LEADERSHIP CORNER
Cadinha chairman predicts 'good net effect' of mutual fund scandals
Interviewed by Deborah Adamson
Advertiser Staff Writer
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Title: Chairman and CEO
Company: Cadinha & Co. LLC
Age: 62
High School: Punahou School
College: B.S. in finance, insurance and real estate with a minor in economics from the University of Hawai'i
Little known fact: "I tended bar at Beachwalk Broiler in Waikiki."
Breakthrough job: "I saw an announcement that E.F. Hutton was coming to Honolulu to set up an office. I was familiar with the firm and I went to talk to them about opening a brokerage office in Maui. That led to my joining the firm in Honolulu. After a year or two, I became part of their institutional research group. That led to my gravitating to money management."
Major challenge: "It's a competitive challenge. Our competition is typically much larger than we are — the major banks and major firms from Wall Street that come out here looking for clients."
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Q. What made you start your own money management company?
A. I felt that Hawai'i really needed an independent investment counselor with an approach that was macroeconomic in nature. Nobody was really exercising a "top down" strategy, which would start with an economic analysis before doing an investment. Everybody was doing a "bottom up" approach. (A bottom up investment strategy starts with fundamental analysis of a company — such as sales and earnings growth.)
I thought there was enough volatility in the economic system and enough leverage that someone with this kind of an orientation could probably succeed. That prompted me to hang up the shingle, register with the SEC, and do it.
I started with Bill Jurika (founder of Jurika & Voyles investment firm in San Francisco). About 20 years ago we split into two different firms; I stayed as Cadinha & Co. It was a very amicable divorce. They had a different approach and we wanted to stay with a conservative approach. That philosophical difference led to the split.
Q. Investigations into the mutual fund industry have been making headlines. How do you think this latest Wall Street scandal is affecting the industry?
A. The net effect is going to be good ... there's probably going to be a lot of clean up necessary. This may weed out (errant firms) and hopefully shed light on their investment decisions for investors.
Q. Has the industry turmoil affected your firm?
A. We don't manage any funds. We don't use funds in the management of portfolios. If there is any effect, it might be positive. We have had some recent inquiry from potential clients who have voiced some concern over working with Wall Street firms and wanted independent counsel that was truly independent.
Q. As a money manager, where do you see the market going?
A. I see an upward bias in the stock market. It should be a pretty good year. The economy is getting stronger. With smaller deficits, higher growth rates and with companies being fairly lean, economic growth will probably translate to higher corporate earnings growth than expected. But there are some storm clouds out there that have to be watched. One is the weak dollar policy and the trade policy as espoused by the Bush administration. It's basically protectionism.
Q. Why are you against these policies?
A. It's anti-free flow of capital and resources around the globe. So everybody begins to get defensive and it can only result, way down the road, in some kind of economic contraction as it makes the world less efficient.
(The extent of the impact) depends on the route taken, how aggressive they are and whether they use currency or tariffs. If they try to be protectionist through currency manipulation you run the risk of central bankers having to print more money ... and that could be very inflationary. (A weak dollar makes American products cheaper to buy abroad, putting pressure on other countries' central banks to weaken their currency by boosting their money supply, which could result in higher inflation.) If protectionism manifests itself through tariffs, it could be immediately contractionary.
Q. What do you make of the 8.2 percent jump in the GDP for the third quarter? It reminds one of the kind of growth rates we're used to seeing in China and other emerging nations but not in developed Western economies.
A. It's not surprising. There's a lot of operating leverage in the system. The tax cuts were really the savior of this economic cycle and have acted as a floor under the stock market — and that's been good. But as time progresses, the power of the tax cuts diminishes because they are destined to end. Without a successful election next year, the Bush administration won't be able to make these tax cuts permanent. They all start phasing out in 2008, 2010.
Q. Where are you investing?
A. We're totally U.S. We think this dollar weakness is overdone. The dollar is probably the best currency in the world, contrary to what many people believe. I think stocks will continue to beat bonds for the foreseeable future.
Q. Haven't stocks historically beaten bonds anyway?
A. If you went back and compared long-term Treasurys with stock indices, you'd find out that Treasurys were very competitive for 10 to 20 years. Over 50 to 100 years, equities still maintain the bias. But if you do 10-, 20-year cycles or even 5-year cycles, you can do very well.
Q. Are you still a proponent of a flat tax for Hawai'i?
A. Let's call it a consumption tax. Hawai'i needs to attract capital. Capital, when invested, creates jobs and capital will always gravitate toward an environment that offers a better after-tax rate of return. We have to provide an environment to attract capital to get economic growth and better job opportunities. The biggest hurdles for capital come in the form of payroll taxes, income taxes, capital gains taxes and regulation, which is a form of taxation. My theory is it would be better to shift the tax burden so that it's shared by more people, which would include visitors. To have a flat sales tax of 7.5 percent, (the state) could afford to drop the income tax completely, the capital gains tax, the business income tax and the estate tax, which would be very attractive for capital to come in here.
At present, we have a unique societal problem in that we need to provide infrastructure to take care of more people than there are citizens of the state. We have so many visitors — our visitor industry brings in millions every year into the state — and we have to provide the roads (and other infrastructure) for these visitors. And yet the cost of these services to maintain and to build is primarily being placed on the back of Hawaiian citizens.
Q. How have you resisted the call of Wall Street? You could have set up shop in the nation's financial center — New York.
A. I'm a third generation (kama'aina). This is my home. I love the way of life. I spent enough time on Wall Street to know it and understand it — and there's no reason you have to be on Wall Street to be a good investor.
