining growth rates in the labor
the population is still growing. force over the coming decades. The potential global labor force is set to
increase by only 0.7% a year from 2010 to 2050. That compares with an
Chart 1: The global population is growing annual average of 1.8% growth over the 1950-2010 period. The workforce
in some regions, including Japan, the eurozone and China, is even
10.000
expected to shrink.
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One effect of these changing demographics is that the potential economic
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growth rate will be significantly lower than the levels with which we have
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(* million)

become familiar. In fact, based on the UN’s population statistics, the

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global economic growth potential for the next four decades is around 1
3.000 percentage point lower than in the period since 1950.
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1.000 More old people and fewer workers are combining in a further issue. The
0 ratio of workers to dependents (essentially those too old and too young
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World More developed regions Less developed regions
Source: UN Population Division, Robeco
b) The aging of the population
A growing world population is not a new phenomenon. But the aging of
the population is new (see chart 2). That is one of two trends within the
wider demographic shifts that will have the greatest impact. In the US,
for example, people on average live to 77. In 1940, by comparison, the
average was under 65. People who make it to 65 now typically have 18
years of retirement. Those aged 65 or over currently make up around 20%
of the population in G7 countries. But by 2050, that is set to have risen to
over 30%, according to the UN.
to work) is falling, meaning there are fewer wage earners to fund the
pensions of the retired and the schools of our children. Tough measures
will be required. They might well require cuts in pension benefits, as well
as rising contributions. In addition, public finances are being undermined
by rising public pension expenditures, as well as increasing healthcare
costs.
There is a simple if unpleasant solution: a rise in the retirement age would
significantly reduce the cost of aging. Academic research suggests that
the US retirement age would have to rise to 72/73 by 2030 to maintain
dependency ratios at current levels.
Overall, aging is negative for growth and increases the risks of inflation,

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due to a scarcity of labor. The negative fall-out from lower potential
economic growth is not very relevant in the short-term perspective of the
next few years, as unemployment is currently high in many developed
countries. The effect of the expected changes on financial markets—
thanks to retirees cashing in their investments—is at best neutral.
c) The rise of the global middle class
Another key development within the wider demographic changes is the
rise of the global middle class. Across the world, there are increasing
numbers of middle class people, boosted by the tremendous, ongoing
economic growth in emerging markets. In fact, the share of these
consumers in the global population is expected to more than double in
the next 20 years (see chart 3). That means there are more consumers
there who can afford to buy cars and iPods, a trend that is driving strong
growth in consumer spending in these countries.
Chart 3: The world’s middle class is increasing rapidly
Source: UN Population Division. Goldman Sachs Research.
Look at India as an example. Unlike many countries that are grappling with
an aging population and rising dependency ratios, India’s population is
young and its workforce continues to grow. The Indian consumer is typically
young, urban and middle class: around 60% of India’s population is below
35 years old, while the middle class is forecast to make up around 60% of
India’s population in five years’ time.
What is so exciting is the combination of the sheer numbers involved
already and the terrific scope for growth. India already has more mobile-
phone users and savings-account holders than the population of the US, for
instance. There are as many internet users as the population of Germany.
That sounds pretty impressive. But those data points only hint at the
potential of India’s consumption market. Take media as one example. The
Times of India is the biggest-selling English-language newspaper in the
world. India’s newspaper readership base already totals more than 200
million, which makes it the second-largest print market in the world. Even
so, this readership is only a part of India’s total population of 1.2 billion.
There are similar stories across emerging markets. In China, the
government is in the process of shifting the economy from an investment/
export driven model to a domestic consumption driven one. As part of the
process, it is emphasizing wealth redistribution in its policy mix. It should
also be recognized that there is a savings glut in China, as citizens need
to fund their own retirement and future healthcare costs in the absence
of any state provision. If the government were to take over these costs
through health insurance and pensions, consumer spending would be
boosted significantly.
In general, the balance sheets of emerging consumer households are
strong, as they are essentially debt free and cash rich due to high levels of
savings compared with developed countries.
This increasing spending power of the emerging markets consumer
is well-enough established that a company like Swiss-based luxury
goods group Richemont now generates some 50% of its revenues from
consumers in emerging markets.
d) Changing consumption patterns
But that isn’t the only change in consumption patterns that is occurring.
Another development is the rise of the digital consumer. Signature
developments include the emergence of mobile devices such as the
Blackberry, the Kindle and the iPad, and the shift away from traditional
media (such as newspapers and radio) towards digital alternatives (such
as portals, social media and blogs).
Other consumer developments are impacted by the megatrends. The
aging of the population is reflected in people’s different spending habits
as they get older, with more spent on travel, leisure and healthcare, and
less on children’s clothing and education. And increased environmental
awareness means a change in consumer preferences towards organic
foods, natural products and recyclable packaging.
A final consumer trend is a bifurcation in consumer spending habits.
While there is an increased demand for luxury goods, consumers are also
trading down to cheaper alternatives for other products. The middle is
getting squeezed.
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e) Increasing health consciousness
People are also becoming increasingly health conscious. Not only is this
changing consumers’ shopping habits, as they seek out organic and
natural food, but there is also a greater focus on illness prevention. Not
surprising, perhaps, given the rising cost of healthcare, the third factor
that is having an impact. After all, it is better—and cheaper—to prevent
than to cure. A fourth issue is the greater incidence of obesity: the World
Health Organization predicts that 2.3 billion people will be overweight
and 700 million obese by 2015.
In response to these developments, new products, services and
technologies are emerging, which are helping to turn a niche market into
a mass market. As well as healthier nutrition, other growth areas include
fitness centers, athletic apparel, generics, early diagnosis and chronic
care.
How to capture the opportunities in demographic change
The key demographic changes expected can be captured in the Robeco
thematic strategies. Thematic funds benefit from megatrend-related
opportunities by identifying companies that should profit over the long
run by developing products and services that address the real issues
related to these trends. Robeco Consumer Trends Equities, for instance,
focuses on the emerging consumer, the shift in consumption patterns
from the traditional to the digital economy, and the green consumer.
Meanwhile, the SAM Sustainable Healthy Living Fund focuses on
investments in companies that help to preserve or improve personal
wellbeing. It invests in four market segments: healthy nutrition, activity,
personal care and healthcare.
But it isn’t just a thematic equities fund like this that captures the
demographic trends. For robust consumption growth, it is necessary
to turn to emerging consumers. At the same time, aging is affecting
emerging markets less than developed markets, India in particular. The
range of Emerging Markets Equities strategies, including Robeco Indian
Equities and Robeco Afrika Fonds, are exposed to the upside here.
2. Shortage of natural resources
The second megatrend—the current and future scarcity of natural
resources—is linked to the first. That is because the emergence of the
global middle class could cause increased demand for food and water,
gasoline and other forms of energy, land and various types of metal.
And—at least for the time being—new supply is turning out to be very
limited. Oil and copper, for instance, are increasingly hard to find, while
the supply of food is badly interrupted by extreme weather. Price spikes
result from this limited supply meeting with increased demand.
a) Oil & metals
Oil and metals such as copper tend to gain most attention in discussions
on shortages of natural resources. Both are becoming increasingly hard—
and expensive—to extract from the earth, particularly after 30 years of
underinvestment in the industry. In addition, demand is surging. The
potential global population of nine billion-plus by 2050 will want to work,
live and consume like westerners currently do. To put this in perspective,
more natural resources are expected to be consumed in the next decade
than in the past century.
In short, a supply shortage of historic proportions is looming. The
population—and with it demand—is growing faster than our ability to
find and extract these energy sources from the ground.
b) Soft commodities
But it isn’t just oil and metals that are being affected; soft commodities
are also becoming scarce. The price of corn, for instance, rose to an all-
time high in April, surpassing the records set in the food crisis of 2008.
In fact, the price of corn has risen by more than 100% over the past year,
while inventories have declined.
High food prices have resulted in simmering discontent boiling over this
year in some of the relatively poor and unequal countries of North Africa
and the Middle East. With increasingly volatile weather affecting harvests
and global inventories set for further declines, the situation should not be
expected to improve soon. High volatility in agricultural commodity prices
is here to stay.
The longer-term picture is a concern, as well. Food demand is expected
to increase by 70% by 2050 from current levels, driven by three factors.
First, the rapid growth in the global population. Second, the wealth
effect as the emerging markets middle class expands. As incomes rise
globally, meat consumption increases (see chart 4). This is important, as
livestock require a substantial amount of grain as food. Each kilo of beef,
for example, requires around 10 kilos of grain, as well as 15 kilos of hay
and thousands of liters of water. That is adding significantly to the need to
increase grain production.
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Chart 4: Meat consumption expands as the middle class grows
450
400
Consumption (million tonnes)
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+29%
200 +34%
150 21%
100 40%
50
34%
0
1985 1995 2005
Beef Pork Poultry Lamb
Source: Rabobank (based on FAPRI, FAO, USDA, EC, OECD)
Third, the increasing use of alternative sources of energy, in particular,
corn-based ethanol. Brazil, the EU, US, China, India, Indonesia and
Malaysia have implemented policy measures or targets for biofuel use.
In some countries, mandatory blending requirements are in place. In
Brazil, for example, there are blending requirements that vary between
20% to 25% ethanol in different parts of the country. And in the EU, there
is a legal requirement that all transport fuel includes 10% of renewable
energy by 2020. These developments will result in rising demand for
cereals, sugar cane and edible oil for biofuel production. It means there is
increasing competition between food and fuel.
Increased production output will have to be driven by improving
productivity, as global availability of arable land and water resources is
not expected to rise significantly in the coming decades. Higher required
yields will be the result of investing in biotechnology, fertilizers, irrigation
and better management practices. Just as important is reducing the
substantial losses that occur in the post-harvest stage. More efficient
infrastructure—roads and railways, storage depots and refrigeration
facilities—would make a big difference, minimizing yield losses and
increasing food security.
c) Water
The third area in resources is the shortage is fresh water. The average
European uses 200 liters of water every day for drinking, washing and
cooking, according to the UN Human Development Report, while North
Americans use 400 liters. And that doesn’t count all the water used
to grow food and in other processes. For instance, it takes 140 liters of
water to make a single cup of coffee, because of the water used to grow
the beans, convert them to a usable form and to transport them to
your kitchen. Globally, more than 80% of water consumption is used in
agricultural production, according to the United Nations Environment
Program.
+23%
The negative consequences of overexploiting the available resources are
+25% 34% being felt in many countries already. In arid regions, for instance, it is
now difficult to irrigate crops sufficiently to feed everyone. Food already
30%
accounts for up to 35% of imports in certain countries that do not have
39%
enough water to produce sufficient food to feed their own population.
40%
Around one billion people around the globe lack safe drinking water,
25% 23% while more than 2.5 billion do not have safe sanitation, according to
2015 2025 WHO/Unicef. They also estimate that some 1.4 million children die from
diarrhea caused by unclean water and poor sanitation each year. The
situation will only become more critical in the years ahead.
But water scarcity isn’t an issue confined to isolated regions. It is
increasingly becoming a global problem as well. Furthermore, water
quality and providing an effective infrastructure to transport water
are presenting growing challenges. These challenges are opening up
attractive markets for innovative, well-positioned companies.
Overall, the development of the water market will be shaped by five main
trends: global population growth; urbanization; the crumbling water
infrastructure; higher water quality standards; and climate change.
How to capture the opportunities in the shortage of
natural resources
The continued strong demand for materials and energy around the world
can be tapped by investing in Robeco Natural Resources Equities, which
invests in companies that are expected to profit the most, such as those
that own upstream assets in the tightest supply-demand areas. It invests in
companies that are involved in oil or mining. It also focuses on producers as
well as companies that search for innovative ways to efficiently exploit and
use the increasingly scarcer commodities.
This final factor is also the case for the SAM Smart Energy Fund, which
focuses on alternative ways of producing energy; the alternative route
becomes increasingly viable economically as oil prices rise. The fund
invests in global companies offering technologies, products and services in
innovative technologies in four key segments: renewable energies, natural
gas, distributed energy systems and demand-side efficiency.
SAM Smart Materials takes advantage of the rising demand for technologies
and products that offer a solution to the scarcity of basic materials. It
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invests globally in companies that offer products and services in the area of
extraction and efficient consumption of raw materials, the recycling of used
resources, and the development of innovative alternative materials.
Interest in food & agri investment is likely to be boosted in the coming
years by inflation and rising demand/short supply. The SAM Sustainable
Agribusiness Equities fund addresses the strong demand for food resulting
from the growth of the world population and the rise of the middle
class in emerging countries. It considers investments throughout the
agribusiness value chain, though with a special focus on the upstream
part of the chain. So as well as investing in food processors, the fund
focuses on areas such fertilizers, seed producers, machinery, plantations,
transportation and infrastructure, which help to realize global food
demand in a sustainable way.
The SAM Sustainable Water Fund identifies the major trends affecting the
water-value chain. The stocks picked for the fund are those best positioned
to benefit from these trends.
3. Environmental awareness
Our third megatrend is growing environmental awareness. The effects of
climate change are becoming increasingly visible: catastrophic flooding,
hurricanes or periods of extreme drought are just some of the weather
phenomena that repeatedly make the headlines.
Global trends such as demographic changes, growing emerging markets,
environmental sustainability and CO2 restrictions are intensifying the
demand for products and services that anticipate or react to climate change.
Consumers and corporates alike are showing this increased awareness.
Companies are not only targeting earnings growth but also the reduction
of their CO2 footprints and their water usage. Take, for instance, the
Dutch/UK consumer goods group Unilever. It recently declared its goal
of doubling sales by 2020—but also to do this with the same CO2
emissions. To do this, Unilever intends to invest in new manufacturing and
packaging technology.
Meanwhile, more shelf space in supermarkets is given over to organic and
biofriendly products. That’s because consumers are asking for them—and
they are willing to pay higher prices for them.
How to capture the opportunities from increased
environmental awareness
One way to play the attempts to find solutions to the problems caused
by climate change is the SAM Sustainable Climate Fund. The fund invests
in companies in three main clusters—the mitigation of climate change,
adaptation to climate change and response to climate change.
The megatrends we identify are clearly overarching and overlapping
trends that influence and shape more than theme. A number of funds
offered by SAM, Robeco’s sustainability investing specialist boutique, thus
play these sustainability themes as part of their wider focus. These include
the SAM Sustainable Water Fund, the SAM Smart Energy Fund and the
SAM Sustainable Agribusiness Equities Fund. Finally, the green consumer
is one of the main focuses of the Robeco Consumer Trends Equities fund.
4. Inflation
a) Structural factors pointing to higher inflation
Demographic change and the shortage of natural resources are
increasing the likelihood of inflation, which is the fourth key issue that will
shape the future. Demographic change is important because of the aging
of the population, which will make labor scarcer. Within natural resources,
prices might rise as more and more buyers scramble for scarce resources,
also leading to higher inflation.
There is a third factor that is also increasing the risk of inflation. Many
governments across the globe owe massive amounts. They—or their no
longer so independent central banks—could be tempted to inflate away
some of that debt. Boosting inflation stimulates nominal growth, thereby
reducing the debt/GDP burden. That is much less painful than actually
reducing the level of debt.
b) The current global inflation situation
Right now, though, inflation is not the most pressing of problems in most
developed-world countries, but it is on the rise. Core inflation is at 1.1%
in the US, 1.0% in the eurozone and -0.6% in Japan. And even though
the ECB hiked interest rates in April 2011, central banks continue to be
accommodative.
Chart 5: Robeco’s inflation monitor
Barometer Inflation
Source: Robeco
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Yet the Robeco Inflation Monitor (see chart 5) tells an unequivocal story.
It is clear that inflation has bottomed worldwide and is expected to rise
in the near term. Rising commodity prices, a rise in inflation expectations
and the recovery of the world economy are all pointing in that direction.
That said, the risks are not evenly spread across the world. There is an
unambiguous dividing line running between the emerging economies
and their developed counterparts. Inflation is already above average in
emerging markets, due to the high food and commodity prices, as well
as some moderate capacity limitations. Ultimately, much will depend
on what happens to food prices, which have been affected by floods and
droughts recently.
By contrast, the rise in inflation in the developed world appears to be
more of a normalization than a serious threat. Barely six months ago, the
major fear was the onset of deflation, which prompted the US Federal
Reserve to embark on a second round of quantitative easing (QE2). Now,
with unemployment high and capacity utilization rates low, the ample
spare capacity is putting a brake on second-order effects from the spike in
commodity prices. But tensions are clearly on the rise.
c) Why inflation matters
Investors who have experienced only low and stable inflation tend to
ignore the effect that inflation has on their purchasing power and their
real wealth. Just like individuals, pension funds also face a money illusion
problem—the feeling of being wealthier in nominal terms while this is
not so in real terms. Although they may want to increase the pensions of
their participants in line with wage or price inflation, they are required
to report their solvency on a nominal basis. This may force them to focus
on the short-term nominal funding ratio and put their plan to protect the
purchasing power of their participants onto the backburner. Clearly, this
may have undesirable consequences for the participants in an inflationary
scenario.
How to protect against—and capture the opportunities
in—inflation
a) Inflation protection vs benefiting from inflation
How, then, to protect against inflation? Our research, as shown in chart
6, shows that commodities and commodity-related equities provide the
best protection, followed by equities and inflation-linked bonds. Nominal
bonds suffer badly in inflationary periods.
Chart 6: Asset classes’ correlations with inflation
Source: Robeco
But chart 6 also shows that different asset classes with relatively high
levels of correlation with inflation vary substantially in their amount of
return volatility. Those assets with low volatility relative to inflation are
best suited for investors requiring protecting strategies that hedge the
impact of inflation on an investment portfolio and preserve its purchasing
power.
Inflation-related investing isn’t only about protecting against it, however.
Instead, it is possible to invest to benefit from inflation, largely by
maximizing inflation-related returns, typically via a more opportunistic
stance. The higher volatility products shown in chart 6 are appropriate
for this more opportunistic, benefiting approach. Ultimately, deciding
whether to protect against inflation or to benefit from it will depend on
the investment goals.
Robeco at a glance
Founded in Rotterdam in 1929, Robeco is a pure-play asset manager.
Utilizing an active investment style, it offers a full range of products in
both traditional asset classes (equity, fixed income, money markets)
and alternatives (private equity, hedge funds, managed futures) for a
balanced mix of institutional and retail clients in selected markets across
the globe. The company’s core investment capabilities are complemented
by a ring of specialist investment boutiques.
A global leader in responsible investing, Robeco has assets under
management of EUR 150 billion / USD 201 billion (as of 31 December
2010). Robeco is 100%-owned by AAA rated Rabobank.
For more information, please visit www.Robeco.com
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 Important information
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