Your Money: Who's a good fund? You’re a good fund!

[December 18, 2018]   By Chris Taylor

NEW YORK (Reuters) - If you want a friend, get a dog.

If you want to make money, invest in people who want to get dogs. You can do this now because investment funds focusing on furry friends are starting to hit the market: One an exchange-traded Pet Care fund from ProShares (ticker PAWZ, of course) and the other an actively-managed Pet Parents NextShares fund from famed money manager Mario Gabelli’s Gabelli Funds.

“We’ve been watching this space for a long time,” said Steve Cohen, managing director for ProShares, whose PAWZ just launched in November. “Every pet owner knows how much they spend on their pets. We treat them better than we treat ourselves, and there is nothing we wouldn’t do for them.

“It’s one of those growth stories where you hit yourself on the head and say, ‘Of course!’”

If you are a pet owner yourself, take a moment and tabulate what you spend – it is probably plenty. Roughly seven out of 10 U.S. households have pets, according to the American Pet Products Association's most recent Pet Owners Survey – far more than the number of households who have children, and up from 56 percent 30 years ago.

The survey found that Americans spent a record $69.5 billion on pets in 2017, with 2018 expenses expected to spike further to over $72 billion. That amounts to $29 billion just on pet food, with another $17 billion on veterinary care.

The two new investment funds take distinct approaches to the sector. The ProShares fund is a straight index of the biggest players in the space, a screen that results in around 25 companies. Among its biggest holdings: Insurance firm Trupanion Inc and Zoetis Inc, a pet-drug producer.

Gabelli’s product, meanwhile, digs into the numbers to come up with a group of 30 companies it judges to have particularly bright futures. Of those, around two-thirds are purely pet-oriented, while the rest are larger companies with a pet-care component – such as General Mills Inc, which recently paid $8 billion for natural pet food company Blue Buffalo.

“There are a lot of fundamental reasons that are driving this growth,” says Gabelli Funds portfolio manager Dan Miller.

A woman walks her dog on Wall St. during a cold day in New York City, U.S., December 13, 2018. REUTERS/Brendan McDermid

“There is humanization, which means that we are essentially treating our pets as children. There is the fact that millennials are remaining childless for longer, and are getting pets in the meantime. Meanwhile aging baby boomers are getting pets as well, because of the need for companionship.”

Among the largest components in the Gabelli fund: The small-cap wellness firm PetIQ Inc, along with Central Garden & Pet Co and prominent Australian pet-care firm Greencross Ltd.

BREAKING IN

One challenge for funds in the space: There has been plenty of mergers and acquisition activity in recent years, which has tucked pet services into larger conglomerates.

For instance, J.M. Smucker Co recently bought Ainsworth Pet Nutrition (maker of Rachael Ray’s Nutrish pet food) for $1.9 billion, to add to previous stockpiling of brands like Milk Bone and Meow Mix.

Lively M&A activity also means that some of the biggest pet-care players are not even publicly traded anymore, limiting the universe of pet-care stocks available to portfolio managers. The pet retailer PetSmart, for instance, was bought by a group of private equity firms led by BC Partners, which in turn snapped up the popular pet product website Chewy.com.

Another risk, which faces all niche ETFs: The race to draw enough assets to make the product viable for the long-term. Results so far are encouraging: The ProShares fund has attracted $17 million within only a few weeks, which suggests it will not become like one of the record 136 ETFs that closed in 2017.

One reason for that, said Cohen: Investment advisors seem to enjoy bringing the product up with their clients. After all, everyone likes to talk about their dog.

(Editing by Beth Pinsker and Frances Kerry)

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