Print this article

EXCLUSIVE INTERVIEW: Don't Overlook Education As Big Investment Theme - WHEB

Tom Burroughes

26 November 2012

Editor’s note: Thematic investing has been one of the trends in the industry in recent years. At WHEB Asset Management, partner and head of sustainability research Seb Beloe gives his views about the theme of education and how that plays out. While the firm is based in the UK, his insights apply across the globe.

What sort of reasons drive education as an investment theme? When did it first begin to arise?

As an investment theme, education builds off of a range of "mega-trends" that will continue to reshape the global economic landscape over the next few decades. These include demographics, technology, urbanisation, rising living standards, and the shift to "knowledge-based" economies. Life-long learning is emerging as a theme thanks to the growth in retired populations as well as the need for workers to update knowledge throughout their careers. In the US, for example, 29 per cent of students are now over the age of 40 and 36 per cent over 30.

Urbanisation is changing access to education. In Argentina, 90 per cent of the population lives in cities and over 70 per cent of the population is enrolled in tertiary education. In Kenya, the figures are 25 per cent and 5 per cent, respectively.

Globalisation is another driver, both indirectly, as countries compete on the basis of the skills and quality of their workforces, and directly, through demand for language courses. For example, one of our holdings is Benesse, the owner of the Berlitz language schools.

How long do you expect education to be a big theme in investment?

The above trends show no sign of abating, and education will remain an important theme for as long as they are in play. Education is also a key determinant of income inequality and has been identified as such by the World Bank in China. This makes it one of the most important areas of discretionary spend for emerging middle classes, along with healthcare. We therefore believe that education will be a growth area of the global economy for many years to come.

In which parts of the world is this theme particularly important? Can you give some specifics for say, Asia, Latin America?

The most challenging market at the moment is probably the US, where fiscal pressures are eating into school budgets. At the same time, some analysts have argued that college enrolment is subject to bubble-like characteristics, fuelled by debt and government aid. Meanwhile, 50 per cent of bachelor degree holders in the US were unemployed in 2011. Most of the jobs they are now getting are in low paid sectors where their degrees are not relevant.

But even in the US, companies with strong exposure to digital platforms and content are able to succeed. Pearson continues to gain market share and has done for the last 13 years. Its North American business has grown revenues by 55 per cent and nearly doubled operating income between 2007 and 2011. This might in part explain the promotion of head of education division John Fallon to group CEO recently. It is good news for us as we hold Pearson on account of its strength in education.

The picture is very different in emerging markets. Spending in the US and Japan averages $77,000 per student across primary, secondary and tertiary segments. In Brazil, China and India the average is less than $25,000. And nearly half of this comes from Brazilian spending on tertiary education. At the same time, demand for educated employees is burgeoning. According to a 2010 Manpower survey, 60 per cent of respondents in Brazil, 40 per cent in China and 15 per cent in India have reported difficulty in filling graduate positions at their companies.

What sort of age groups are of specific interest? Are we talking about primary, secondary, tertiary education?

Private sector involvement in primary and secondary education can sometimes lead to controversy for investors in these areas. In most jurisdictions other than the US, however, there is relatively little involvement of the private sector in running primary and secondary schools. Our investment focus is skewed away from these controversial areas and focuses instead on the wide-range of other businesses that feed into educational provision.

What sort of businesses are these?

Well, the broader sector includes academic publishing, information technologies, text book suppliers, language schools, educational suppliers, post-secondary education, support services, corporate and professional training and tutoring, and supplementary education.

Given its importance and positive story, why hasn't education as a theme been more visible when compared to some others, such as "human ageing" or "luxury"?

Good question! Perhaps the large role of the public sector in education creates a perception that the investable universe is not as large as some of the other global growth themes you have mentioned, and makes it off-putting for non-specialists. The theme is also not subject to the quicker growth rates visible in some of those areas, like luxury goods. However, our view is that the underpinning structural drivers are profound and will ensure that well-run businesses operating in the sector will enjoy a growing market for many years.

Do you expect other firms to make more of this theme in their investment approach?

This may depend on the manager. This is a relatively small investment theme. Our whole investment universe across nine social and environmental themes in total only represents approximately 15 per cent of the MSCI World. And the education theme represents only 5 per cent of that. For more generalist managers, it may well be just too much trouble to get to know an area of the market that is so small.

Any thoughts in general about the benefits of thematic investment?

Successful thematic investing is about understanding how the world will change over the coming years, and identifying and investing in those parts of the market that benefit from these changes while also avoiding those that suffer. Some aspects of these changes are well-understood by the market - for example the ageing of populations particularly in Japan, Europe and North America. We try to look beyond the obvious implications of these trends to find investment ideas that are not widely understood or appreciated. The challenge is then to use integrated sustainability and ESG analysis to identify the highest quality companies operating in those areas, and then invest in them at attractive valuations.