NEW YORK — HERE'S something to cheer about - if it proves true: The 1990s looks like a decade of relatively low inflation and modest but sustained economic growth. Moreover, the United States could be to the '90s what Japan was to the 1980s - the primary source of international investment capital, high productivity, and corporate creativity. Sound too good to be true? Not at all, says Graham Tanaka, manager of the Retirement Planning Fund Equity for Venture Advisers and president of Tanaka Capital Management, Inc.
Mr. Tanaka believes that such a scenario is not only possible, but probable, in large part because of the changing demographic structure of the US. And, adds Tanaka, the segment of the investment world that will most benefit will be growth stocks.
Tanaka, as he admits, would be among those likely to gain in such a scenario. He has already been scooping up a host of growth stocks. Tanaka says he is looking for stocks that are selling at reasonable prices, fill a demonstrated product niche, and most of all, offer the possibility of a turnaround. Oh yes: The companies must also have the potential to grow 15 percent to 20 percent or more a year.
Tanaka Capital was rated the No. 3 adviser in terms of investment performance in the US during 1989 by CDA Investment Technologies. Moreover, the retirement fund registered a gain of 40 percent last year, placing it within the top 20 of some 1,700 US mutual funds.
Tanaka looks at the world of investing through the perceptions of both an engineer and financial analyst; he holds degrees in engineering and urban studies from Brown University - and worked as a civil engineer in Honolulu and Los Angeles. He also picked up an MBA from Stanford.
The high US inflation rate of the past few decades, Tanaka believes, is related to the ``politics of need,'' when women, and young people from the baby boom generation, poured into the work force. But the huge movement into the labor force has slowed. Companies are increasingly finding a scarcity of workers. So the underlying thrust of the '90s will be to make the ``existing work force more productive.'' Further, baby boomers will be salting away more savings as they move toward middle-age. And Washington will need to ensure high productivity to keep the economy growing at all.
Growth will be the great investment theme of the '90s, not leveraged buyouts, or spectacular stock deals, as occurred in the 1980s, says Tanaka. A number of companies will steadily post high earnings gains. But since the economy itself will be slowing, overall corporate profit growth will be down. So when you put the earnings gains of growth companies in context with the slowing of corporate profit growth in general, the growth stocks will, argues Tanaka, stand out like stars.
Tanaka believes in holding relatively few companies in the portfolios he manages. Thus, while he meets with officials of about 300 companies a year, he has positions in about 40 companies for the mutual fund, and 18 to 20 companies in separately managed accounts. Once bought, a company will be held for three years or more.
Tanaka's current holdings include Intel Corporation, Airborne Freight Corporation, American Cyanamid Company, Federal National Mortgage Association (Fanny Mae), Pfizer Inc., and Humana Inc.
Is there any danger that the decade may not turn out looking quite as rosy as Tanaka believes? Some economists fret about the upward impact of overseas interest rates on US rates. Even Tanaka concedes that the absorption of Eastern Europe into the Western European economy may put upward pressure on global rates. And the federal budget deficit, with its pressure on US rates, has yet to go away. Still, Tanaka believes that not only do changing demographics ensure greater productivity and lower inflation, but that Congress - through such eventual legislation as enactment of a reduction in capital gains - will make certain that they occur.