Baby boomers mean big business for the Generation Wave Growth fund, which bets on three industries poised to benefit from the torrent of boomers entering retirement over the next 15 years: healthcare, financial services, and technology.
The $35 million fund, managed by Allen Gillespie and Charles Norton (the pair also run the Vice Fund, which invests in the alcohol, tobacco, gambling, and defense industries), holds roughly a dozen stocks and 20 exchange-traded funds, which track a range of sectors and countries, including emerging markets, oil services, and Standard & Poor's 500-stock index. Over the past five years, Generation Wave has gained an average of 8 percent per year, 1 percentage point ahead of the S&P.
U.S. News spoke with Gillespie about demographic factors that contributed to the U.S. housing bust, best-positioned stocks, and how the election will rock the healthcare, financial-services, and technology industries. Excerpts:
What makes the Generation Wave theme compelling for investors?
Demographics are a very important long-term driver of demand—one that's relatively slow moving and can be predicted years in advance. We believe the unique economic and lifestyle trends of the more than 80 million baby boomers will drive long-term supply and demand trends for industries like healthcare, financials, and technology.
Why those industries?
Between now and 2025, there will be a boomer retiring every 16 seconds. This creates huge demand for financial services. Although investors have been accumulating money inside retirement plans, they don't typically use an adviser; instead, they use tools provided by their company. But as their account balances get larger and they begin planning for retirement, they're more likely to seek out financial advisers. The average age of a brokerage client is 50.5 years. And with a disproportionate number of people moving from middle age to old age, healthcare spending will accelerate. Technology goes hand in hand with financial services and healthcare. For example, both Google and Microsoft have started creating digital medical storage records.
We're also playing demographic themes in other countries. For example, South Korea looks much better than Japan or China, where you have an aging population. Here's why: Younger people who are just starting out are getting married, having kids, buying shoes for the kids, and buying houses. Household expenditures generally peak about the time children leave home, so countries with younger demographics generally experience rising consumer demand, which drives profits.
Although in Japan there's an emerging trend: People are starting to enter the workforce now who are too young to remember the stock crash of 1989. Stocks are still—20 years later—about 50 percent below that peak. The idea that stocks are risky isn't likely to resonate with this younger generation; hence, they're willing to speculate a little. A new bull market starts.
How long will this Generation Wave theme work?
Particular themes within industries and countries will generally change every 16 to 22 years as the age of the population changes. For example, we think demographics were a contributing factor to the recent housing bust. According to the Census Bureau, the average age of a repeat home buyer in the U.S. is 41.4. The last of the boomers were born in 1964, so the math suggests that mid-2005 was a significant peak in housing demand.
We're at a point of transition with financial services, because peak savings occurs between age 45 and 54, and peak spending happens during the period of household formation: marriage, home purchase, kids, bigger home purchase. This means that the first boomer just hit retirement and the last boomer just bought their last home. Going forward, financial service companies that handle savings and retirement planning are better positioned than those that support spending.
What are a few of your favorite stocks?
Right now, we like Tenet HealthCare, which owns and operates hospitals and surgery centers. They focus on quality of care, an increasingly important area of this industry. We see Tenet as a turnaround situation: The company has had a lot of issues in the past, but most are behind them. There are still some operational hurdles, but we think they're doing the right things.
In technology, we like AT&T, which has agreements with Apple on their new products, and also Research in Motion. AT&T has partnered with the right firms, and their positioning within wireless is very strong.
A financial services company we like is Citigroup, another turnaround. We've lowered our weightings in financial services, but expect the financial crisis to burn out soon, and think this is an opportune time to be looking. Overall, we have a preference for companies that don't take on balance sheet risk and are more service oriented, like Citigroup, which serves retail customers.
About 85 percent of the fund's assets are in exchange-traded funds. How do ETFs fit in with your strategy?
We get broad exposure to countries and sectors through ETFs and then invest in individual stocks for sniper-shot situations where we think there's a good longer-term story. Hologic is an example. This company has women's healthcare covered: They have a product line that spans girls to women and includes things like digital mammography and osteoporosis assessment. We like it as sort of a niche situation.
We use ETFs to get exposure to things like emerging markets and growth stocks. To play on Japan's stock market, for example, we use an ETF that invests in small Japanese companies.
How might the industries you focus on be swayed by the presidential election?
In healthcare, there are three major issues: access, quality, and cost. These are important because we're on the cusp of a demographic explosion, as healthcare demand and cost rise with age. Both political parties want to address these issues, but in different manners. Major change will be more likely if Barack Obama wins, given the Democratic control of Congress.
Renewable energy is a big issue on the technology front, and the boomers tend to be more environmentally active as a carryover from their youthful days in the 1960s.
As for financial services, we expect more onerous regulation of investment banks under the Democrats, which will curtail proprietary risk taking. But financials could benefit from a surge in restructuring. In addition, we believe there are two important trends developing: for private businesses to sell out to other ownership before capital gains tax rates increase and for European companies to buy U.S. companies while the dollar is cheap.
Corrected on 7/08/08: An earlier version of this article incorrectly reported the assets of the Generation Wave Growth fund. The fund has $35 million in assets.