the demographic investor - AIM Equity Funds Inc

American Demographics, Dec, 2000 by Michael J. Weiss

They follow demographics. In the hyperactive world of investing - with its rapid trades and lust for instant wealth - some analysts take the long view.

Forget Fed Chairman Alan Greenspan with his worries about short-term interest rates. Turn off CNBC and its breathless updates about the dot-coms du jour. Don't even think about listening to the day-trading gurus who promise you riches from buying and selling Dell in less time than it takes to down a cappuccino. Now, relax and start counting heads.

Despite the wildly-gyrating Dow, that's the sane advice of a small but influential community of investment professionals who use demographics to pick stocks, bonds, and mutual funds. At a time when many money managers zip in and out of stocks almost hourly, a growing number of experts now base their investment strategies on the same long-term population trends used by market researchers and policy wonks. And they're spreading the word that understanding demographics can mean the difference between making a killing and getting trampled by the bulls.

Just in the last year, the AIM family of mutual funds launched the Dent Demographic Trends Fund, for which California money manager Harry S. Dent Jr. identifies generational shifts and the sectors expected to profit from them. Likewise, Robert Farrell, a senior investment adviser with Merrill Lynch & Co., recently began highlighting a half-dozen demographic "themes," such as "the aging population" and a "growing Generation Y," to advise clients on the stocks that will benefit from them. At Victoria Capital, a private investment fund based in Washington, D.C., Todd G. Buchholz, the company's chief investment officer, now focuses on the rising Hispanic population as reason to buy ethnic media companies such as Univision Communications.

"You want to go where the numbers are," says Buchholz, a global economist, and author of Market Shock, a book about the financial impact of social trends. "It's the opposite of that old baseball cliche to `hit 'em where they ain't.' You want to hit 'em where they are."

No one keeps track of how many demographic experts prowl Wall Street, but their numbers seem to be growing. Many investment banks and brokerages now employ demographic-minded analysts along with their "technical" analysts who chart the momentum of a stock's price, and the "bottoms-up" specialists who probe a company's balance sheet to predict earnings. Increasing media coverage of demographic news has made population shifts part of every fund manager's stock picks. You'd be hard pressed to find a broker who hasn't concluded that Baby Boomers are getting older and will soon need more prescription drugs. That translates into an expected increase in sales - and a higher stock price - for pharmaceutical companies such as Pfizer, the maker of Viagra.

But "true" demographic investors are also obsessed with long-range trends, tracking the number and ages of people over time in order to identify the pockets of consumers who spend disproportionately more money than other groups. By following their buying patterns throughout their lives, shrewd investors can predict new spending patterns created by demographic shifts. Aging Boomers? Merrill Lynch's Farrell believes they'll benefit the makers of backyard decks (that's why he's recommending the Trex Company) and online bill-paying software (Checkfree Holdings) as they set up their homes as retirement cocoons. "Demographics show you where the opportunities are emerging," says Farrell, who describes himself as a "theme strategist."

While other analysts pour over company balance sheets, demographic investors sift through reports from the U.S. Census Bureau, the Bureau of Labor Statistics, and the National Center for Health Statistics. Richard Hokenson, chief economist at Donaldson, Lufkin & Jenrette, says he gets some of his best tips at conferences held by the Population Association of America, where he listens to professors describe their research-in-progress. At a recent meeting, he learned of the declining divorce rate - from above 50 percent to the mid-40 percent range - and promptly turned bearish on the toy industry. As he explains, "What counts for toys is not how many children there are, but how many adults are related to a child. When divorce rates are falling, there are fewer gift-givers, so you have a negative impact on firms like Toys `R' Us or Mattel."

But demographics can do more than simply indicate a hot sector or a cold stock. In fact, Hokenson believes that its most important use is forecasting inflation, which influences the asset allocation of an investor's portfolio. For instance, aging Boomers have already made major purchases - their homes, cars, and furnishings - which indicates lower borrowing and inflation rates. That, in turn, will keep interest rates low, stock values high, and encourage investors to keep a large share of their assets invested in the stock market. "An aging population produces a disinflation, so you want to own long-date financial assets such as stocks and bonds," says Hokenson. "That will change when Generation Y begins borrowing heavily to form households, and inflation shoots up. You should then place more of your assets in cash and real estate."