(Bloomberg) — It's an early weekday morning in Tokyo and the Japanese pub is already filled with a boisterous clientele, mostly pensioners. Sitting among them is Kengo Kuzuhara, taking notes.
The 41-year-old wants to know how his elders spend their cash, as he runs a stock fund that invests in things they buy. The strategy is paying off as Japan's baby boomer generation reaches retirement age: Sumitomo Mitsui Asset Management Co.'s Active Senior Life Open Fund is gaining even as the market falls, and has beaten more than 90 percent of peers over the past five years.
Japan has about 34 million — more than the combined populations of Australia, New Zealand and Ireland — and people in their 60s or older control about two-thirds of household wealth. Kuzuhara is betting they'll spend it on everything from healthy chocolates to developers that can minimize inheritance tax.
"It's starting to show in the results of companies we invest in," Kuzuhara said in an interview in Tokyo. "And the rate of old people in Japan is only going to grow."
Kuzuhara's 11.8 billion yen ($109 million) fund has returned 15 percent over the past year, against a 14 percent drop for the Topix index, according to data compiled by Bloomberg. It's posted an average annual return of 24 percent over the past five years, beating 92 percent of peers, the data show. That's helped it win best Japanese equity fund in both the Lipper Fund Awards Japan and the R&I Fund Awards this year after taking top spot in a ranking by Morningstar Inc. in 2015.
Kuzuhara's fund mixes defensive bets on health-care shares with a kind of cautious growth investing. It picks companies likely to benefit from spending by the nation's healthy elderly, firms with stable long-term earnings, rather than flashy Internet stocks. Seniors appreciate this strategy and are big investors in the fund, he says.
Kuzuhara has also been lucky. His 77 holdings have a domestic focus, meaning they escaped much of the impact of the slump in oil and strengthening yen.
In seeking to profit from Japan's growing ranks of pensioners, Kuzuhara is taking a different slant on what's viewed as one of the nation's biggest challenges. People aged 65 or older make up slightly more than a quarter of the country's population — already the highest level in the world. That's projected to increase to 40 percent in coming decades, curbing growth prospects and adding to pressure on the pension system.
Kuzuhara's largest investment, Daito Trust Construction Co., targets the elderly's aversion to inheritance taxes, which were raised last year. The top rate is now 55 percent. Daito Trust, which builds rental properties used to mitigate the levy, has seen record profits in each of the past five years, and its shares are up 18 percent in 2016 through Tuesday. The company slid 0.3 percent on Wednesday.
The second-biggest is Toridoll.corp, an operator of chicken and Japanese noodle restaurants whose stock rose 47 percent from a September low through Tuesday. The noodles are cheap, so three generations of a family can eat there for less than 1,000 yen, and udon noodles are the perfect baby food, Kuzuhara says. He notes that while Japan's elderly are willing to spend big on certain things, they're reluctant to waste money on routine ways to pass time. Shares rose 2.5 percent Wednesday.
