Pets are not just fun to have around, they are also an excellent investment. ‘The pet economy is growing faster than the economy as a whole every year, because it benefits from a number of megatrends that are converging,’ according to Andreas Fruschki, manager of the Allianz Pet and Animal Wellbeing fund.
The amount spent on pets in the US, the country with the highest number of pets per capita according to Fruschki, has grown by an average of 5.2% per year over the past 10 years, he says. And this year, that amount is expected to exceed $100 billion. In Europe, too, spending on pets has increased in recent years. ‘China is about one generation behind the West. There, the growth rate is now as high as 15 percent a year.’
The growth of the pet economy has two pillars: ever more people buy a pet, but they also spend more and more money on it. The popularity of pets is due to a combination of several megatrends, Fruschki says. ‘First, demographic change: households are getting smaller, so people are more inclined to get a pet. In addition, younger generations such as millennials have pets more often than their parents, and they also spend more money on them,’ says the German, who has two dogs of his own with his family.
Snoopy
The latter has to do with another trend: pets are increasingly seen as an integral part of the family, partly due to the fact that families are getting smaller. Fruschki says: ‘In the 1950s, a dog generally lived in a doghouse in the garden, like Snoopy, and no more was spent on him than a few vaccinations and simple dog food’.
But this is no longer the case. Nowadays, pets live in the house with the rest of the family and sometimes even sleep in their owners’ beds. ‘Owners have higher demands regarding the health and hygiene of their pets. And because it is now normal for pets to live indoors, living in the city is no longer an obstacle to getting a pet.’
People are also prepared to spend a lot more money on their new family members. Fruschki: ‘Millennials in particular want their pets to live the same way they do. This includes a healthy lifestyle and fresh, good quality food. There’s a lot more choice in dog and cat food now than there was, say, 10 years ago. Such as fresh food that can be ordered online. The choice is endless, and the food can, for example, be tailored to the breed and age of the animal.’
Vegetarian dog and cat food is also on the rise. ‘This is a niche market that I expect to grow. More and more people are becoming vegetarians, so more and more dog and cat owners are also eating vegetarian food. This makes it only logical that you also want vegetarian food for your pet.’
Producers of pet food make up about one fifth of the Pet and Animal Wellbeing fund’s portfolio. The fund’s strategy is unconstrained, which means that investments can be made all over the world and in both small and large caps. Most companies in the fund are midcaps from the US and UK.
Animal healthcare
By far the largest weighting of the fund (about 45%) is to the healthcare sector. This is the fastest growing segment of the pet economy, according to Fruschki. ‘Pets are increasingly receiving medical treatment, also because more and more is possible in the medical field. Five or ten years ago, you might not even have gotten a diagnosis when your pet was ill, but now there are more and more treatments available.’ And that comes at a cost. ‘If your dog has arthritis or another chronic illness, it can cost you thousands of euros a year in medication. But most owners are prepared to pay this.’
Healthcare for dogs and cats is also a lucrative investment. ‘The margins are higher than in human healthcare because there is less competition and less government regulation. Because of the high costs, people are also increasingly taking out health insurance for their dogs and cats.’ This niche occupies some 10% of the fund’s assets.
Corona pets
A look at the performance of the Pet and Animal Wellbeing fund shows that the outbreak of the coronavirus has not done the portfolio companies any harm. Whereas until March last year the fund performed more or less in line with the benchmark, the MSCI ACWI Total Return, since then there has been a clear outperformance: over the past year the fund has achieved a return of around 33% (LU1931535857), 13 percentage points more than the benchmark.
‘The pandemic accelerated already existing trends. This was reflected, for example, in a faster growth in the number of pets because many people felt lonely as a result of the pandemic,’ Fruschki says. ‘Because there has been a lot of attention to this, perhaps more people have also become aware that the pet economy is in a sweet spot, and have started to invest in it.’
Until now, the hard core of investors in the fund has consisted of veterinarians and other medical professionals. I don’t have any figures on this, but this is my assessment based on anecdotal evidence. These people invested in our fund because, from their background, they were the first to be aware of the enormous growth potential of the pet economy.’
But that awareness is now spreading more widely, Fruschki estimates. ‘Not all annual results of the portfolio companies are in yet, but by far the majority of companies have recorded substantial increases in revenue.’ Fruschki does not expect this growth to continue at the same pace, however. ‘The growth is now taking place from a higher level, so I expect it to drop back towards trend level. But that is still well above average global GDP growth.’