Changing of the guard: investing in enduring generational shifts

Pieter Hundersmarck, Fund Manager at Flagship Asset Management

Understanding and profiting from the shifting behavioural and financial dynamics of a world in which there is a changing of the guard requires recognising what aspects of life will endure and what have fundamentally changed.

By far, the most important factor that can be gleaned from our study of upcoming generations in relation to the past is the enormous, far-reaching impact that the internet is going to have on human society. Many before us have said it, modelled it and bought into it. Still, the truth is we don't believe we are even scratching the surface of the social, consumption and investment changes that will occur as we grow ever more interconnected and online.

Interpreting generational change is intertwined with technological change, shaping the way people consume, save and invest. Many of the pastimes we currently enjoy were unavailable to previous generations due to technology: the smartphone is easy to point out. Going a step further, a third of generation Z (4 to 24) would trust a robot to make their financial decisions, and they watch eSports more often than traditional sports. As a result of the internet, interactions are increasingly conducted online, with a staggering 40% of 16 to 18-year-olds prefer to interact virtually.

While technological advancement was slower for the silent generation (age 75 to 92) than subsequent ones, their wealth accumulation was staggering, bested only recently by their children, the baby boomers (56 to 74). In contrast, the rise of the internet, social media, and a renewed focus on the individual instead of the collective have defined the millennial generation (25 to 39). Millennials are also far less wealthy than the boomers were at the same age, seeing 28% declines in median wealth for the

The internet is a medium through which people participate and observe the popular culture. Core cultural needs – whatever their medium - will likely remain the same. Mothers and fathers of 30 years ago will desire the same things as mothers and fathers in the next 30: a good education for their children, a safe environment, a stable income and food on the table. Disposable income then, and in future, will be spent on apparel, the outdoors, and travel for as far as we can anticipate.

Money earned will need to be spent; unless generation Y and Z become massive savers, which at the current rate seems unlikely. On that note, a savings industry, as long as a capitalist, free-market economy continues to exist, will be vital.

Some of the mainstays of previous generations (independent of technology) are changing. For example, surveys reveal that only half of US teens can drive, less than half of Gen Z over 18 drink alcohol (versus a third of millennials), and more than half have some kind of meat-eating restriction. For both generations, mobile phone usage, social media, cultural participation, awareness of the environment and social awareness are essential themes.

There is no doubt that generation Y and Z are delaying marriage, children, and homeownership, as well as postponing other traditional consumer purchases.

Commercial intentions are also affected - 80% of Generation Y and Z factor ESG investing into their financial decisions. They are also quick to drive sustainability campaigns, such as green energy (much of this campaigning is conducted from relative safe perches behind their mobile phones or tablets).

The lives of both these generations are conducted online, and they are financially conservative (perhaps because they have to be…?). Significantly, 90% of them live in emerging markets. Why is it important to understand this, and what conclusions can we draw from it?

On the one hand, generation Y and Z have youth on their side. One might say, "who cares" what the current crop of young kids wants? We all had desires, limited means (and not much wisdom) when we were young. This is the defining theme of generation Y and Z: they are young. As we grow older, our understanding of the world and how we participate in it changes, and with it, so will our needs and wants.

Durable investment conclusions cannot be drawn on the fact that young people today don't use credit cards, like to play video games or don't currently drive a car.

Some of these phenomena can be explained by their current stage of life and their means. Financial success (and different payment methods like credit cards), as well as responsibility (you can't play video games all day when you have children) and driving habits (at the right price or if you live outside a city, you will own a car) change as you age.

There is money to be made in understanding the nuances of changing consumption habits, but also in understanding, some things don't change. Investors need to concern themselves with the changes that will endure and understand those drivers that will not change.

To take advantage of these societal shifts, our global funds participate in many of the long-term themes we have identified in the newer generations, and we continue to look for more ways to invest behind them.