To Follow the Money, Follow the Population
March 15, 2004
When you're looking for growth, industries with favorable demographics can make that growth easier. That doesn't mean we at Sterling Advisors won't own stocks that are in industries with more challenging demographics, but we think having a good idea of what the favorable demographic trends are is one helpful starting point.
If you start with the observation that the biggest growth in population over the next five to 10 years is going to be people in their fifties and sixties, healthcare is an area where there's going to be a very favorable tailwind.
But that doesn't mean that owning every pharmaceutical company is a slam dunk, because there are other very important dynamics going on in the industry, namely competition from generics and drugs going off patent protection. Also, there' the whole issue of who pays for the drugs, with the government putting that into further question with each passing day.
So, we've been more interested in medical equipment companies. Last year, for example, we owned a company called Centerpulse, a Swiss company that focuses on orthopedic replacements. Space part for aging Boomers, if you will.
There's another company in our portfolio right now called Fresenius Medical Care, a German company that owns and operates the largest renal care chain in the United States. Given the diabetes problem associated with aging, it's pretty well positioned to not only benefit from the aging trend but also, unfortunately, from the obesity issue that's a trigger for diabetes. If Centerpulse was spare parts for aging Boomers, Fresenius is a lube job.
The medical device and medical equipment area is interesting because the FDA approval procedure is less cumbersome than for drugs. There's a company called Angiotech Pharmaceuticals involved in drug-eluding stents. These are stents coated with a drug that makes them far more effective.
On the flip side, we look at areas that are demographically challenged, one such area being mortgage origination. Even though mortgages have been going crazy with the low rates recently, if you look at people's debt profile, the folks who take out big mortgages tend to be in their thirties and forties. People in their fifties and sixties with retirement looming generally want to pay down those mortgages. It doesn't mean they won't refinance in response to interest rate changes and the like, but I would guess over the next 10 years that the mortgage-origination business is going to face a demographic challenge.
Echo Boomers have their own trends. Shops for teens, the college-bound and those in their early twenties look like they're going to be growing rapidly because the Baby Boomers' kids are heading off to college. One stock that we don't own currently but we've looked at is SLM Corp., which used to be Sallie Mae. It's focused on college financing. The demographics for that area look pretty good.
We also try to look at broader, big-picture economic trends. If you look at the demand for financial assets by age group, obviously people in their twenties don't have any financial assets. The chart really starts to climb when you see people moving into their forties, fifties and sixties, and it stays pretty high even through the retirement years. Couple that with the demographic growth trajectory, which is concentrated in advanced middle age and early retirement years, and I think the demand for financial assets and financial services stays pretty high.
Twenty years ago, you didn't see mutual fund commercials on television. Now you turn on Sunday sports news and half the commercials seem to be in that area. Knock on wood, we think financial planning and financial services probably is still pretty well-positioned demographically. We're probably at a point in the interest rate cycle where we've actually become a little more cautious on financials, but from a secular point of view, the demographics are pretty good.
Of course, some academics are concerned that January 1, 2011, the day Boomers turn 65, they'll all go to Florida and hit 1-800-SELL-STOCKS. The models I've seen don't see that rollover in financial assets occurring until about 2020 or beyond.
Double the Economy
And I don't know how much weight to put on those scenarios even then because if the world has 4% productivity growth and you double the economy every 18 years, it's a very different world than some of the grim scenarios that project 2% GDP growth, where it takes 36 years to double the size of the economy.
I think ultimately the productivity path of the economy and the extent to which the technology revolution continues could swamp demographics as a major factor for asset markets. Some computer scientists believe that in 20 years, $1,000 PCs will be almost as smart as humans. If robots all of a sudden start appearing everywhere, then effectively, productivity soars, and economic growth could soar as well.
William Sterling is chairman and chief investment officer of Sterling Advisors, a growth-oriented investment advisory firm in New York that specializes in separately managed accounts and mutual funds. This column originally appeared in SMA Adviser, a newsletter of sister publication Financial Planning.
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