Untitled - Neuberger Berman

Transcription

Neuberger
Berman
annual
review
2012
Neuberger Berman
We are an independent, employee-controlled investment manager
in service to our clients. We partner with institutions, advisors and
individuals throughout the world to customize solutions that address
their needs for income, growth and capital preservation. With more
than 1,800 professionals focused exclusively on asset management,
we are deeply grounded in original, fundamental research and offer
an investment culture of independent thinking. Founded in 1939,
Neuberger Berman today provides solutions across equities, fixed
income and alternative investments.
Our mission is to
partner with our clients
to achieve their unique
investment objectives.
This statement reflects a purpose and integrity formally
originated in 1939 when Roy Neuberger and Bob Berman
organized this firm to help discerning private clients, their
families and their charitable organizations preserve and
manage their wealth. They set in motion their belief that
informed, research-based insights should guide portfolios
and that close client engagements must be a priority. In
2012, the firm continued to demonstrate the enduring
relevance of this mission with strategies investing in both
public and private markets for clients from London to
Dubai, from Beijing to New York.
Key Statistics
90%
assets under
management
number of
employees
30
$205
1,812 16
billion
87
%
42
412
26 years
1
of clients’ assets
managed by lead PMs
who have 20+ years of
industry experience
offices
countries
Portfolio managers
average
investment
professionals
distinct
investment
teams2
of the firm’s equity and fixed
income AUM outperformed
of industry experience
their benchmarks for the most
recent 10-year period3
Table of contents
A Message from our CEO......................... 2
CIO Discussion and Review...................... 8
Building Partnerships............................. 11
Solving for Income................................. 19
Exploring Alternative Investments........... 25
Partnering with Private Clients............... 31
Underscoring the
Client Commitment................................ 35
Financial Highlights................................ 40
Board of Directors
and Management.................................. 41
All information is as of December 31, 2012, except as otherwise noted. Firm data reflects the collective data for the various affiliated investment advisers that are subsidiaries
of Neuberger Berman Group LLC.
1
Includes $94 billion in Equity assets, $96 billion in Fixed Income assets and $15 billion in Alternatives assets under management.
2
As of March 1, 2013.
3
AUM outperformance data is asset-weighted and based on the gross of fee performance of the firm’s traditional equity and fixed income strategies against their respective
benchmarks and peer categories. Individual strategies may have experienced negative performance during certain periods of time. See disclosures at the end of this material
for additional information regarding AUM outperformance and peer statistics (including 3- and 5-year statistics) and ratings. Indexes are unmanaged and are not available for
direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
page 1
➊ A Message from our CEO
Dear Friends,
Four years ago, when employees assumed control of Neuberger Berman, we
articulated a simple vision grounded in our seven decades of history. We committed
to one another that we would be a firm focused only on investing for clients.
We believed that if we delivered for clients, the firm would grow prudently over
time, but growth in assets under management (AUM) would not be our primary
objective. Stability of our firm and its investment talent as well as sound risk
management would trump asset growth on our scorecard. Rather than being
driven by near-term profitability or contribution to a corporate parent, our firm
would make decisions for the long term, just as we do when investing for clients.
So we looked beyond our respected competitors and also learned from first-rate
consultants, elite law firms, leading medical faculties and other talent-based
organizations, particularly partnerships. Those are rarely the largest or fastestgrowing institutions. Instead, they are recognized for the quality of results they
deliver to clients, which we share as our governing objective.
George H. Walker
Chairman and
Chief Executive Officer
At the same time, we recognize the need to continuously improve. More specifically, in
2012 this meant becoming more global—being closer to our clients and the markets
in which we invest—and continuing to invest in our people and infrastructure to
better focus on our mission: partnering with clients to achieve their unique investment
objectives. In that context, 2012 was another year in which Neuberger Berman made
significant, steady progress.
Employee Ownership and Stability
On the subject of ownership, our employees started 2012 with a 52% stake in the
firm and, now, as of mid-March own 72%. Neuberger Berman remains on the path to
100% employee ownership over the next four years. Significantly, the 2012 purchases of
firm common equity were funded entirely by our employee owners, an offering which
was recently repeated with similar employee demand. It is gratifying to see that our
partners continue to invest more of their capital into the firm rather than seeking net
distributions from it, grounded in their commitment to Neuberger Berman and their
confidence in our future.
As part of our agreement to increase employee ownership to 100% of the firm, we
committed to redeem the then-outstanding $871 million of preferred equity. We
completed this refinancing in March 2012, and in doing so reduced our annual
AUM by Client Organization
as of 12/31/12
55% Pension Funds, Sovereign Wealth
Funds and Other Institutions
25% Financial Institutions, RIAs
and Advisors
20% Individuals, Families and their
Charitable Organizations
neuberger berman annual review 2012
AUM BY CLASS
as of 12/31/12
46% Equity
47% Fixed Income
7% Alternative Investments
financing costs by 46%. The reception of our firm by investors, all leading fixed income competitors, was
gratifying, and we thank them for their support.
In 2012, we also welcomed 23 new partners into our ownership group, totaling 320 employee owners at
year-end. We believe the process of increasing and deepening employee ownership will help us deliver on
our commitment of stability and alignment in the years ahead.
Experience and stability count in investing. At Neuberger Berman, over 90% of client assets are managed
by lead portfolio managers with 20 or more years of experience. Our average manager experience of 26
years is considerably higher than the industry average (see page 1). We believe the related judgment and
wisdom is paramount in serving as a fiduciary.
Average Manager Industry Experience (YEars)
26
26 years of industry experience,
and an average of 13 years working
together at Neuberger Berman
Neuberger
Berman
37%
% higher than industry average
Industry
Average
19
As of December 31 2012. Industry averages based on data reported to eVestment which includes separate accounts, mutual funds and
other commingled funds.
Similarly, we think of investing as a team sport, best performed by individuals dedicated to their craft
and clients who have worked together through market cycles. While the Neuberger Berman team has had
many Hall of Fame investors over the past three-quarters of a century, never have we had so many on the
field at one time. You will hear from many of them in this report. It ups the bar for us all and is part of
what makes this a special time to work at our firm.
Retention Levels for Senior Professionals
2009
2010
2011
2012
Managing Directors
97%
94%
99%
96%
Senior Vice Presidents
95%
91%
95%
97%
94%
85%
87%
96%
Investment Professionals
Non-Investment Professionals
Managing Directors
AUM by client domicile as of 12/31/12
77% U.S.
23% Non-U.S.
New Institutional Mandates—
Client Domicile (2012)
43.4% Americas
39.2% Europe/Middle East
17.4% Asia-Pacific
page 3
Investing in Our People and Infrastructure
Our private structure and ownership enable us to focus on the long term. In 2012, we grew headcount by a
measured 4%, much of which was focused on three key areas:
n
lobal. 57% of our new institutional mandates in 2012 were from non-U.S. institutions, and we have
G
been investing to properly service those and other similar relationships. We opened offices in Dubai,
Taipei and Toronto during the year—extending our reach to 14 cities outside of the United States, and
attracting 17 new client-facing professionals, including four Managing Directors in London, Frankfurt
and Dubai.
n
.S. Intermediary. Responding to interest from several important clients for additional Neuberger Berman
U
client professionals working closely with their advisors, we added 33 colleagues focused on serving wealth
advisors, approximately a 25% increase.
n
I nfrastructure. During 2012, we rolled out new pilot investment reports to institutional equity clients;
and we introduced the Advisor Portal, which gives our partners access to our best insights and research.
Our mission is important—we work hard to deliver the guidance, strategies
and performance that can translate into attractive long-term investment results.
2013 will bring the addition of new portfolio management capabilities. We have been clear for years that
we would like to beef up our capabilities in emerging markets fixed income, an $11 trillion universe, 84%
domestic to the various local markets, where corporate hard currency debt alone now rivals the $1 trillion
U.S. high yield corporate market in size. We expect this asset class to continue to grow given EM economies’
high GDP growth, reasonable external debt, controlled inflation and—in certain cases—superior
governance versus several developed countries.
With our strengths in high-grade fixed income, high yield and emerging markets equities, it was a natural
extension for us to build a presence in Emerging Market Debt (EMD). The challenge for us has been to find
individuals who are of equivalent quality to our existing teams and who we felt confident would be with
Neuberger Berman for decades to come. With the additions of Rob Drijkoningen and Gorky Urquieta as
part of a full-scale, EMD platform buildout (hard and local currencies, as well as dedicated Asian credit),
we are excited about our capabilities in this critical arena (see page 23).
We do not add investment professionals casually, or simply to accomplish business-building objectives. Our
choices carry with them high expectations. Our most recent high profile recruit was Eli Salzmann, who
joined us in 2011 and has managed our Large Cap Value portfolios with intense focus and discipline—and
we are pleased with the performance results. It is very gratifying when investors of such high caliber choose
to join our firm.
In 2012 legendary investor Seth Glickenhaus chose to recommend that his clients transfer their assets
from Glickenhaus & Co. to the Straus Group within Neuberger Berman, given his admiration of Marvin
Schwartz and our 74 years of experience with sophisticated private clients and their advisors. While no
longer managing client assets and having now transitioned to the role of a non-employee senior advisor, Seth
is still active in the markets and maintains an office in our headquarters. He is able to attend management
meetings (we hosted 1,400 executive teams in our offices last year) and is excited about “the next half of his
career”—a model for us all. By the way, Seth is 99, less than a decade away from equaling Roy Neuberger’s
unsurpassed legacy! We are very honored by his faith in our people and culture.
A Sense of Purpose
Our mission is important—we work hard to deliver the guidance, strategies and performance that
can translate into attractive long-term investment results, be it for teachers in Texas, auto workers
in Michigan, New York City police officers or, increasingly, sovereign government funds, university
endowments and private clients or philanthropists preparing for their next bequest.
In 2012, there were numerous new mandates that reflect the breadth of our investment capabilities. For
example, China’s National Council for Social Security Fund selected Neuberger Berman as one of four
global multi-asset class managers. In the pension space, a U.S. state pension fund awarded Neuberger
Berman a $200 million custom private equity fund of funds assignment, a Dutch pension provider selected
the firm to run a $200 million U.S. large-cap growth mandate and a European public pension fund chose
us for a $150 million high yield assignment. Other recent mandates included a $975 million core bond
assignment from an international insurance company and a $300 million fixed income mandate from a
sovereign wealth fund.
Today, investment skill is needed more than ever. Many individuals have significantly under-saved for
retirement. A recent survey of working people and retirees in 15 countries revealed expected retirements to
last 18 years but projected savings to last just 10 years.1 While pension assets increased with the markets
in 2012, the largest U.S. corporate defined benefit plans are still at record underfunded levels—$533
billion at mid-year 2012 amongst the 100 largest—and U.S. public pension funds as a whole are even
further behind at only 75.1% funded, a gap of $1.2 trillion.2 Of course, pension accounting, central bank
engagement and an unprecedented yield curve all contribute to this underfunding.
Historic under-investment in retirement assets has many causes. An important one has been sown by
overly optimistic returns assumptions. These beliefs, and the techniques used to assemble portfolios
around them, have caused trajectories to be awry for retirement plans for many of those so greatly in need.
In collaboration with some of our most sophisticated clients, we have developed new paths grounded in
seeking improved relative and absolute return potential, with portfolios assembled with less reliance on
historical correlations and assumptions and more reliance on real time market conditions. By being more
dynamic, we seek to capitalize on risk premia when present, while mitigating risk.
Partnering in Evolving Markets
Adapting this philosophy to the current market regime, we believe that correlations among world markets
will become more normalized and investors will increasingly focus on company news and prospects,
rather than trading on broad global concerns. This should create a prime opportunity for active fund
managers who can identify and capture value. And this is where we can shine. Our solutions are designed
for the long-term and we believe our focus on quality fundamentals is well suited to navigate through a
wide range of markets. Looking at the last 10 years, more than 87% of equity and fixed income assets
under management at Neuberger Berman outperformed their benchmarks. Long-term client investment
returns—that is how we measure success.
Our experience and client partnerships allow us to design new solutions as markets evolve. In the hedge
fund space, for example, new invested capital in the last five years has been driven by large defined
benefit plans with real staffing constraints. At the same time, financial institutions have sought to reduce
their commitment to hedge fund teams, driven by Dodd-Frank/Volker, Basel III and other regulatory
requirements. As such, we pursued two discrete opportunities in 2012:
We raised a $1.28 billion private equity vehicle, Dyal Capital Partners, which acquires minority ownership
stakes in the GP of leading hedge fund firms. With the goal of generating strong cash flows, to date Dyal
has completed investments in six firms’ ownership and expects to purchase an additional six to eight
ownership stakes in the next three years.
We have also sought to expand our client offering and deliver solutions across product boundaries. For
example, given the appeal of alternatives, we have expanded our “liquid alternatives” offerings, which are
mutual funds that employ hedge fund-like strategies while providing the appeal of daily liquidity and
1
2
Source: HSBC, The Future of Retirement: A New Reality, 2013.
Source: Milliman, 2012 Public Pension Funding Study.
page 5
generally lower fee structures. Capitalizing on hedge funds managers’ interest in tapping new markets,
our hedge fund selection team created an investment strategy that allocates its assets among multiple
established hedge fund advisers. In addition, the Kantor Group’s long/short strategy is now available
to a broader client base. Further, our Greater China team, which “soft” closed its long-short strategy
at approximately $400 million in assets, added important long-only mandates this year. Institutional
clients increasingly are focused on benchmark construction issues which have led them to be significantly
underweight China, which, for example, represents only 2.2% of the MSCI World Index, yet represents
11.5% of world GDP. While many are discouraged by market declines over the past five years in China
A shares, we believe today’s valuations and long-term growth prospects represent an attractive entry point
for these markets once one is prepared for the volatility. In 2012, Neuberger Berman was pleased to be
among the 72 investors awarded a Qualified Foreign Institutional Investor license by the China Securities
Regulatory Commission, reflecting our commitment to the region and their interest in attracting global
investors to this important market.
One of the teams that was center stage at Neuberger Berman in 2012, given markets and the team’s longterm performance, has been our High Yield team. The group, led by Ann H. Benjamin, Thomas P. O’Reilly
and Russ Covode, delivered again in 2012, prudently capitalizing on still healthy high yield spreads and
what we believe to be excessive concerns about corporate defaults. Over the past five years, within the
Non-Investment Grade arena more broadly, we have also built out our Bank Loan and Distressed investing
capabilities amid intense demand for yield from our clients. In Private Equity, we continued to innovate.
For example, our alternatives group is focusing on niche opportunities in the health care sector/acquiring
medical royalties, while in private debt, our managers see potential in mezzanine and second lien issues
which offer sizable yield advantages in exchange for liquidity risk.
Yet among the many compelling investment theses at the firm, many in niche or rapidly evolving markets,
U.S. equities remain our largest risk allocation and again in 2013 we continue to favor an overweight
position. Our portfolio manager discussions in the pages that follow allow them to share their convictions
in their own words. While the inevitable end of unsustainable policies by central banks and governments
will bring volatility, we remain bullish on U.S. equities for the long term.
Partnering in Communities
We are committed to giving back to the communities where we live and work. We elected to memorialize
our independence as a firm four years ago with “Celebration With Service,” a week-long firm-wide
program during which we take part in community service projects, such as preparing meals for the
homeless, planting sustainable gardens and mentoring high school students.
This year, thanks to demand, we are exploring the possibility of opening up these service projects to
clients and former employees. We are better investors than we are gardeners or cooks, I promise, but if
you would like to partner with us in a very different context, please join us. Just call.
These volunteer efforts are a reflection of the fact that Neuberger Berman exists to serve others. We help
our clients prepare a brighter future for themselves and their communities. We provide intelligence and
reflection on some of the most complex and fraught decisions that face any investor or institution. And,
we seek to deliver with a single-minded focus on what our clients need and want. Nothing distracts us
from our goal. That is how this firm was launched, and it is the heritage we seek to honor each day.
Thank you for your partnership.
Sincerely,
We Are Investors
With time horizons compressing to unimaginable slices
of micro-chronology, investors are challenged to step
out from the high-frequency culture of today’s trading
environment and evaluate businesses on a different
time scale. We call it research—fundamental, bottomup research.
At our core, Neuberger Berman is a research organization.
Our mission to partner
with our clients to
achieve their unique
investment objectives
translates naturally into a
mission of independent,
thoughtful investment
decisions. From megacap equities to sovereign
debt and private equity,
our approach is handson, bottom-up research.
We engage vigorously
with the firms we seek
to own. We meet with
them. We ask questions
and listen carefully. We
are a destination for
hundreds of publicly
traded businesses who
visit our offices to tell
their story. Our research
is proprietary, conducted
and disseminated for the exclusive use of our 42
portfolio management teams for the benefit of our
clients. In 2012, we hosted some 1,400 meetings with
public companies in our offices alone, and we visited
hundreds of businesses, their suppliers, competitors and
consultants throughout the year.
With our emphasis largely fundamental and exacting
amid an investing landscape increasingly characterized
by short-term market considerations, we seek relentlessly
to drill down to the most fundamental and deep seeded
drivers of shareholder value creation over a multi-year
horizon. Our analysts are evaluating the quality of the
secular growth opportunity and management’s ability to
extract shareholder value from growth. Further, we seek
to understand where and why there are routine dislocations of the price of a stock from its intrinsic value.
We believe that these
critical
qualitative
concepts are hard to
trap algorithmically;
rather they are best
harnessed
through
experience and deep
familiarity with companies, business models
and the state and
direction of industries.
We are privileged to
employ a significant
number of career analysts in both equity
(fundamental
and
quantitative) and fixed
income research as
well as a significant
squad of private equity
and hedge fund investment professionals who
perform original, hands-on research. Their focus on
sectors, industries and issuers across the asset class
spectra provide a basis on which individual portfolio
teams can build their analysis. Further, their individual expertise and substantial experience are able to
help various teams source ideas and pursue in-depth
research projects.
From left: Timothy Creedon, Michelle Giordano-Valentine, Ronald Silvestri, Teresa Donahue and Martin Sankey.
page 7
➊ CIO Discussion and Review
Managing Investment Management
Joseph V. Amato
President and
Chief Investment Officer
The investment environment of the past
few years has been impacted by a series of
challenges that many have characterized as
“unprecedented.” The fiscal situations in
the U.S. and the eurozone have reminded
investors that fiscal policies do have an impact
on financial markets. While these challenges
appear enormous, particularly when observing
the day-to-day grind of the political process,
progress has been made. The European Central
Bank (ECB) has made it clear that it will do
everything and anything it can to remove
the systemic risk that so unnerved investors
in 2010 and 2011. The U.S. Fed’s policies
have also been quite aggressive in keeping
rates low, which has helped encourage a move
toward risk assets. Despite failing (as of yet)
to generate strong economic growth in these
economies, these policies have had a positive
effect on financial markets. U.S. and Euro
equities markets have generated an annualized
return of 10.9% and 3.9%, respectively, over
the last three years.1
will change. A return to a more “traditional”
investment environment should occur, in our
view, due to the mitigation of a number of
these macro/systemic risks. We believe investors
will return to a focus on industry and company
fundamentals. This should allow for a much
more differentiated set of investment returns
reflecting a more typical lower correlation of
asset classes/securities.
There are still several important broad themes
that will impact the investment environment
over the next few years. While there are many
long-term trends/issues our portfolio managers
consider, I would point out three that I think
are most important:
(1) Economic Growth—We expect continued
slow economic growth in the developed
economies reflecting stubbornly high debt
levels, challenging demographic trends
and slowing productivity growth. These
factors, which a number of our portfolio
managers discuss on the following pages,
will likely present a challenging investment
environment. As a result, reassessing one’s
As we look forward, we believe the financial
markets that we’ve seen in the last three years
Developed World Growth at a Crossroads?
Real GDP Growth Rate for Select Developed World Economies
Real GDP Growth Rate
5%
Actual
Forecasts1
3%
1%
-1%
-3%
-5%
1992
1994
1996
1998
2000
United States
2002
2004
Euro Area
2006
2008
2010
United Kingdom
Source: Bloomberg. Annual data, 1992–2013.
2012 and 2013 annual GDP growth rate is the median of all responses Bloomberg data services received from
professional forecasters.
1
1
As of 12/31/12. U.S. equities are represented by S&P 500 Index and Euro equities are represented by MSCI Europe Index.
2012
The Search for Yield Continues
10-Year Bond Yields for Developed Economies
(U.S., Germany, Japan, UK, Canada, Australia)
10-Year Bond Yield
15%
12%
9%
6%
3%
0%
1982
1990
1998
2006
2012
Monthly data, 1/1982–12/2012.
Sources: Neuberger Berman, Bloomberg, Trading Economics,
Departments of Treasury: U.S., Germany, Japan, UK, Australia.
Treasury Board of Canada. Reflects the average of 10-year
yields across the following six countries: U.S., Germany, Japan,
UK, Canada, Australia.
investment landscape, whether that means
reviewing asset class allocations (equities vs.
bonds), economies (developed vs. emerging
markets) or asset vehicles (alternatives vs.
traditional), may become a crucial factor in
helping investors stay on the path towards their
investment goals.
(2) I nterest Rates—Central bank policies have
been clearly and consistently articulated: rates
will remain low for an extended period of
time. This presents all sorts of challenges for
investors seeking returns anywhere near the
last several decades. While one cannot rule
out slower growth and even deflation (the
environment where bonds could have a more
attractive outlook), we see that as a less likely
scenario. There are fixed income asset classes
that we believe have an attractive yield profile:
below-investment grade and emerging market
bonds, for example, but these are further out
on the risk spectrum than traditional fixed
income investments.
(3) Inflation—Significant increased money supply
reflecting the quantitative easing and bond
purchasing policies of the Fed and the ECB
have meaningfully increased the concerns over
inflation. With economic growth where it
is and unemployment rates remaining high,
we see less of a concern over the near term.
However, we believe central banks want to
increase inflation (it is a very effective policy
for dealing with the fiscal imbalances that
currently exist) and one should not forget
about the old adage: “Don’t bet against the
Fed,” or for that matter the ECB. We do see
the merit in some type of portfolio allocation
to help hedge against inflation, whether
something on the lower end of the risk
spectrum, such as Treasury TIPS, or on the
higher end, such as commodities.
We believe this investment environment plays to
our strengths. Neuberger Berman’s investment
culture is one that emphasizes a long-term focus
on industry and company fundamentals. Over
time, we have seen long-term investment returns
correlate with long-term fundamentals. Our firm’s
long-term investment track record reflects this
dynamic. This approach, combined with a risk
awareness, yields an investment philosophy that is
consistent across the full range of capabilities that
we offer clients, whether equities or fixed income
or alternatives, whether global or U.S.
or emerging markets.
To all of our clients, we thank you for your
support and your confidence in us. I know our
team will continue to work tirelessly to add value
as part of our mission to partner with clients to
achieve their unique investment objectives.
Sincerely,
page 9
From left: Wai Lee, Aisha Haque, Anthony D. Tutrone and Alan H. Dorsey.
1.
building
Partnerships
All investing is, at its core, is a complex act of partnership. Research, both
macroeconomic and fundamental, must inform portfolio management and
strategic allocation decisions. And portfolio management must address the
requirements of plan sponsors, advisors and their end clients—retirees in
Asia, Australia, Europe and the U.S.—who are facing income, liquidity and
slow growth challenges. Investing as a strategic partner demands a broad
view of markets, opportunities and valuations across asset classes, time
horizons and geographies. For Neuberger Berman, the act of partnering is a
natural extension of our heritage, a manifestation of our mission.
page 11
➊ 1 Building Partnerships
Portfolio
Considerations
A discussion with Alan H. Dorsey
Key Challenges—
and Possible Approaches
Since the start of 2013, four challenges have
commanded particular attention in our
discussions with clients—slow economic
growth, low yields, inflation risk and risk-on,
risk-off markets.
Alan H. Dorsey, CFA
Head of Investment
Strategy and Risk
Regarding prospects for slow global economic
growth—we believe that you should allocate
“where the growth is,” which today includes
emerging markets. Increased economic
stability and healthy currency reserves support
a notion that’s already reflected in the pricing
of many EM debt issues—that the emerging
markets increasingly resemble, and even
surpass the fundamental characteristics of,
“developed” nations. Equity valuations have
yet to reflect this reality, potentially providing
a strategic opportunity for many investors.
Emerging Markets Have Become a Larger
Share of Global GDP
Emerging markets’ share of global GDP has
grown from 21% to 36% in the last decade,1
and it is estimated to reach 40% by 2015.
50%
IMF
Forecast2
40%
30%
20%
10%
0%
‘90 ‘93 ‘96 ‘99 ‘02 ‘05 ‘08 ‘11 ‘14 ‘17
 Developing Asia
 Latin America and the Caribbean
 Rest of The Emerging Markets
Sources: IMF World Economic Outlook, Neuberger Berman.
Emerging markets’ share of World GDP has increased
from 21% in 2001 to 36% in 2011.
2
World Economic Outlook, October 2012.
1
Also top-of-mind are low fixed income yields.
How do you seek to cover future liabilities
in a zero interest rate environment? Part of
the answer may entail looking further out on
the risk/return spectrum, such as the noninvestment grade sectors where relative yields
are still healthy. This means high yield, bank
loans and—somewhat more off the beaten
track—mezzanine debt, which provides an
attractive return profile for liquidity risk.
Fundamental active currency management
also can be part of the solution.
Tied to the yield challenge is inflation risk.
It may be tempting to rely on a commodities
allocation and/or TIPS to hedge inflation.
But commodities have provided mixed results
when inflation advances, and TIPS have real
interest rate risk. So, in our view, a broader
multi-asset approach may be more effective,
one that has the ability to capitalize on the
various correlations of assets to inflation, and
permits managers to make adjustments to
that mix depending on the economic regime
in place at any given time.
This highlights the virtues of a key theme for
us, which is flexibility. Although stresses have
eased somewhat, the markets still periodically
can be engaged in risk-on, risk-off behavior.
So strict adherence to low tracking error
mandates may make it harder to react to
current market realities. Within fixed income,
it could be better to shift between interest rate
and credit exposure, depending on yield levels
and ongoing economic dynamics. In equities,
it could be more effective to let equity
managers make reasoned decisions regarding
sector allocation and security selection.
As we partner with clients, the list of issues
always changes. And we hope that our
observations prove useful to them, but we
also know that their contributions to the
discussion will make us more effective as
portfolio managers.
THE APPEAL OF FREE CASH FLOW
2012 was a positive year for equity investors,
marked by improvement in the overall economy
and corporate fundamentals. Our focus on in-depth
company analysis has helped identify attractive
buying opportunities created by macro-related
issues. Entering 2013, we believe valuations remain
attractive for well-managed companies generating
identifiable and growing free cash flow. Company
level valuations are coming into focus as enterprises
producing free cash flow reward shareholders. This is
being accomplished through investing in the business,
returning cash through dividends and share repurchases,
making selective acquisitions and improving the capital structure.
Accordingly, given the attractive free cash flow yields we are
seeing, we believe equities present an appealing risk/return profile
in this environment.
Bullish, powerful Fundamentals
2012 demonstrated that headlines can move stock prices in
the short term, but fundamentals tend to drive stock prices in the
long term. The headlines in 2012 were loud, distracting and often
negative...while the fundamentals were subtle, powerful and bullish.
Looking ahead in 2013, we continue to see fundamentals that are
bullish for equities: companies delivering strong growth in free cash
flow, leading to more dividend increases and stock buybacks. After
a few years of massive flows into the bond market and fixed income
investments, the reversal of those flows back into equities could
provide support to the stock market in the upcoming year.
David S. Portny, Tony M. Gleason, Richard S. Levine and Sandy M. Pomeroy
The MLG Group
Richard S. Nackenson
The Nackenson Group
Looking for attractive Individual Stocks
In the face of a macroeconomic environment that was, at best,
uncertain and, at worst, quite negative, the strength in equity markets
in 2012 proved once again the wisdom of the advice, “Don’t
fight the Fed.” Aggressive accommodation
by the Federal Reserve, the ECB and the
Chinese Central Bank trumped decelerating
worldwide GDP growth, fiscal cliff
brinksmanship and a host of other risks
to drive double-digit gains in equity
averages. Because we don’t attempt
to predict central bank behavior, our
team continues to search for attractive
individual stocks, maintaining active
share without taking undue risk.
Daniel H. Rosenblatt and John J. Barker
Large Cap Disciplined Growth
page 13
Don’t Underestimate the Potential of Mid-Caps
Central Banks are Aggressive
Heading into 2012, the continued deterioration of the
European Sovereign credit crisis, the potential for a hard landing
in China and growing concern related to the negative economic
impact of the “fiscal cliff” in the U.S. suggested the possibility of
a painful deflationary outcome. However, aggressive monetary
stimulus from Central Banks globally hinted at an ultimate inflation
outbreak in the future. While outcomes remain binary and severe,
the Central Banks’ aggressive monetary stimulus has, for the
time being, kept deflationary risks at bay while raising the
specter of inflation. Given that potential
outcomes remain dependent on continued
Central Bank intervention, we curtailed
some of our top-down sector bets
in favor of emphasizing our longstanding focus on finding highquality, differentiated businesses
that have the potential to thrive in
all environments.
Robert W. D’Alelio and Judith M. Vale
Small Cap Value
2012 began on a rather gloomy note with the
continued overhang from the European debt crisis
and, closer to home, looming fiscal austerity and
political acrimony—all fostering a suboptimal level
of investor confidence. This resulted in many investors
avoiding equities. However, stocks managed to scale
the “walls of worry” and delivered compelling returns in
what we now characterize as having been a “stealthy”
bull market. Mid-cap stocks were particularly attractive,
with the Russell Midcap® Growth Index returning
nearly 16%. As we head into 2013, we continue to
find attractive mid-cap valuations and are encouraged by the
continued resiliency, despite the uncertainty, of both our economy and
the financial markets.
Kenneth J. Turek
Mid Cap Growth
Policy Makers’ Outsized Role
As much as we would like to avoid
political discussions, we can’t escape the
fact that policy makers and their lastminute antics have added an unpleasant
dimension to our investment process.
Whether it is discussing the impact of
prospective tax hikes on consumer stocks
or sequestration on defense companies, the
reality is that decision makers in Washington
are having an outsized role on our stock
selection process.
Benjamin H. Nahum and Michael C. Greene
Intrinsic Value
Quality Fundamentals:
Core Equity and Socially Responsible Investing
In 2012, we continued to experience heightened market
volatility as investors rotated quickly between “risk-on” and “risk-off”
positioning. While this volatility can be challenging for equity investors,
it also creates opportunities to invest in well-positioned businesses at
favorable prices.
In light of the current global debt problem, we continue to invest with
an eye on “fat tail risk”—the potential for debt-driven deflation and
recession on one hand, and for policy-induced
inflation on the other. We believe that our
holdings are positioned to grow in a slow
growth environment and can navigate
through these fat tails, if necessary.
We expect short-term financial market
returns to be influenced by continued
debt issues abroad and in the U.S. Against
this backdrop, our plan is to stay focused
on identifying and opportunistically
investing in high-quality, financially strong
companies, positioned for growth.
Arthur Moretti and Ingrid S. Dyott
Core Equity/Socially Responsive Investing
Value Opportunities
In 2012, the European banking crisis created opportunities for
relatively healthy U.S. banks to expand their lending in Europe—
something we took advantage of in portfolios.
Since then, bank valuations have risen and with an
increase in lending capacity in the U.S., these names
aren’t as attractive to us. Still, we think that
continued uncertainty and volatility will present
value opportunities in 2013, particularly among
the consumer staples, utilities and health care
stocks. Unlike last year, the economy probably
won’t prove to be better than consensus,
particularly in the second half, supporting the
case for more defensive names.
a Multidirectional Sensibility to
Approaching Risk
A common theme voiced throughout 2012 by individuals and
institutions alike was the focus on managing risk, although, how
one defines “risk” can vary widely. Whether viewed as downside
mitigation, managing volatility or other metrics, risk management
is top of mind for our clients. To us, we do not focus on a single
definition but rather approach risk management from multiple
directions, which we view as particularly prudent when navigating
the volatile conditions of recent years.
We have partnered with clients on various strategies to address
these risk-focused goals while still aiming to provide strong
returns. In commodities, for example, we look to deliver the
benefits of the asset class by determining allocations based on
risk contributions of commodities and actively rebalancing to
them. In global allocation portfolios, we consider not only risk
contributions, but also correlations, volatility and tail risk, and
often use diversifying strategies such as shorting or leverage to
help manage risk, not amplify it.
This focus on multidirectional approaches has not been limited
to a particular demographic—from financial advisors to large
institutions with custom mandates, the dialogue consistently
comes back to these questions of risk. Often our approach with
clients is not only to manage assets, but share our perspectives
on broader investment issues. Our research work on incorporating
such risk management considerations into portfolios has been
increasingly recognized with multiple papers in scholarly
journals receiving research awards over the past year.
Our objective, though, is to be able to translate our
insights into our clients’ portfolios—and returns—as
an engaged partner. n
Wai Lee, PhD
Chief Investment Officer and Director of Research
Quantitative Investment Group
Eli M. Salzmann
Large Cap Value
page 15
Emerging Markets equities: More than China
and Consumer Staples
Central Banks Front and Center
Equity market performance in 2012 was overwhelmingly driven by
central bank policy. ECB policies drastically reduced the “tail risk” of a
European sovereign debt crisis, propelling global markets and European
banks in particular. Those firms better positioned to navigate
economic volatility trailed their more leveraged peers. In Japan,
economic and monetary policies designed to increase inflation
(and weaken the yen) have boosted the Japanese market—
especially, the exporters—and undermined valuations in
Korea, their fellow export-oriented competitor. We are
more attracted to companies with solid global franchises,
including exposure to North America and Emerging
Markets. Economic volatility is not yet fully behind us.
Benjamin E. Segal, CFA
Head of Global Equity Team
For 2012, many investors were obsessed
with China’s economic prospects. While the world’s
second-largest economy is important to EM returns,
its impact is exaggerated. Many other EM countries
outperformed China last year, including India—despite
its own issues. While the traditional safe-haven Consumer
Staples performed well, the smaller EM Health Care
sector performed the best. We continue to believe in
the broader, secular domestic growth in EM markets.
Companies in many of these markets offer unique
access to these opportunities at attractive valuations. Detailed
fundamental and strategic analysis to identify quality companies
outside the typical benchmark names could continue to reward
investors in 2013.
Conrad A. Saldanha, CFA
Emerging Markets Equities
2013: The Potential Beginning of a New Era
2012 was a milestone year for China. Encouraging year-end
manufacturing data, strengthened Industrial Production numbers
and healthy retail sales figures all supported a modest
recovery in the world’s second-largest economy. Perhaps
most noteworthy, however, was the smooth transition in
leadership, resulting in the turnover of more than half
of the Standing Committee members.
Looking ahead, we are optimistic about the potential
for robust economic growth, yet also realize that
it will take time for the new leadership to reach
consensus on reforms and policies. We will continue
to monitor the shifting economic, political and social
landscapes, and remain deeply committed to our
fundamental, bottom-up, research-intensive approach.
This level of granular understanding, in our view, is the
key to unlocking the potential inefficiencies across the
Greater China equity markets.
Frank Yao
Greater China Equities
Vice Chairman, Asia-Pacific
Global Investors
Beneath a shadow of global macro events which have
been driving markets to march in locked step, fundamental security selection has favored portfolio managers
able to identify successful businesses in both developed
and developing markets.
These quality businesses operating in the global jet
stream of broad secular themes or local, fundamental
scenarios are defining the opportunity for many serious
investors including sovereign funds, corporate
plans, public pensions
and individual investors.
New patterns of trade
and resource management, manufacturing
and economic growth
are charting a changed
map of investment opportunities around the world.
This creates opportunities for fundamental,
research-informed portfolio strategies. Much
has changed over the
last twenty-five years.
Emerging market share
of global growth is doubling during that time
period and FX Reserves
from the BRIC countries
as well as the emerging
economies are in excess
of $6 trillion. The developed markets, in spite of the
challenged eurozone economies, provide a landscape
rich with fundamentally attractive investments, strong
franchises with global markets and powerful secular
theme foundations.
In this changed environment, Neuberger Berman is a tenured and valuable partner. Often our client conversation
involves the construction of global benchmarks and new
asset allocation frameworks. Our original, bottom-up
approach to individual securities across many markets,
From left: Conrad A. Saldanha, Tony M. Gleason, Benjamin E. Segal and Maximiliano Rohm.
as well as our ability to provide top-down allocation
tools and risk management, informs a rich and vigorous
discussion regarding the global opportunity set.
For clients seeking a more attractive return and yield
profile, opportunities in faster-growing economies often
resonate, as do the investment prospects created by
less correlated geographies. For many portfolios, globalization is incremental. Our hands-on, security-bysecurity approach can
provide a helpful partnership as portfolio allocations are refocused on
both equity and fixed
income opportunities in
developed and developing markets.
As a research-driven
organization, we explore
ideas throughout the
world seeking opportunities in both private
markets such as Latin
America, as well as
public markets in Europe,
the Pacific and China,
where our research
analysts have been on
the ground, on average, for fourteen years.
Our all-cap and largecap ex-U.S. portfolios
have been managed by
Benjamin Segal since 1998. His team invests across the
capitalization range seeking sustainable, high-quality
businesses regardless of sector. Conrad Saldanha and
his team of analysts who manage emerging market
portfolios for our clients look to domestic consumption
as a key driver in identifying opportunities. And Tony
Gleason and Sandy Pomeroy, co-portfolio managers,
invest client funds in global thematic opportunistic strategies informed by broad secular themes supported by
fundamental security analysis.
page 17
From left: Ann H. Benjamin, Bradley C. Tank, Andrew A. Johnson and Lori Holland.
2.
solving for
Income
Income solutions in today’s low interest rate environment demand that the
investor chart new and often original paths. We are privileged to work globally
with a growing number of plans that recognize constructive alignment with our
firm; we are investors only, we work across a broad universe of investment grade
and below-investment grade income solutions, we perform our own research and
we value original, independent thinking. Our fixed income experience and insight
is recognized by plan sponsors, sovereign wealth funds and advisors across the
range of our strategies. Customizing benchmarks, addressing liability-driven
investing requirements and investing in emerging markets’ debt opportunities
inform many of our strategic partnerships, drawing on the strength and depth of
our fixed income business.
page 19
➊ 2 Solving for Income
Fixed
Income Considerations
A discussion with Bradley C. Tank
Looking at Yield from Multiple Angles
Investment yield was a core issue for many of
our clients in 2012 and remains so today. Yield
influences their ability to maintain portfolio
stability, compound total returns at a viable
rate and, in a basic sense, fund current cash
needs as well as future liabilities. For the
fixed income team, we have understood how
important it is to adapt to the current low yield
environment while maintaining our dedication
to risk management.
Bradley C. Tank
Chief Investment Officer—
Fixed Income
In our portfolios, this has translated into
cautious but systematic measures that seek
to enhance income. We have been generally
less exposed to investment grade issues, and
within the non-investment grade segment
have been favoring loans over bonds. The
bank loan market is somewhat higher rated
than the high yield market, and is placed at
an elevated level in the capital structure. Its
floating rate component reduces sensitivity
to interest rate fluctuations. Within high
yield, we have been increasing credit quality,
believing that certain issues are poised
for upgrades to investment grade status.
Although their yields are lower than other
high yield bonds, they could hold up better in
the event of adverse market behavior.
At the same time, we have been generally
underweighting lower yielding areas. For
instance, short to intermediate Treasuries
were not particularly compelling in the first
quarter, and their lack of current income
leaves investors without a buffer in the event
of price declines.
Clearly, broad shifts in market sentiment can
still have a significant impact on returns—
both at the asset level and in sub-segments.
In the fourth quarter of 2012 alone, we
saw short episodes of investment grade
outperformance and rate declines followed
by underperformance and rallies in interest
rates. To us, this underscores the importance
of broad diversification and the value of an
opportunistic approach. Weightings across the
fixed income markets should tend to smooth
this ride significantly, while keeping income
levels at healthy levels.
Eyeing Inflation
Closely tied to the yield quandary is the threat
of inflation, and there’s considerable interest
from investors in how to defend against higher
prices without sacrificing too much return.
While the TIPS market has been strong
recently, it has reduced their real yields and
largely limited their total return potential. So
where does one go to manage inflation risk?
We’ve been advocating the use of multiple
assets with high correlations to inflation
within portfolios. Commodities, real estate,
utilities, master limited partnerships—all
may react differently and at different times in
the inflation cycle. In our view, combining
them, with the ability to shift allocations
opportunistically, can be very effective as a
portfolio overlay.
Partnering Strategically
In the context of strategic or multi-asset
relationships, we seek to deliver customized
solutions for clients. A key theme last year
and continuing today is the strength of global
mega-cap companies, whose balance sheet
strength and exposure to faster-growing
markets will tend to favor all parts of the
capital structure. On a geographic basis, we
have noted the continued superior economic
growth of emerging markets, and systemic
improvements to their capital markets, which
support higher allocations in both fixed
income and equity. Having capabilities across
these areas has provided an advantage in our
efforts to reach meaningful solutions for clients
to yield issues, as well as to diversification, risk
management and capital growth challenges.
And we expect this comprehensive approach to
continue in 2013.
Deep Municipal Research
Flexibility, Opportunity in Fixed Income
Despite aggressive actions by central banks, many developed
countries are now experiencing only modestly positive or slightly
negative economic growth. In our view, policymakers face
considerable challenges in 2013, as U.S. fiscal issues have not
been adequately addressed and the eurozone has fallen back into
recession under the weight of fiscal tightening. Against this uncertain
backdrop, we’re anticipating “more of the same” for 2013. The
expansion in the U.S. should remain fairly tepid, while the
eurozone and Japan will struggle to
expand at all. So expect monetary policy
accommodation to continue throughout
2013, with central banks intensifying
their efforts to garner their share
of global growth. Within the fixed
income market, we feel that a
flexible, opportunistic approach
is called for—one that includes
strategic allocations to a wide array
of sectors, coupled with tactical
adjustments, given shifting economic
and market conditions.
ndrew A. Johnson, Head of Investment Grade Fixed Income,
A
and Thanos Bardas, PhD
Investment Grade Fixed Income
The municipal bond market continued to produce solid returns
in 2012 with higher risk securities delivering the strongest absolute
performance. The Federal Reserve’s aggressive stance on monetary
policy has driven some municipal bond investors further
out on the curve and/or into lower-rated issuers in
order to meet their desired level of income. In this type
of environment, it would be easy to chase the market
with the belief that the Fed can lift all risk assets. The
reality may be quite different, as we firmly believe
that valuations cannot diverge from fundamentals
indefinitely. The month of December proved that point
as Moody’s downgraded various Puerto Rico credits,
and lower-rated issuers significantly underperformed
higher quality credits. In 2013, we expect higher
levels of volatility as the fiscal debate intensifies. We
believe that security selection backed by fundamental
credit analysis will continue to be the most effective way
to invest in the municipal bond market in 2013.
James L. Iselin
Head of Municipal Fixed Income
A Positive Backdrop, but Less Robust Returns
Many of the factors that propelled the investment grade
credit market higher in 2012 remain in place. Corporate
fundamentals are solid and balance sheets are largely
flush with cash. Borrowing costs continue to be favorable.
And overall demand is likely to be strong given investors’
search for yield. Even so, given exceptional returns over
the last two years and current spreads, we expect only
modest tightening in 2013. In such an environment,
we feel our research-driven investment process will be
essential in seeking to avoid tail risk and capitalize on
mispricings that occur during periods of market stress.
From a sector perspective, we favor those areas that
offer attractive yields and are not directly tied to global
macro issues that have yet to be fully resolved.
David M. Brown, CFA
Corporate Strategies and Corporate Trading
page 21
➊ 2 Solving for Income
Finding Niche, distressed opportunities
Robust supply, Robust demand
The high yield corporate bond
market posted exceptional returns
in 2012. While briefly interrupted at
times given macro-driven flights to
quality, demand for lower-rated/higheryielding securities was generally robust as
investors searched for yield in the ultra-low
interest rate environment. New issuance hit
a record high in 2012, as many corporations took advantage of low
borrowing costs to extend their maturities. Against this backdrop,
high yield defaults were well below their historical average last
year, further supporting the market and driving spreads tighter. We
continue to have a positive outlook for the high yield market as, in
our view, many of the factors supporting the market in 2012 remain
in place. From a fundamentals perspective, corporate earnings are
fine and balance sheets are generally in good shape. Furthermore,
we believe high yield defaults will continue to be below trend in
2013. In terms of market technicals, we anticipate ongoing robust
supply albeit driven by refinancing activity. We anticipate that investor
demand will remain strong given the low rate environment.
Ann H. Benjamin, Chief Investment Officer, Non-Investment Grade Credit,
Russ Covode and Thomas P. O’Reilly, CFA
Non-Investment Grade Credit
We are in the midst of an extended distressed debt cycle, which
we expect to result in further compelling investment opportunities into
2013. Many banks have yet to clean up their balance sheets and shed
legacy assets, with more than $1.9 trillion of non-performing loans
remaining on global banks’ balance sheets. In 2012, we saw
central bank operations continuing to provide
liquidity to banks, which have temporarily
reduced the urgency of bank asset sales.
However, tightening capital requirements
going forward will increase pressure for
banks to shed assets. While countryby-country factors relating to the speed
of disposal may vary, problem assets
need to come off bank balance sheets,
creating opportunities that may be of
interest in the medium term. Our key
areas of focus in 2013 are infrastructure,
transportation and real estate.
P atrick H. Flynn, CFA and Michael J. Holmberg
Distressed Debt
A strong outlook for bank loans
Many of the macro-economic concerns and unanswered
questions we faced entering 2012, namely the European sovereign
debt crisis and U.S. fiscal cliff discussions, turned out to have a limited
impact on the market—despite no real resolution of either concern.
While macro issues certainly can have an impact on the floating rate
bank loan market, performance is ultimately driven by individual issuer
fundamentals. And we believe that non-investment grade corporates
are in solid financial health, generating adequate free cash flow and
maintaining significant liquidity with very little in the way of nearterm debt maturities. Given these fundamentals, we expect
the default rate to remain below long-term
averages in 2013. With a solid fundamental
backdrop, floating rate bank loans may
provide a steady income stream to
investors while protecting them from an
increase in interest rates and inflation.
While the market will always face
some sort of near-term headline risk,
focusing on the fundamentals presents
the opportunity to generate attractive
returns over the long term.
Stephen J. Casey, CFA, and Joseph P. Lynch
Bank Loans
Building Emerging Market Debt Portfolios
through fundamental valuations
Real Estate Recovery Provides
Yield Opportunities
The structured products markets in 2012
were the beneficiary of the twin forces of the
Fed-induced monetary stimulus combined with
a recovery in the residential and commercial
real estate markets. The continued low interest
rate environment fueled by Fed purchases of
Treasuries and MBS has driven fixed income
market participants further out the risk/return
spectrum. In previous years, the market was
skeptical of chasing yields offered by securities backed by
commercial or residential mortgages out of fear that the underlying property
values had further to fall which would diminish the ultimate realized yield.
While yield profiles in the securitized products markets remain attractive
relative to other fixed income instruments, we believe that there are other
unexplored avenues to generate yield from the recovery in real estate. In
particular, we find that the Residential Loan market provides fertile ground
to buy higher yielding assets at what we believe to be attractive valuations
relative to the underlying property values.
Thomas A. Sontag and Terrence J. Glomski
Structured Products
A Gradual Comeback of Relative FX Fundamentals
In Europe, the U.S. and Japan, policymakers had to carefully balance
austerity with pro-growth measures last year. Political decisions and
constant central bank interference dominated the currency market while
relative fundamentals were often overshadowed by the swings in risk
appetite. The policy response of all the major central banks has helped
to limit tail risks but that has also discouraged investors from jumping on
currency trends.
In 2012, generating returns was not impossible but
undoubtedly challenging. Volatility dropped dramatically and
the price action was often dominated by mean reversion.
But in our view, as conditions normalize, currency investors
should begin to focus more on relative growth and
expected return differentials. Not all developed economies
are at the same stage in the inflationary cycle and we
expect greater growth dispersion. We believe this should
translate into higher volatility in the currency markets and
offer greater opportunities to generate alpha in 2013.
In 2012, the growth in emerging market debt outpaced
developed market economies by a factor approaching 3x, and
totaled $11 trillion in market cap as of 12/31/12. Favorable
tailwinds such as increasing political stability, rapid infrastructure
development, strong balance sheets and a growing, educated
middle class converged to define a stable, more orthodox
investment market. The increasing prominence of sovereign
wealth funds in the developing world has also hastened a more
stable and sophisticated marketplace for debt issuance.
During the year, many emerging market debt assets traded tighter
than non-core developed markets, with yields close to record
lows across the board. However, we find the improved risk/
reward proposition appealing.
Our investment approach has been grounded in fundamentals.
We believe bottom-up perspective enables us to understand
correlations within the asset class, sovereign credit and individual
securities, as well as to identify improving or deteriorating
situations early on, particularly in light of the market’s recent
indiscriminate behavior. Our detailed analysis allows us to apply
fundamental valuations in the face of persisting inefficiencies to
identify attractive yields.
Despite these positive developments, we acknowledge that
emerging markets are not without challenges. They remain
vulnerable to event risks and the drivers of those risks; however,
we believe that because these economies are less interrelated
now than they have been in the past, they are resilient enough
to stand on their own and not be derailed by broader, developed
market issues.
As we look to the remainder of 2013,
we believe that emerging market underrepresentation in the global indices and
increasingly meaningful institutional
mandates are optimistic indicators for
continued growth. n
Rob Drijkoningen and Gorky Urquieta
Co-Heads of Emerging Market Debt
Ugo Lancioni
Currency
page 23
From left: David G. Kupperman, Eric D. Weinstein, Elizabeth S. Traxler, Anthony D. Tutrone and Michael D. Rees.
3.
exploring
Alternative Investments
Alpha-driven active management has historically defined an important
dimension of the firm’s DNA and how we develop multi-asset platforms
to serve our clients’ needs. Our Alternatives platform now includes our
“liquid alternatives” offerings, which are mutual funds employing hedge
fund-like strategies, as well as other separate account strategies with
lower historical correlations to stocks and bonds, such as Real Estate and
Master Limited Partnerships (MLPs). Alternative investments can provide a
source of uncorrelated alpha, clearly a desirable and extensively evaluated
emerging allocation. With respect to our traditional alternative strategies,
our fundamental, hands-on bias toward identifying private equity and
hedge fund investments supports client relationships with transparency,
original research and a thorough embrace of each investment idea and its
potential role as an investment solution.
page 25
➊ 3 Exploring Alternative Investments
Alternative
Considerations
A discussion with Anthony D. Tutrone
Anthony D. Tutrone
Global Head
of Alternatives
Private Equity focuses on building
long-term sustainable value for
investors by investing in businesses
where their influence and oversight
of detailed strategic and operating
plans can create significant value
over a three- to six-year period.
In 2012, private equity managers
continued to take advantage of the
volatility in the public equity and
favorable debt markets to build
and harvest from their portfolios in
attractive opportunistic transactions.
In the U.S., M&A activity was up
significantly as many tax-motivated
transactions occurred as it became
clear that higher tax rates would be
implemented in 2013. We expect
transaction activity in 2013 to temper
as many transactions were accelerated
into 2012.
European markets continue to
operate in the shadow of economic
uncertainty, while liquidity will
be limited in 2013 from European
investments. We believe significant
investment opportunities can be
found as public market values remain
low. If asked, we might suggest that
Latin America could be the best
performing emerging market in
2013. Distressed opportunities have
moderated in larger, more liquid
credits; however the opportunity set
continues to be robust in the small
and mid-market where access to credit
markets is more problematic. Overall,
we believe small and lower middlemarket opportunities can generate
outsized returns in 2013.
More than just a buy and hold
During 2012, many private equity investors increased their
allocations in an effort to generate enhanced returns in a low
interest rate environment. Investors today view private equity
as more than just a buy-and-hold asset class. The secondary
market for private equity has created liquidity options
that allow investors to actively manage their private
equity portfolios in a manner similar to what they do for
their more liquid investments.
Secondary deal volume remains at record levels,
as investors use the secondary market to rebalance
their portfolios, generate liquidity, reduce capital
costs or comply with regulatory requirements. For 2013,
the Neuberger Berman secondary team believes it will
continue to be an attractive market to be investing in
secondary private equity.
Brian Talbot, CPA
Private Equity Secondary Investments
Private Equity: A Fundamentally Driven Asset Class
The volatility of markets during 2012 emphasized the
unique nature of private equity as a long-term, fundamentalsdriven asset class. Private equity performance during the
year was driven by realizations of high-quality businesses
that had been purchased at reasonable valuations
in prior years, where private equity managers had
substantively improved the businesses during their
ownership. We believe it will be critical in 2013 to
continue to focus on fundamentals, while being flexible
in allocating capital to areas of private equity that offer
outsized potential risk-adjusted returns. Corporate private
debt and middle market private equity in Latin America are
two such opportunities.
Peter J. von Lehe
Private Equity
strategic Private equity investing over market cycles
OPPORTUNIstic co-investing around the world
The current environment poses serious investment challenges.
Top-of-mind investor concerns at present include slow global growth,
record low interest rates, high market volatility, increased correlations
among asset classes and regions, looming fears of inflation and
sovereign/regulatory risk. These challenges make our job as investors
much more interesting and relevant.
In alternatives, we are seeing a number of compelling opportunities
across the risk spectrum. On the fixed income side, we believe that
private debt lending (like mezzanine and second lien) to small and
medium-sized businesses is offering outsized yields at the moment
because of high illiquidity premia. At the other end of the spectrum,
private equity investments run by top-notch managers continue to
thrive for a number of reasons. Notably, it is still possible to find
pockets of strong growth in the current macro environment (whether in
sub-sectors of the economy or emerging markets), and these managers
are able to invest through highly negotiated transactions in a much
less efficient market. In addition, private equity is a “hands-on” asset
class, in which managers have strategic and operational control of the
asset and can implement critical measures to enhance performance,
even in a broadly slow growth environment. Finally, another attractive
opportunity is for investors to play the current market stresses with
opportunistic, special situation investments. In Europe, in particular, we
continue to see opportunities to acquire good and performing assets
from distressed or otherwise forced sellers.
The Crossroads platform focuses on building value for
our clients through: tactically weighting different asset classes
over time in seeking to capture the most attractive risk/reward
opportunities in private equity, using diversification to achieve
suitable risk management and focusing on investing with premier
private equity firms. During 2012, market conditions allowed our
funds to execute on private equity manager investment decisions
later in their fundraising, yielding us better portfolio visibility and
insight. We also focused investments toward niche opportunities
that represented value-oriented, highly defensible strategies.
Overweight allocations to growth and technology in
2004–2006 and to distressed strategies
in 2008–2010 resulted in significant
distributions for our clients in
2012. In 2013, our emphasis will
likely be directed again toward
niche opportunities in the lower
middle markets globally. Latin
American fund opportunities will
continue to be an area of increased
attention. Distressed-oriented
opportunities will be focused more
on “turnaround” managers in the
lower middle market.
John P. Buser and Brien P. Smith
Private Equity Fund of Funds
David H. Morse, Joana Rocha Scaff, David S. Stonberg and Michael S. Kramer
Private Equity Co-Investments
page 27
➊ 3 Exploring Alternative Investments
seeking a catalyst for hedge fund ownership
In early October of 2012, the Dyal Capital Fund finished nearly
two years of fundraising, with aggregate commitments of $1.28 billion.
The long lock-up and uniqueness of the strategy, buying minority
interests in the management companies of leading established hedge
fund firms, required extra evaluation from our investors.
The final closing came at an opportune time, as uncertainty
in Washington regarding taxation policy created a catalyst
for hedge fund owners to seek a completed deal in 2012. We
deployed about a third of the fund in December.
Hedge fund owners continue to want tax-advantaged sales of
a portion of their enterprise, coupled with the strategic advice
that Neuberger Berman can offer, creating a robust environment
heading into 2013.
Michael D. Rees
Private Equity, Dyal Capital Partners
Confidence in MLPs for 2013
We are highly constructive regarding the long-term outlook
for master limited partnerships (MLP). Energy mid-stream MLP
companies should continue to be a major beneficiary of the
U.S. energy shale revolution. MLPs are investing heavily in the
infrastructure vital to sustaining production growth for natural
gas as well as crude oil from domestic shale
regions. More than $250 billion is expected
to be invested in energy infrastructure over
the next 20 to 25 years.
Current MLP valuations appear reasonable
within the context of historical cash flow
multiples and distribution yields. We
expect another year of solid distribution
growth.
Yves C. Siegel, CFA, and Douglas A. Rachlin
Master Limited Partnerships
Higher dividend yields and improving
fundamentals prove powerful for REITs
Despite concerns regarding the
presidential election and fiscal cliff, the REIT
market performed well in 2012. The combination
of higher dividend yields and improving
fundamentals proved to be a powerful driver
for small- and mid-cap REIT outperformance.
Additionally, a nascent housing recovery
influenced the commercial property market. The
apartment sector underperformed as strong rent
growth, combined with low interest rates and
still-depressed home prices, became a catalyst for
an improved single-family home market.
Given the recent recovery in commercial real estate and a cost
of capital advantage for many REITs, we are seeking to add to
companies with the potential to make acquisitions and start new
developments. We believe our investments in smaller, underfollowed
companies can help generate excess returns. We believe low interest
rates, modest economic growth, subdued supply growth and a
recovering housing market should be key drivers for continued
improvement in the REIT market.
Steve Shigekawa, and Brian C. Jones, CFA
Real Estate Securities
Seeking Capital appreciation opportunities
Against Rising Inflation
At the beginning of 2012, our view was that risk assets (equities
and high yield bonds) presented one of the most attractive
risk-adjusted return prospects. We continue to maintain this
view entering 2013. The challenge lies in identifying capital
appreciation opportunities against rising inflation.
The quest for yield continues unabated
in fund of hedge funds
In the face of a fairly bleak macroeconomic and geopolitical
backdrop, risk assets, almost universally, enjoyed a banner year. While
several factors were undoubtedly at play in this non-intuitive result,
the unprecedented actions of central banks globally were a crucial
factor. Time will tell if their efforts to kick-start sluggish growth are
successful, but one clear consequence of the near 0% risk-free rate
environment which they have engineered was an unabated quest
for yield on the part of investors throughout 2012. Unsurprisingly,
non-traditional income producing investments such as high-dividend
equities, high yield bonds and non-agency residential mortgage-backed
securities were all beneficiaries of this dynamic as many investors
began looking further out on the risk/return spectrum in search of
attractive yield profiles. As we observed flows into many of the ETFs
and index-based mutual funds which track these assets classes, we
learned that dislocations were emerging owing to the deluge of capital
being allocated. We believe there are ways to capitalize both from the
likely continuation of this trend into yielding assets as well as from
the relative pricing anomalies which have been resulting between
securities. This could be achieved by increasing allocations both to high
yielding structured credit instruments where we expect there to be
greater investor focus over the course of the year, as well as to more
liquid long/short credit and capital structure arbitrage trades where
one can exploit pricing anomalies between index and non-index bonds
and between banks loans and unsecured bonds.
Ian Haas, CFA, David G. Kupperman, PhD, Eric D. Weinstein,
Fred R. Ingham, ACA, CFA, and Jeff A. Majit, CFA
Fund of Hedge Funds
The Federal Reserve’s low interest rate policy—intended
to induce businesses and consumers to borrow and spend
more—is also serving to penalize those savers who have
already paid down their debt and are now looking to save and/
or live off the proceeds of their interest income. Thus, because
lower nominal yields are making the traditionally “safer” asset
classes less attractive for income seekers, many investors are
now looking at higher risk assets, not only for their capital
appreciation potential, but as a potential source of yield. We
believe traditionally “safer” asset classes have the potential to
be eroded by inflation over time.
The greatest known challenge facing the global central banks
today is the proper timing of transitioning from measures
designed to add liquidity to financial markets to those designed
to withdraw liquidity. Withdrawing liquidity on the scale
currently provided is an unprecedented challenge for the Federal
Reserve. We believe that a premature withdrawal would likely
increase the risk of tipping the economy into another recession,
while too late a withdrawal could stoke excessive inflation. This
transition, while manageable, will not provide financial markets
with a smooth ride.
Against these uncertainties, many investors remain unwilling
to assume full equity market risk. Some investors are willing to
accept a more conservative risk/return profile but are still mindful
of inflation and maintaining purchasing power.
As investors with a long-term view, we believe
the U.S. should be able to couple “energy
independence” with ongoing productivity
improvements and technological innovation.
We could be on the verge of a manufacturing
renaissance, which itself could ultimately have
positive implications for investments, job
creation, consumer sentiment and the value of
U.S. equity markets. n
Charles C. Kantor
The Kantor Group
page 29
From left: Michael J. Kaminsky, Marvin C. Schwartz and David R. Pedowitz.
4.
partnering with
Private Clients
We are investors. We are deeply committed to managing client assets to achieve
their unique investment objectives. We think for ourselves, offering original
and independent insights. There is no house view. On the contrary, we value
hands-on, bottom-up research that leads to strong convictions that translate
into portfolio management. Since our founding, we have been committed to
developing innovative, customized investment solutions while seeking to uncover
alpha-generating opportunities across markets and market cycles.
page 31
➊ 4 Partnering with Private Clients
Bullish with Cause
2012 was another challenging
year in which to manage portfolios, given the
volatility and various macro events that occurred—i.e., the election,
fiscal cliff, slowdown in China, QE and European debt crisis. The
election is now over, the fiscal cliff is behind us, the China slowdown
has abated and, although the Sovereign Debt crisis is not resolved,
Spanish and Italian 10-year bond yields have dramatically declined, and
the euro trades above the $1.30 level. It was a highly positive year for
the S&P 500 Index, and equities almost everywhere. 2012 once again
reinforced our belief that trying to “time the market” is difficult.
We believe that, for 2013, the U.S. economy has “self sustaining”
momentum. GDP is expected to grow at a 2.3% rate, corporate
balance sheets are underlevered and maintain huge cash positions, and
Residential housing is in an “upswing”... all factors leading to improved
consumer confidence. We believe that the strength in corporate
balance sheets and their large cash holdings (earning practically zero)
will likely trigger a significant increase in M&A activity, along with
continued dividend increases and greater share buyback activity.
The Straus Group will adhere to its investment philosophy of taking
long-term positions in high quality, well-managed equities with belowaverage price earnings multiples. We remain bullish on this philosophy
for 2013 and beyond.
Equities for the Long Run
2012 presented yet another year of high volatility resulting in
significant trepidation for investors. Our team remained focused on the
longer term while much of the market was caught up toggling between
“risk-on” and “risk-off” volatility, turning on commentary from central
bank officials. We stuck to our knitting, seeking to identify secular
trends and themes that could lead to long-term results.
While our view is that overall macroeconomic growth could be slow,
and that markets could remain volatile because of political and
economic concerns, as we look out over the long run, we continue to
believe equities are one of the most attractive of the publicly traded
asset classes. We will continue to invest in long-term secular growth
as well as opportunities where we believe we see meaningful companylevel change still unrecognized by the market.
Marvin C. Schwartz
The Straus Group
The Straus Group, pictured left to right: Richard J. Glasebrook, Jeremy R. Kramer,
Henry Ramallo, Stephanie J. Stiefel, Marvin C. Schwartz and David I. Weiner
Gerald P. Kaminsky and Michael J. Kaminsky
Team Kaminsky
Team Kaminsky, pictured left to right: James Gartland, David G. Mizrachi,
Mindy Schwartzapfel, Michael J. Kaminsky, Gerald P. Kaminsky and
Richard M. Werman
Buying “Special Companies” Trumps Market Timing
We used the word “balance” a lot
during last year’s stealth bull market. As
we begin 2013, we are again balancing
expectations between an uncertain
global economy and continuing historic
stimulus from central banks. Along with
today’s political quagmire, other concerns
have carried over from last year, including
eurozone economies and potentially
destabilizing geopolitics. On the other
hand, emerging markets and the U.S.
housing market should provide some lift. It
seems premature at this juncture to lean too
far in any direction regarding the outlook for
2013. Consequently, we will stick to investing
in special companies that have the potential to deliver aboveaverage results, even if the economy becomes more challenging.
David R. Pedowitz and Jeffrey Bolton
The Bolton Group
forecasting tomorrow’s
forecast
Roy Neuberger often would
say that “markets are laws unto
themselves.” 2012 showed this
clearly. In spite of the haranguing
about the euro crisis, the U.S. budget
crisis and fiscal cliff, the parlous state
of state and local pension funds and
the flow of investments into fixed income and away
from equities, the stock market rose by more than 15%. The
lesson we see here is that one must have the character and discipline
to look at the merits of individual investments and investment themes
and not be overly influenced by the popular, generalized sentiments
that may sway one to take the seemingly safest route when rational,
fairly valued, sound investment opportunities are available.
Sherrell J. Aston, Jr., Daniel P. Paduano, CFA, and David A. Wilson, Jr., CFA
The Paduano Group
One Stock at a Time
When the macro becomes uncertain,
focus on the fundamentals
Equity returns were solid in 2012 despite another year of
severe volatility, marked by macro-related concerns in both the U.S.
and Europe. Several important lessons for investors were evident
throughout the year in what could often be characterized as a
bipolar market. The probabilities of extreme
outcomes are often overestimated—stay
the course, stay appropriately invested and
focus on the most likely outcome. When
the macro becomes uncertain, focus on
the fundamentals. Lastly, the mantra of
“don’t fight the Fed” is often a prudent
strategy. For 2013, both fiscal drags and
the prospect of higher interest rates
and inflation appear more prominent.
Accordingly, we believe that companies
with high returns on capital and pricing
power are well positioned to capitalize on
the upcoming economic environment.
ichael W. Kamen, CFA, and Lee J. Tawil, CFA
M
The Kamen Group
As long-time, experienced investors, we continue to manage
accounts the old fashioned way—one stock at a time. Every year
brings with it new opportunities, new challenges, new landscapes and
new issues that grab the attention of investors and endless television
commentator discussion on the effects of those changes. However, in
the end, investing comes down to careful stock selection, conviction
in those decisions and the flexibility to not fall in love with them. As
our mentor, Roy Neuberger, said
many times, “People should fall in
love with ideas, with people,
or with idealism based on
the possibilities that exist in
this adventuresome world.
The last thing to fall in love
with is a particular security.”
So as we embark on 2013, we
take with us all our decades of
experience and apply it once
more to the future.
Michael N. Emmerman, Michelle B. Stein, Brooke Johnson
and Kenneth M. Kahn, CFA
The KSE Value Group
page 33
➊ 4 Partnering with Private Clients
The Fraenkel group
We were reminded last year that
order in the stock market remains
elusive. But predicting the market
is not our primary job.
Instead, we concentrate on
the long-term prospects of
the individual investments
while remaining fast on our
feet to take defensive action
as needed. 2012 was a year
that tested us on both skills.
Our patience and flexibility will
continue to position us well as
we move ahead.
Joseph Stein, Jr., Ann Marie Foss, CFA, David M. Ross, Francis L. Fraenkel and
Robert H. Pearlman
The Koplin Lloyd
Group
The Sloate Group
The Anderson
Group
Constructing a Customized Asset Allocation
This year we worked with clients—institutions,
advisors, individuals—who were attuned to the
challenges of global macro risks, highly correlated
asset classes and the search for current income. In short,
they have developed a more skeptical viewpoint as well
as heightened sophistication about today’s markets. Our
approach delivers a customized solution and draws on
a wider range of ideas than ever before. We leverage
market insights, drawn from our own analysis, as well as
the tactical and long-term views of the Neuberger Berman
Asset Allocation Committee. We look at core and satellite strategies
across a broad spectrum of asset classes and geographies in an
effort to establish a foundation that addresses the unique investment
objectives and needs of our clients.
Matthew L. Rubin
Director of Investment Strategy
Comprehensive Fiduciary Services with an Investment Focus
Cary A. Koplin
Laura J. Sloate, CFA & Gizmo
John E. Terzis
The Schupf Group
Capital Group
The Eisman Group
With the approach of the fiscal cliff at year-end, clients were
concerned about the potential for higher income, estate, gift and
generation-skipping transfer tax rates. Thus far, the outcome has proven
less taxing than it might have been and the looming deadline provided
an opportunity for us to work with clients and their advisors to
review and optimize their gift and estate tax plans in light of
their current circumstances. Additionally, given our strong
investment focus, our dedicated professionals spent significant
time during the year evaluating risks and opportunities in
the market, and dynamically adjusting our individual and
institutional clients’ portfolios as needed, utilizing our
robust complementary platform of Neuberger Berman
and unaffiliated investment solutions. For institutional
clients of the trust company’s Outsourced CIO service,
we have assumed responsibility for key investment tasks,
implementing and overseeing their investment strategies,
while helping board and investment committee members
manage their fiduciary liability.
Diane E. Lederman
President and Chief Executive Officer, Neuberger Berman Trust Company N.A.
Chief Executive Officer, Neuberger Berman Trust Company of Delaware N.A.
H. Axel Schupf
Yolanda R. Turocy
Dana E. Cohen and
Michael E. Cohen
5.
underscoring the
Client Commitment
As we bring forward new ideas and fresh approaches, we encourage a rich dialogue
with our clients. Their feedback on our investment ideas, on bespoke solutions, on
benchmarks and allocations generates a substantive investment conversation. Our
goal with each engagement is to enhance the discussion and introduce insight,
perspective and value based on our broader multi-asset class vantage. We work as
one firm, flexible and innovative in the way we serve our clients. Throughout our
organization, we understand that while innovation is often celebrated, we do not
change for the sake of change. Our value is frequently gleaned from the things we
have been doing for decades.
page 35
➊ 5 Underscoring the Client Commitment
Partnership Considerations
A discussion with Andrew S. Komaroff
Our client conversation is central to everything
we do and is constantly evolving.
We approach each engagement as a long-term
discussion, a conversation through which both
sides explore solutions to near and longer-term
investment challenges, as well as evaluate the
economic and capital market environments that
shape these challenges.
Andrew S. Komaroff
Chief Operating Officer
For Neuberger Berman, this is the definition of
client commitment—rich, open and insightful
dialogue. We reach for a common language
with our clients to facilitate candid discussion
about income needs, liquidity, risk/return
profiles, customized benchmarks and portfolio
parameters. Our goal is to arrive at a set of
investment ideas and guidelines rooted in a
shared economic outlook. From here we can add
value and deliver resources from across our 400+
investment-professional platform. Our bias
toward a deeper, more intimate dialogue with
clients sets a backdrop against which specific
solutions—both single sleeve and multi-asset
class—can emerge.
In 2012, we saw our partnerships evolving
rapidly around the world. We embrace the
intricacies of client requirements and new asset
classes to deliver relevant solutions employing
multi-class investing, dynamic allocation and
risk management. In these multi-dimensional
relationships, the role of knowledge transfer,
co-joint research and collaborative investment
analysis is paramount. Neuberger Berman is
investment oriented and free from product
or business silos. We are privileged to be able
to share ideas constructively and collegially
regarding economic regimes, systemic
and structural market changes, allocation
frameworks and risk dynamics.
More and more frequently, we are engaging
in dialogues with plans and funds to help
them implement a strategy to meet specific,
idiosyncratic requirements for liability
management, inflation hypotheses and growth.
These strategic partnerships grow and mature,
carrying the discussion forward as markets and
needs evolve.
As dynamic markets create opportunities,
they also elevate the demand for informed
dialogue and communication. We continue to
add selectively to our client-coverage team by
recruiting experienced, passionate professionals
for whom our client-centric, investment-only
business model appeals. Our 300+ clientcoverage professionals specialize by client type
and, importantly, are geographically located
to be close to clients. In 2012, our most
significant additions occurred in our North
American financial advisor marketplace and
in accelerating our expansion in Asia and the
Middle East, including opening offices for the
first time in Taiwan and Dubai.
Client Coverage Is Global Coverage
Tokyo
(Regional Headquarters)
New York
(Global
Headquarters)
As of December 31, 2012.
London
Hong Kong
Growth around the globe
Supporting Consultants
van Lomwel: All of our relationships, whether new or long established,
derive from an ability to present investment solutions that are developed in
partnership with our clients. With nearly 400 clients investing in a wide range
of asset classes through UCITS, separate accounts and other vehicles, our
EMEA brand and value proposition of experience, expertise and innovation
continues to resonate. In 2012, we continued to expand and deepen our
footprint in Europe, the Middle East and Latin America, adding selectively
with experienced client-facing professionals and opening offices in Zurich and
Dubai. The organization functions fluidly and effectively to deliver investment
solutions to clients throughout the region.
Ohira: Our business is a client business—at the end of 2012, we were
privileged to serve over 125 investors in East Asia, one quarter of whom
look to Neuberger Berman for more than one investment strategy.
Reliability and partnership explain our value proposition. During the year,
we initiated significant intermediary relationships both in Japan and Korea,
thus introducing a broad range of strategies to individual investors through
local partners.
We stay close to our clients, focusing our investing solutions on local
circumstances where customization and bespoke, original thinking is
invaluable. Both in Japan and Korea interest rates are at record lows, and in
tandem with the recent depreciation of the Japanese yen, more institutions
are pursuing offshore assets. Our approach allows us to share ideas
and work closely with clients to develop allocation frameworks and risk
management protocols. This emphasis on client dialogue and communication
helps ensure that we are aligned in our approach to investment solutions.
Hoar: We continue to expand our presence and client franchise in the
Asia-Pacific region as sovereign wealth funds, pension funds and insurance
companies increasingly look to Neuberger Berman to serve as an investment
partner. Consequently, our physical footprint evolves, including experienced
client-facing professionals in Hong Kong, Singapore and Melbourne and the
opening of our office in Taipei, Taiwan, where late in 2012 we received our
operational license.
Our global approach connects the firm with clients throughout the region—
our U.S. and European based portfolio management teams travel regularly
through the region to update investors.
Our strategic partnership clients can
leverage our firm’s intellectual capital,
where knowledge transfer and
sharing can help them gain
a better understanding of
the dynamics of the markets
in which they invest. From
providing analysis of private
equity investments to designing
a framework for strategic asset
allocation, we are an engaged
global partner in the region.
2012 witnessed continued consolidation and globalization
in the institutional investment consulting arena. The consultants’
engagement with clients is deeper, more nuanced and perhaps
more pervasive than ever. For us, this is a great opportunity.
We are entirely client focused—committed to
consultant relations, transparency and access.
This year, we expect to see more strategic
partnerships between investors and
asset managers, which continue to alter
traditional relationships. Our investmentonly business model and alignment of
interests with clients help align Neuberger
Berman with such partnerships and we
look forward to more collaboration with
consultants executing complex mandates—
making information sharing and frequent
communication imperative.
Alison B. Delgado
Head of Consultant Relations
Localization for product solutions
We don’t use the word product very often at Neuberger
Berman, rather, we think in terms of solutions that can help
our clients advance toward their goals. For us, this is a process
that starts and ends with a client conversation about a unique
problem to be solved. Our approach is designed around
a series of collaborative discussions, leading to a shared
understanding of the desired outcome. We’ve learned
through experience how this iterative process
evolves both our clients’ and our own thinking,
and ultimately helps us build better solutions.
With interests completely in alignment with
clients, we are fortunate to be in a position to
consider each client individually, drawing upon
our global investment insights and platform to
deliver comprehensive, modern solutions. Engaging
with clients in this manner is the essence of who we
are as a firm.
Neil S. Siegel
Head of Marketing and Product Development
F rom left: Dik van Lomwel, Head of EMEA and Latin America ,
Ryo Ohira, Head of East Asia, and Nick J. Hoar, Head of Asia-Pacific
page 37
➊ 5 Underscoring the Client Commitment
Supporting Advisors and their Clients
Throughout 2012, the task of our Advisor Solutions Group
remained the same—to meet with financial advisors to learn about
their businesses and engage them on how to help grow those
businesses and serve their clients. Given shifting markets, the
focus of our conversations was broad ranging—from income to
risk management to capital appreciation—and we worked
to educate advisors on our offerings and how they could
help address such issues, as well as delving into planning
issues like wealth transfer. As part of this, we built a
dialogue on alternative strategies including mutual
funds which are making these effective diversifiers more
available to a broad range of investors. For 2013, we
will build on these efforts, to deepen our insights and
assure that our solutions continue to meet the needs of our
advisor partners and their clients.
Jason R. Ainsworth
Head of Advisor Solutions Group
Customized Client service
Our clients face many challenges today and
increasingly look for custom solutions; whether that
means a customized liability-driven investment strategy,
developing a strategic asset allocation, or determining
some of the best ways to capture the opportunities that
arise in an ever-changing marketplace. At Neuberger
Berman, we look to be a solutions provider for our clients,
and want them to consider us an extension of their own
investment teams. We may design a custom benchmark
to efficiently track a pension plan’s liabilities; we may
apply a risk-balanced approach to determine a strategic asset
allocation framework; or we may provide a multi-asset class solution
that addresses a specific need or concern, like inflation hedging. In
all cases, we strive to deliver the firm and our expertise to help our
clients achieve their unique investment objectives.
Lori Holland
Head of Institutional Client Service
Understanding Clients
Partnering with Clients and their Advisors
2012 turned out to be fairly positive for investors, though it
rarely felt that way at the time. Across our client base of registered
investment advisors, family offices and trust banks, the issues of
yield, volatility and inflation potential were front of mind. With our
emphasis on customization, we introduced solutions to address both
structural investment and market challenges with comprehensive
cross-asset solutions on inflation and new innovative
alternative offerings aimed at mitigating volatility.
For plan sponsors, fee transparency, stable value
challenges and menu simplification dominated many
discussions. Though in its nascent stages, plan
sponsors are acknowledging the importance of
managing volatility in seeking better participant
outcomes. Along these lines, they are increasingly
drawn to the risk characteristics, correlation
benefits and diversification provided by
alternative investments.
Despite volatility stemming from macro uncertainties
like the Europe debt crisis and U.S. fiscal cliff, equity
markets on the whole turned in solid performance
last year. Helping our clients understand and work
through the risks in the market, and building
strategies that are in line with their goals and risk
tolerance, is the crux of what we do in Wealth
Management. Our Wealth Advisors lead clients
and their families through the process of building
customized wealth management solutions. We
combine advice, a broad range of proprietary
investment strategies and highly personalized
service—often working in concert with our clients’
trusted network of advisors—in our efforts to help
clients achieve their goals.
Kenneth G. Rende
Head of Wealth Management
Scott Kilgallen
Head of Financial Institutions Group
Firmwide Partnership
What differentiates partnership at Neuberger Berman
is our true belief that we—all 1,800-plus employees—
are partners focused on one common goal: our clients.
By taking this broader perspective, partnership isn’t
confined to our investment management and client
coverage organizations, but extends across our entire
firm and is ingrained in our culture.
We can’t build successful, lasting client relationships
without the “behind-the-scenes” partnership that
thrives at Neuberger
Berman. We—our support and management
functions—take great
pride in ensuring we
are able to provide
the tools, resources
and infrastructure that
enables our clients to
have a first-class and
seamless
experience
with our firm.
This “behind-the-scenes”
partnership was truly
at its best in 2012, as
different departments
teamed to deliver new
resources and improved
capabilities, all for the
benefit of our clients.
Our infrastructure group
along with digital
marketing and client
service personnel partnered to improve the client
experience by streamlining online account access
and launching our Advisor Portal. Infrastructure
also teamed up with Human Resources to automate
the year-end compensation management process,
delivering budgeting, planning, allocation, approvals
and electronic statements.
These, of course, are just a few examples of the many
efforts undertaken across the firm.
From left: David Eckert, William A. Arnold and Heather P. Zuckerman.
A further extension of our successful partnership
finds its roots in our reemergence as an independent,
employee-controlled firm in May 2009. At that time,
we recognized the importance of creating a structure and incentive system that ensured continuity and
aligned the interests of our employees with those of
our clients. The result: our equity ownership structure
and our Contingent Compensation Plan (CCP), both of
which incentivize our employees to operate as prudent
risk managers and to partner with their colleagues.
We are proud that
today nearly 20% of
our employees own
equity in the firm, while
most others participate
in our profit sharing
plan. This has provided
greater stability across
our organization, particularly with our investment teams. Through
our CCP, a portion of
our compensation is
aligned to the returns
of our client portfolios.
Simply put, we “eat our
own cooking.”
Whether it be developing a specific tool that
directly assists in the
investing and servicing
of client portfolios or
developing and maintaining an incentive program that further aligns our
interests to those of our clients, together our teams
work tirelessly to deliver the best-in-class support our
clients deserve.
We know that the fruits of this partnership help build
a better firm for both our employees and our clients
and it’s this holistic approach to partnership that
helps define Neuberger Berman and contributes to our
unique culture.
page 39
Financial Highlights
AUM By Client Domicile ($ in billions)
U.S.
Non-U.S.
Total
AUM By Distribution Channel ($ in billions)
HNW
Institutional
Intermediary
Total
Headcount
$
94
96
15
205
Dec 2011
$
88
88
17
193
$
90
83
17
190
$ 158
47
205
$ 153
40
193
$ 158
32
190
$
$
$
43
104
58
205
1,812
Summary Financial Information
40
94
59
193
1,740
41
90
59
190
1,681
Operating Revenue
($ in millions)
($ in millions)
$ 358
278
148
609
88
1,481
Long-Term Bonds
Accrued Comp and Benefits
Payables and Other Liabilities
Total Liabilities
$ 800
241
198
1,239
Common Equity
$ 242
Total Liabilities and Equity
$1,481
$1,180
$1,124
$985
2010
Cash and Cash Equivalents
Investments
Receivables
Goodwill and other intangibles
Other assets
Total Assets
Dec 2010
2012
AUM By Asset Class ($ in billions)
Equity
Fixed Income
Alternatives
Total
Dec 2012
2011
Neuberger Berman Operating Entities
Board of Directors
As of March 3, 2013
Joseph V. Amato
Robert W. D’Alelio
Richard B. Worley
Joseph F. Berardino
President of Neuberger Berman
Group LLC; Chief Investment
Officer, Equities
Portfolio Manager,
Small Cap Value
Former CEO and CIO
of Morgan Stanley
Investment Management;
Former Chairman of Miller
Anderson & Sherrerd
Managing Director,
Alvarez & Marsal;
Former CEO of
Andersen Worldwide
George H. Walker
Larry Zicklin
William J. Fox
Chairman of the Board of
Directors; Chief Executive
Officer of Neuberger Berman
Former Managing Partner
and Chairman of Neuberger
Berman; Clinical Professor at
the Stern School at New York
University; Senior Fellow at
The Wharton School at the
University of Pennsylvania;
Chairman of the Rand
Center for Corporate Ethics
and Governance
Managing Director, Alvarez
& Marsal; Executive Vice
President and Global CFO
of LBHI; Former Senior
Executive Vice President,
CFO, Director and President
of Strategic and Corporate
Development, Revlon Inc.
page 41
Mutual Fund Board
As of March 3, 2013
Tom D. Seip
Robert Conti
Joseph V. Amato
Faith Colish
Martha C. Goss
Independent Non-Executive
Chairman of the Board and
Trustee/Director
President, CEO and
Trustee/Director
Mutual Funds
Interested Trustee/Director
Securities Regulatory
Attorney
Formerly, Controller—
Prudential
Formerly, Senior Executive
with The Charles Schwab
Corporation
CEO, Neuberger Berman
Management LLC
Michael M. Knetter
Howard A. Mileaf
George W. Morriss
Jack L. Rivkin
Candace L. Straight
President and CEO,
University of Wisconsin
Foundation
Formerly, Vice President
and General Counsel,
WHX Corporation
Adjunct, Faculty Member,
Columbia University School
of International Policy
and Affairs
Formerly, Executive Vice
President and CIO,
Neuberger Berman
Holdings LLC
Director, Montpelier Re
Formerly, Executive Vice
President and CFO, People’s
Bank, CT
Director, Idealab
Formerly, Dean, School of
Business, University
of Wisconsin
President and CIO,
Neuberger Berman
Trustee of the Year
(2001, 2008) Mutual Fund
Industry Awards
Formerly, Principal, Head
and Partners
Peter P. Trapp
Formerly, Ford Motor
Company Executive
Formerly, President,
Sentry Life Insurance
Company
The Mutual Fund Board, comprised of eleven Board members, nine of whom are independent
of Neuberger Berman, serve to ensure that the Funds are operated and managed to protect
the interests of Fund shareholders who entrust their money to the Funds.
Partnership Committee
As of March 3, 2013
John J. Barker
Ann H. Benjamin
Jeffrey Bolton
Alan H. Dorsey
Michael N. Emmerman
Richard J. Glasebrook
Andrew A. Johnson
Gerald P. Kaminsky
Michael J. Kaminsky
Richard S. Levine
Thomas P. O’Reilly
David R. Pedowitz
Daniel H. Rosenblatt
Marvin C. Schwartz
Anthony D. Tutrone
Judith M. Vale
Dik van Lomwel
The Partnership Committee is comprised of selected leaders of Neuberger Berman,
including numerous senior portfolio managers. It serves as an advisory board for
senior management on material decisions and the strategic direction of the firm.
page 43
Operating Committee
As of March 3, 2013
Jason R. Ainsworth
Joseph V. Amato
Robert Arancio
William A. Arnold
William Braverman
Robert Conti
Timothy Creedon
Alan H. Dorsey
Robert Eason
David Eckert
Margaret E. Gattuso
Joseph K. Herlihy
Nick J. Hoar
Scott Kilgallen
Andrew S. Komaroff
Ryo Ohira
Kenneth G. Rende
Neil S. Siegel
Bradley C. Tank
Anthony D. Tutrone
Dik van Lomwel
George H. Walker
Heather P. Zuckerman
The Operating Committee is comprised of senior management engaged in day-to-day
management of the firm.
Managing Directors
As of March 15, 2013
Jason R. Ainsworth
Joseph V. Amato
Bradley M. Anderson
Robert Arancio
William A. Arnold
Sherrell J. Aston
James C. Baker
Athanassios Bardas
John J. Barker
Gregory P. Barrett
Ann H. Benjamin
Jeffrey Bolton
Vivek Bommi
Michael L. Bowyer
Richard N. Bradt
William Braverman
Leo D. Bretter
David M. Brown
Jeffry P. Brown
Brian S. Bruman
David H. Burshtan
John P. Buser
Vasantha Butchibabu
Stephen J. Casey
Fabio Castrovillari
Brad E. Cetron
Dana Eisman Cohen
Michael E. Cohen
Robert John Conti
Jonathan S. Cook
William Russ Covode
Timothy Creedon
Robert T. Croke
Bruce A. Crystal
Daniel R. Darst
Alison B. Delgado
John D. DeStefano
Teresa M. Donahue
Alan H. Dorsey
Thomas Douie
Daniel J. Doyle
Rob Johan Drijkoningen
Ingrid S. Dyott
Robert Eason
David Eckert
Elliott H. Eisman
Lillian Eisman
Michael N. Emmerman
Ethan Falkove
Seth J. Finkel
Stephen J. Flaherty
Daniel J. Fletcher
Patrick H. Flynn
Darren M. Fogel
Ann Marie Foss
Drew D. Fox
Kristina C. Fox
Francis L. Fraenkel
Gregory P. Francfort
Gordon K. Froeb
Kenneth G. Fuller
James Gartland
Margaret E. Gattuso
Maxine L. Gerson
Amy S. Gilfenbaum
Michelle A. Giordano-Valentine
Theodore P. Giuliano
Richard J. Glasebrook
Anthony M. Gleason
Terrence J. Glomski
Carolyn S. Golub
Alan I. Greene
Michael C. Greene
Neill Groom
Virginia M. Guy
Brian E. Hahn
Kevin Handwerker
Aisha Haque
Joseph K. Herlihy
Nick John Hoar
Edward P. Hobbie
Lorraine L. Holland
Michael J. Holmberg
Takashi Ikushima
Frederick Roy Ingham
James L. Iselin
Marshall W. Jaffe
Andrew A. Johnson
Edward John Murray Jones
Kenneth M. Kahn
Michael W. Kamen
Gerald P. Kaminsky
Michael J. Kaminsky
Charles C. Kantor
Susan B. Kasser
John A. Kauffmann
Judith Ann Kenney
Scott Kilgallen
Lawrence J. Kohn
Andrew S. Komaroff
Cary A. Koplin
Jeremy R. Kramer
Michael S. Kramer
David G. Kupperman
Laura M. Ladewski
Sajjad S. Ladiwala
Ugo Lancioni
Diane E. Lederman
Wai Lee
Richard S. Levine
Melinda L. Lloyd
Elisabeth Lonsdale
Linda J. Ludwig
Raoul Christian Luttik
James A. Lyman
Joseph P. Lynch
Jeffrey A. Majit
Thomas Marthaler
Martin E. Messinger
Stephen Miller
Arthur Moretti
David H. Morse
Khalid Mohamed Murgian
Richard S. Nackenson
John D. Nadell
Benjamin H. Nahum
Holly Newman Kroft
Kevin J. O’Friel
Paul O’Halloran
Ryo Ohira
Bradley Franklin Okita
Thomas P. O’Reilly
Daniel P. Paduano
Maria Pappas
Robert H. Pearlman
David R. Pedowitz
Tristram Perkins
Cas Peters
Peter B. Phelan
Alexandra M. Pomeroy
Nish Vinayakrai Popat
Samuel N. Porat
David S. Portny
Ryland K. Pruett
Anthony Pullano
Joseph F. Quirk
Douglas A. Rachlin
Henry Ramallo
Elizabeth Reagan Teasdale
Michael D. Rees
Brett S. Reiner
Kenneth G. Rende
Carter P. Reynolds
F. Christian Reynolds
Joana Palhava Rocha Scaff
Lucas Rooney
Daniel H. Rosenblatt
David M. Ross
Matthew L. Rubin
Robert Ryan
Conrad A. Saldanha
Eli M. Salzmann
Martin A. Sankey
Robert Schlichting
Henri A. Schupf
Marvin C. Schwartz
Benjamin E. Segal
Jennifer Ann Segal
Saurin D. Shah
Monica Sherer
Steve S. Shigekawa
Jonathan D. Shofet
Neil S. Siegel
Yves C. Siegel
Ronald B. Silvestri
Laura J. Sloate
Brien P. Smith
Thomas A. Sontag
Sara Jill Sprung
Joseph Stein, Jr.
Michelle B. Stein
Stephanie J. Stiefel
David S. Stonberg
Raymond Sullivan
Richard J. Szelc
Brian Talbot
Lihui Tang
Bradley C. Tank
Anthony J. Taranto
Lee J. Tawil
Howard T. Taylor
Alfredo Tenaglia
Terri L. Towers
Kenneth J. Turek
Carlton R. Turner
Yolanda R. Turocy
Anthony D. Tutrone
Gorky Urquieta
Judith M. Vale
Bart Anton Van der Made
Dik van Lomwel
Peter von Lehe
George H. Walker
Sean Ward
David I. Weiner
Eric D. Weinstein
Richard M. Werman
Obadiah J. Wilford
David A. Wilson
Frank Yulin Yao
Patricia Miller Zollar
Heather P. Zuckerman
page 45
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security.
Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic or market estimates discussed herein may or may not be realized and no opinion or
representation is being given regarding such estimates. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors,
actual events may differ significantly from those presented. Certain products and services may not be available in all jurisdictions or to all client types. Investments in hedge funds
and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated
investors only. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of
future results.
All information as of the date indicated, except as otherwise noted. Firm data, including employee and assets under management figures, reflect collective data for the various affiliated
investment advisers that are subsidiaries of Neuberger Berman Group LLC (the “firm”), including, but not limited to, Neuberger Berman LLC, Neuberger Berman Management LLC,
Neuberger Berman Fixed Income LLC, NB Alternative Fund Management LLC, NB Alternative Investment Management LLC, NB Alternatives GP Holdings LLC and NB Alternatives
Advisers LLC. Firm history/timeline information dates back to the 1939 founding of Neuberger & Berman (the predecessor to Neuberger Berman LLC). Investment professionals
referenced include: Equity portfolio managers, research analysts/associates, traders and product specialists; Fixed Income portfolio managers, research analysts/associates, traders and
investment support (product specialists, portfolio analysts and trading support); Alternatives investment professionals who are involved in the decisions concerning asset allocation,
investment monitoring and making new investments (includes two consultants). Average years’ experience does not include Equity product specialists or Fixed Income investment
support. Industry portfolio manager averages were compiled by Neuberger Berman based on portfolio manager industry experience data as reported to eVestment and includes
separate accounts, mutual funds and other commingled funds. The new business mandate examples referenced represent select new large mandates and include various products and
services, including investment advisory mandates for the various affiliated investment advisers that are wholly owned subsidiaries of Neuberger Berman Group LLC. It is not known
whether the referenced clients approve or disapprove of any investment adviser for such mandates or any of the investment advisory products and services provided.
Equity and Fixed Income AUM Benchmark Note: For the period ending December 31, 2012, the percentage of total firm equity and fixed income Assets Under Management (“AUM”)
that outperformed the benchmark on 10-yr; 5-yr and 3-yr basis was as follows: Total Equity and Fixed Income AUM: 10-year: 87%; 5-year: 66%; and 3-year: 44%; Total Equity AUM:
10-year: 94%; 5-year: 50%; and 3-year: 29%; and Total Fixed Income AUM: 10-year: 78%; 5-year: 89%; and 3-year: 68%. Firm equity and fixed income Assets Under Management
(“AUM”) outperformance and peer group comparison figures are based upon the aggregate assets for all Neuberger Berman LLC and Neuberger Berman Fixed Income LLC traditional
equity and fixed income strategies that are included in the firm’s institutional separate account (“ISA”), managed account/wrap (“MAG”) and private asset management/high net
worth (“PAM”) composites. The results are based on the overall performance of each individual investment strategy against its respective strategy benchmark and peer group, and
results are asset weighted so strategies with the largest amount of assets under management have the largest impact on the results. As of 12/31/2012, eight equity teams/strategies
accounted for approximately 52% of the total firm equity (PAM, ISA and MAG combined) assets reflected, and eight strategies accounted for approximately 63% of the total firm
fixed income (PAM, ISA and MAG combined) assets reflected. The performance of the individual PAM equity teams/strategies is generally shown as a supplemental exhibit to the
PAM Equity Composite. The respective ISA, MAG and PAM composite reports, as well as the PAM Management Team supplemental performance exhibit are available upon request.
Individual strategies may have experienced negative performance during certain periods of time. Hedge fund, private equity and other private investment vehicle assets are not reflected
in the AUM and product outperformance results shown. AUM outperformance for ISA, PAM and MAG strategies is based on gross of fee returns. Gross of fee returns do not reflect
the deduction of investment advisory fees and other expenses. If such fees and expenses were reflected, AUM outperformance results would be lower. Investing entails risk, including
possible loss of principal. Past performance is no guarantee of future results.
S&P 500 Index is widely regarded as the standard for measuring large-cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.
MSCI Europe Index is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of the developed markets in Europe.
This material has been issued for use by the following entities; in the U.S. and Canada by Neuberger Berman LLC, a U.S. registered investment advisor and broker-dealer and member
FINRA/SIPC; in Europe, Latin America and the Middle East by Neuberger Berman Europe Limited, which is authorised and regulated by the UK Financial Services Authority and is
registered in England and Wales, Lansdowne House, 57 Berkeley Square, London, W1J 6ER; in Australia by Neuberger Berman Australia Pty Ltd (ACN 146 033 801, AFS Licence No.
391401), which is licensed and regulated by the Australian Securities and Investments Commission to deal in, and to provide financial product advice for, certain financial products to
wholesale clients; in Hong Kong by Neuberger Berman Asia Limited, which is licensed and regulated by the Hong Kong Securities and Futures Commission; in Singapore by Neuberger
Berman Singapore Pte. Limited (Company No. 200821844K), which currently operates under an exemption from licensing under the Financial Advisers Act (Chapter 110) of Singapore
for marketing of collective investment schemes to institutional investors; in Taiwan by Neuberger Berman Taiwan Limited, which is licensed and regulated by the Financial Services
Commission (“FSC”) to deal with specific professional investors or financial institutions for internal use only, and which is a separate entity and independently operated business, with
SFB operating licence no.:(101) FSC SICE no.008, and address at: 11F, No. 1, Songzhi Road, Taipei, telephone number: (02) 87292308; and in Japan and Korea by Neuberger Berman
East Asia Limited, which is authorized and regulated by the Financial Services Agency of Japan and the Financial Services Commission of Republic of Korea, respectively (please visit
https://www.nb.com/Japan/risk.html for additional disclosure items required under the Financial Instruments and Exchange Act of Japan). Except for the foregoing, this material is
not intended for use or distribution within or aimed at the residents of any other country or jurisdiction. This document is not an advertisement and is not intended for public use or
additional distribution in the following jurisdictions: Brunei, Thailand, Malaysia and China.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
©2013 Neuberger Berman LLC. All rights reserved.
Neuberger Berman
Global Headquarters
Offices
New York, New York
800.223.6448
Boston, Massachusetts
Regional Headquarters
Buenos Aires, Argentina
Dubai, United Arab Emirates
Hong Kong, China
+852 3664 8800
Frankfurt, Germany
London, United Kingdom
+44 20 3214 9000
Los Angeles, California
Tokyo, Japan
+81 3 5218 1930
Milan, Italy
additional primary Portfolio
Management Centers
Houston, Texas
Melbourne, Australia
Palm Beach, Florida
San Francisco, California
Seoul, South Korea
Atlanta, Georgia*
Shanghai, China
Chicago, Illinois
Taipei, Taiwan
Dallas, Texas
Tampa, Florida
The Hague, Netherlands*
Toronto, Canada
Singapore*
Wilmington, Delaware
Zurich, Switzerland
*Expected Mid-2013.
L0317 04/13 ©2013 Neuberger Berman Group LLC. All rights reserved.
Neuberger Berman
605 Third Avenue
New York, NY 10158
800.223.6448
www.nb.com

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