In a recent article about the turmoil that can erupt when a mutual fund loses its lead manager, the Wall Street Journal recommends that investors start asking questions about a portfolio manager’s retirement plans as soon as the writing is on the wall. “While many fund managers work successfully into their 70s and 80s, it’s fair to start asking questions about their role once they reach their 60s,” the author suggests.
And that’s exactly the kind of questions investors have been asking about Bill Miller, the 60-year-old manager of the flagship Legg Mason Capital Management (LMCM) Value Trust and chief investment officer of LMCM in Baltimore. Responding to clients who were clamoring for details about Miller’s long-term career plans, the company posted a message on its Web site in mid May, announcing that Sam Peters would join Miller as co-manager later this year, identifying Peters as Miller’s “eventual successor.”
In a move that is unusually proactive for the mutual fund industry, Legg Mason made a formal, explicit announcement about a succession plan long before the manager’s retirement date was announced, and even before the heir to the throne joined the management team. Drew Bowden, who heads LMCM’s sales and marketing efforts, told FRC the announcement did not coincide with any particular market event; however, the firm wanted to give clients and gatekeepers plenty of time to get acquainted with Sam Peters before Miller passes the baton. “The last thing in the world you want to do is to catch your clients by surprise with an announcement like
that,” Bowden told FRC.
Consistency is Key
Obviously, the key message Legg Mason wants to communicate to financial advisors and investors is that there is a formal succession plan in place, and that the fund’s investment approach will remain unchanged. “The planned addition of Sam to Value Trust is another important step in the continuing evolution and improvement of our investment team,” states the firm’s Web page. “We are confident that it will better position us to continue to serve clients through the consistent application of the investment philosophy and process [italics added] that has been Bill's life work for the last 28 years.”
A number of other prominent funds could also be poised to pass the torch over the next several years, as managers are lured away by hedge funds (which aren’t subject to the compensation restrictions imposed on banking institutions), newly merged asset management firms such as Columbia Management rationalize their fund lineups and veteran portfolio managers ease into retirement. Market turmoil in 2008-09 also could encourage lingering turnover: Morningstar reports that fund manager turnover jumped from 24% after the dot-com bubble burst in 2003 to 39% just three year later. “Historically, a fund manager exodus has often come a few years after a tough spell in the market,” the Wall Street Journal reported.
The Passive Approach
The passive approach appears to be one of the most common approaches to portfolio manager retirement. In other words, old portfolio managers don’t retire, they just fade away. Consider the case of 106-year-old Roy Neuberger, cofounder of Neuberger Berman and the Neuberger Berman Guardian Fund in 1950, who still has an office at the firm’s headquarters in Manhattan. Or 92-two-year-old Ernie Kiehne, co-founder of the Legg Mason Capital Management Value Trust Fund and a “Portfolio Manager Emeritus” at Legg Mason Capital Management. It appears that 69-year-old Star Manager Ken Heebner of CGM Funds might also work as long as possible, stating repeatedly that he has no plans to retire, ever. But these assurances have done little to assuage the concerns of investors, including the author of a recent Kiplinger’s article about manager turnover: “The first question to ask is: How important was the manager in the first place? If it's a oneman show, like Ken Heebner's CGM Focus Fund, then the loss is critical.”
Other firms prepare for a retirement by quietly adding staff, gradually moving away from the appearance of a one-man show. At Royce & Associates, for example, 70-year-old founder Chuck Royce has “no plans to retire or reduce his role,” said Kristen Swenson, director of communications and marketing. Still, the company has surrounded him with a strong team. “The senior management team consisting of Chuck Royce, [co-CIO] Whitney George, John Diederich, and Jack Fockler has worked together for more than 15 years,”said Swenson. “In terms of our portfolios, the firm works on a back-up system whereby portfolios include co-managers, lead managers, and/or assistant managers.” Swenson says a deep bench enables the firm to deal effectively with any short- or long-term absences on the team.
Statistically, a Non-Event
Although portfolio manager retirement is an emotional event for some investors, it may be relatively insignificant when measured more dispassionately — provided investors have sufficient warning. In his book Mutual Funds: Risk and Performance Analysis for Decision Making, University of North Carolina professor John A. Haslem contends the typical mutual fund is unlikely to experience any significant disruption of investment style or performance when there is a formal succession plan. “Planned succession includes installation of protégés, installation of former portfolio manager team members, and family members with successful portfolio manager experience and the desire to succeed,” he writes.
While new managers are usually eager to make their mark on a fund, Haslem says that the momentum and trajectory of the fund’s performance before the transition may be more influential than the manager’s desire to make changes. Citing research from Morningstar analyst Scott Cooley, Haslem points out that mutual funds with strong performance numbers at the time of the transition usually continue to perform well afterwards. Funds with weak performance continue to perform poorly after the shift.
American Funds’ Approach
One firm that virtually eliminated the uncertainty surrounding portfolio manager transitions is American Funds, which has used its co-called Multiple Portfolio Counselor System for the past 50 years. Under this model, each fund’s assets are parceled into smaller sleeves that are managed individually by different PMs and analysts, all supervised by a lead manager and investment committee. “Our unique approach to managing funds blends teamwork with individual accountability,” the firm says.
“Counselors can be added to a fund as assets grow. If one manager retires or leaves the fund, only a portion of the fund’s assets changes hands.” There are more than 40 decision-makers associated with Growth Fund of America,according to a firm spokesman. On the other hand, the team approach does have some disadvantages, not the least of which is the absence of a “thought leader” or patriarch to establish and nurture one-on-one relationships with gatekeepers. While American Funds admits that the Star System helps investors associate a particular personality with a particular fund, American Funds’ portfolio managers rarely meet with financial advisors. And when they do, it is typically part of a panel discussion. “We believe the consistency of management and the lower volatility that accompanies the Multiple Portfolio Counselor System outweigh the advantages of having a single,Star Manager,” spokesman Chuck Freadhoff told FRC.
In fact, the entire industry may be leaning more toward this multi-manager approach in the future. Morningstar Direct reports that there are currently 2,096 mutual funds with individual portfolio managers and 4,659 with multiple managers.
Conclusion: Communicate
Naturally, the transition from a Star Manager to a subordinate will be much smoother for funds using computerized, quantitative analysis techniques than will be for funds with managers who have a reputation as strong individual stockpickers or managers running very concentrated or sector-specific funds. But either way, it is clear that plenty of preparation and clear communication with investors and financial advisors will go a long way toward easing the anxiety that accompanies a changing of the guard.
It would be in the best interest for firms like CGM, with well-known and strong-performing managers, to develop a formal succession plan long before the manager turns 60. In fact, a formal succession plan should be firmly in place regardless of the manager’s age. In an industry where the only “constant” is change, it is wise to acknowledge the issue of portfolio manager turnover, develop a contingency plan, and communicate it early and often. — Michael Hayes
(michael.hayes@frcnet.com)
Tuesday, September 21, 2010
Friday, July 9, 2010
A Conversation with American Funds
American Funds is the largest provider of R shares in the industry, with more than $164 billion in assets. Although the firm grants very few interviews with the press, the firm’s retirement team answered several retirement-focused questions provided by FRC:
FRC: A growing number of B/Ds, asset managers and plan providers are beefing up their services (websites, value-added materials, etc.) for small and mid-sized retirement plans. Does American Funds have any new support services specifically for this small/mid retirement plan market segment? American Funds: While we don’t have any specific new support services, we are constantly seeking to upgrade and improve our Web site. It’s important to remember that when we launched our retirement Web site, we understood that the majority of advisors using American Funds operated in the small/mid-size market, and that influenced how we thought about the site.
FRC: Why are small and mid-sized plans the target of so much attention these days? American Funds: We cannot speak for other investment management firms, but at American Funds we have always focused on the small/mid-size market. As you know, American Funds can only be purchased through a financial advisor. So we’ve always focused a great deal of attention on individual advisors who, in turn, focused on small and mid-sized business. Our initial focus on small/mid-sized plans was a natural outgrowth of our focus on advisors.
FRC: In 2002, American Funds was just starting to look at R shares as a way to incentivize financial advisors for selling retirement plans. Now your firm is the largest R share provider in the business. How did that happen? American Funds: The idea that American Funds introduced R shares as a way to incentivize/reward financial advisors for selling retirement plans is incorrect. As the Defined Contribution market grew, it became increasingly clear that a one-size-fits-all approach to retirement plans wouldn’t work. We introduced R shares to give advisors and Plan Sponsors more flexibility. With several different retirement share classes, the advisor and Plan Sponsor can choose the most appropriate share class given the size of the plan and complexity of servicing the plan. Giving the advisor and Plan Sponsor the ability to choose the most appropriate share class has helped, but the most important element of our success has been the long-term [performance] record of our funds.
FRC: R shares add another layer of complication to a product that is already complicated enough. But American Funds has been very successful offering several different versions of R shares. Why is that? American Funds: When we introduced R shares, our goal was to give the advisor and Plan Sponsor the flexibility they needed to choose the share class that best fit their needs. While some may believe that having more choices complicates the process, we believe it makes the process more transparent and actually helps advisors and Plan Sponsors choose the most appropriate share class.
FRC: Tracking the source of a retirement sale, and then rewarding the DCIO wholesaler or financial advisor located in that wholesaler’s territory, has always been a complicated issue. As a result, many firms simply pay commissions and bonuses to both the wholesaler and the FA. Has the industry made any progress developing a system to track sales and attribute flows to either the wholesaler or the FA? American Funds: You’re correct. This continues to be a challenge for the industry. We continue to study the issue, but at this point are not in a position to propose a solution.
FRC: A growing number of B/Ds, asset managers and plan providers are beefing up their services (websites, value-added materials, etc.) for small and mid-sized retirement plans. Does American Funds have any new support services specifically for this small/mid retirement plan market segment? American Funds: While we don’t have any specific new support services, we are constantly seeking to upgrade and improve our Web site. It’s important to remember that when we launched our retirement Web site, we understood that the majority of advisors using American Funds operated in the small/mid-size market, and that influenced how we thought about the site.
FRC: Why are small and mid-sized plans the target of so much attention these days? American Funds: We cannot speak for other investment management firms, but at American Funds we have always focused on the small/mid-size market. As you know, American Funds can only be purchased through a financial advisor. So we’ve always focused a great deal of attention on individual advisors who, in turn, focused on small and mid-sized business. Our initial focus on small/mid-sized plans was a natural outgrowth of our focus on advisors.
FRC: In 2002, American Funds was just starting to look at R shares as a way to incentivize financial advisors for selling retirement plans. Now your firm is the largest R share provider in the business. How did that happen? American Funds: The idea that American Funds introduced R shares as a way to incentivize/reward financial advisors for selling retirement plans is incorrect. As the Defined Contribution market grew, it became increasingly clear that a one-size-fits-all approach to retirement plans wouldn’t work. We introduced R shares to give advisors and Plan Sponsors more flexibility. With several different retirement share classes, the advisor and Plan Sponsor can choose the most appropriate share class given the size of the plan and complexity of servicing the plan. Giving the advisor and Plan Sponsor the ability to choose the most appropriate share class has helped, but the most important element of our success has been the long-term [performance] record of our funds.
FRC: R shares add another layer of complication to a product that is already complicated enough. But American Funds has been very successful offering several different versions of R shares. Why is that? American Funds: When we introduced R shares, our goal was to give the advisor and Plan Sponsor the flexibility they needed to choose the share class that best fit their needs. While some may believe that having more choices complicates the process, we believe it makes the process more transparent and actually helps advisors and Plan Sponsors choose the most appropriate share class.
FRC: Tracking the source of a retirement sale, and then rewarding the DCIO wholesaler or financial advisor located in that wholesaler’s territory, has always been a complicated issue. As a result, many firms simply pay commissions and bonuses to both the wholesaler and the FA. Has the industry made any progress developing a system to track sales and attribute flows to either the wholesaler or the FA? American Funds: You’re correct. This continues to be a challenge for the industry. We continue to study the issue, but at this point are not in a position to propose a solution.
Monday, June 21, 2010
Commission Business Spikes
Over the past few years, some of our most basic assumptions about investing and the investment profession, ranging from modern portfolio theory to the repeal of Glass-Steagall have been shaken to the core. Now, the conventional thinking about fees versus commissions can be added to the list.
For at least a decade, wirehouses have been promoting the benefits of fee business, chipping away at the traditional commission-based compensation model embraced by old school stockbrokers who rely on transactions to earn their paychecks. Because the revenue stream generated by a transactional approach to the business is so unpredictable and fluctuates so wildly, brokerage firms have dedicated an enormous amount of time and energy encouraging their advisors to abandon their old commission/transaction approach and transition over to more of a consulting model (e.g. SMAs and mutual fund wrap accounts), typically charging 1% to 2% for every dollar they manage.
Encouraged by the promise that a fee approach would align the advisor’s objectives with the objectives of his or her clients, financial advisors have responded enthusiastically to the call for fee conversions. Data from the Securities Industry and Financial Markets Association (SIFMA) shows that compensation from fees has increased dramatically from 1999 through 2007, representing larger and larger portions of an advisor’s overall income. While compensation from fee business represented just 19% of all advisor compensation in 1999, it soared to reach more than 50% by 1998 (see exhibit 2-1) and spiked to a record-high 55.1% in June of 2008.
A sudden, tectonic shift
But when the stock market crashed in late 2008, everything changed. Fee-based compensation fell from 55.1% in the middle of the year to just 50.3% of all earnings by the end of 2008, slightly above the level reported at the end of 2007. And in 2009, for the first time in at least a decade, fees represented a smaller portion of registered rep income than they did the previous year, falling abruptly to 45.4%. If we assume that financial advisor compensation has remained relatively flat during the past several years, as reported by Registered Rep magazine in its 2010 compensation survey, then we can assume that advisors are conducting more and more transactional business to make up for declining fees.
As Exhibit 2-2 shows, research from FRC’s Advisor Insight series indicates that commission business for all different types of financial advisors (wirehouse, regional, RIA, etc.) has increased steadily, representing a weighted average of roughly 41% or 42% of assets in 2006, 2007, and 2008; then reaching 49% in 2009. This uptick was fueled by variable annuities, which have become especially attractive for their income guarantees. VAs represented 11% of advisor assets in 2006 and jumped to 15% in 2009. One exception to the rule was individual stocks and bonds, which bucked the upward trend in transaction business and fell from 17% in 2006 and 2007 to 15% in 2008 and 2009. Conversely, as shown in Exhibit 2-3, fee business is slipping. Fees represented 59% of financial advisor assets in 2006 and 2007, fell to 57% in 2008, and then dropped sharply to just 51% in 2009. Mutual funds dropped most dramatically, from 40% of advisor assets in 2006 to 33% in 2009. SMAs fell from 11% in 2008 to 8% in 2009.
Why the sudden shift from fees to commissions?
Understandably, investors are turned off by the thought of paying a percentage of their assets to lose money. So, they may be acting on their own volition and driving this shift.
In a depressed market, investors are attracted to benefits and features typically associated with some commission-based investment products, such as the lifetime income guarantees offered by VAs.
Moving money onto the sidelines (money market funds) generates commissions, not fees. Notice the increase in “cash and equivalents” business from 5% to 8% of assets shown in Exhibit 2-2.
Finally, financial professionals who have seen their asset-based paychecks evaporate over the past two years may view commission business as a way to buoy their compensation levels and recoup some of the losses in 2010. So, it is within the realm of possibility that financial advisors are steering clients more toward commissioned products. Of course, wirehouses now have safeguards in place that raise a red flag when a transaction-focused client is spending money on commissions and would be better off paying an asset-based fee.
SEC filings from wirehouses seem to reinforce our findings that commission business is up. Merrill Lynch Global Wealth Management reported “increased transactional activity” in 10Q, and Wells Fargo said revenues were up 10% versus 4Q09 on asset-based fees and “increased brokerage transaction activity.”
Implications for manufacturers
Clearly, several influences have converged to create an environment that makes commissioned products more attractive than asset-based fees for more investors and financial professionals. Although the effects of this shift will be felt most significantly by brokerage firms, mutual fund manufacturers should take careful note of the movement toward Variable Annuities and insurance products, and consider developing Sales Ideas or value-added marketing materials (possibly branded with the VA manufacturer’s logo) that help FAs better understand VAs, incorporate them into their business models, and clearly communicate their benefits to clients.
Finally, asset management professionals should remember that the pendulum of consumer and advisor tastes swings back and forth. Like the markets, preferences are cyclical. FRC believes this shift toward commissioned products is a temporary aberration on the trendline, since advisors continue to predict that fees will constitute larger and larger percentages of their books. So, while this shift has just started to take hold, the most savvy asset management firms should already be anticipating its abatement. When markets stabilize and the current frenzy over commissioned products subsides, investors will start moving back toward fee-based products such as SMAs and wraps.
For at least a decade, wirehouses have been promoting the benefits of fee business, chipping away at the traditional commission-based compensation model embraced by old school stockbrokers who rely on transactions to earn their paychecks. Because the revenue stream generated by a transactional approach to the business is so unpredictable and fluctuates so wildly, brokerage firms have dedicated an enormous amount of time and energy encouraging their advisors to abandon their old commission/transaction approach and transition over to more of a consulting model (e.g. SMAs and mutual fund wrap accounts), typically charging 1% to 2% for every dollar they manage.
Encouraged by the promise that a fee approach would align the advisor’s objectives with the objectives of his or her clients, financial advisors have responded enthusiastically to the call for fee conversions. Data from the Securities Industry and Financial Markets Association (SIFMA) shows that compensation from fees has increased dramatically from 1999 through 2007, representing larger and larger portions of an advisor’s overall income. While compensation from fee business represented just 19% of all advisor compensation in 1999, it soared to reach more than 50% by 1998 (see exhibit 2-1) and spiked to a record-high 55.1% in June of 2008.
A sudden, tectonic shift
But when the stock market crashed in late 2008, everything changed. Fee-based compensation fell from 55.1% in the middle of the year to just 50.3% of all earnings by the end of 2008, slightly above the level reported at the end of 2007. And in 2009, for the first time in at least a decade, fees represented a smaller portion of registered rep income than they did the previous year, falling abruptly to 45.4%. If we assume that financial advisor compensation has remained relatively flat during the past several years, as reported by Registered Rep magazine in its 2010 compensation survey, then we can assume that advisors are conducting more and more transactional business to make up for declining fees.
As Exhibit 2-2 shows, research from FRC’s Advisor Insight series indicates that commission business for all different types of financial advisors (wirehouse, regional, RIA, etc.) has increased steadily, representing a weighted average of roughly 41% or 42% of assets in 2006, 2007, and 2008; then reaching 49% in 2009. This uptick was fueled by variable annuities, which have become especially attractive for their income guarantees. VAs represented 11% of advisor assets in 2006 and jumped to 15% in 2009. One exception to the rule was individual stocks and bonds, which bucked the upward trend in transaction business and fell from 17% in 2006 and 2007 to 15% in 2008 and 2009. Conversely, as shown in Exhibit 2-3, fee business is slipping. Fees represented 59% of financial advisor assets in 2006 and 2007, fell to 57% in 2008, and then dropped sharply to just 51% in 2009. Mutual funds dropped most dramatically, from 40% of advisor assets in 2006 to 33% in 2009. SMAs fell from 11% in 2008 to 8% in 2009.
Why the sudden shift from fees to commissions?
Understandably, investors are turned off by the thought of paying a percentage of their assets to lose money. So, they may be acting on their own volition and driving this shift.
In a depressed market, investors are attracted to benefits and features typically associated with some commission-based investment products, such as the lifetime income guarantees offered by VAs.
Moving money onto the sidelines (money market funds) generates commissions, not fees. Notice the increase in “cash and equivalents” business from 5% to 8% of assets shown in Exhibit 2-2.
Finally, financial professionals who have seen their asset-based paychecks evaporate over the past two years may view commission business as a way to buoy their compensation levels and recoup some of the losses in 2010. So, it is within the realm of possibility that financial advisors are steering clients more toward commissioned products. Of course, wirehouses now have safeguards in place that raise a red flag when a transaction-focused client is spending money on commissions and would be better off paying an asset-based fee.
SEC filings from wirehouses seem to reinforce our findings that commission business is up. Merrill Lynch Global Wealth Management reported “increased transactional activity” in 10Q, and Wells Fargo said revenues were up 10% versus 4Q09 on asset-based fees and “increased brokerage transaction activity.”
Implications for manufacturers
Clearly, several influences have converged to create an environment that makes commissioned products more attractive than asset-based fees for more investors and financial professionals. Although the effects of this shift will be felt most significantly by brokerage firms, mutual fund manufacturers should take careful note of the movement toward Variable Annuities and insurance products, and consider developing Sales Ideas or value-added marketing materials (possibly branded with the VA manufacturer’s logo) that help FAs better understand VAs, incorporate them into their business models, and clearly communicate their benefits to clients.
Finally, asset management professionals should remember that the pendulum of consumer and advisor tastes swings back and forth. Like the markets, preferences are cyclical. FRC believes this shift toward commissioned products is a temporary aberration on the trendline, since advisors continue to predict that fees will constitute larger and larger percentages of their books. So, while this shift has just started to take hold, the most savvy asset management firms should already be anticipating its abatement. When markets stabilize and the current frenzy over commissioned products subsides, investors will start moving back toward fee-based products such as SMAs and wraps.
Saturday, May 29, 2010
Neuberger Berman Rises from the Ashes
Just one year after portfolio managers and other executives rescued Neuberger Berman (NB) from the wreckage of the infamous Lehman Brothers crash, employees are discovering, once again, that the independent life has its advantages. Based in midtown Manhattan, Neuberger Berman gained almost $3 billion in net flows for the first quarter of 2010 (divided equally between equity and fixed income), has some $200 million in cash reserves, is debt free, and “solidly profitable,” according to company president Joe Amato.
Life after Lehman
Judging by its recent performance, the 70-year-old firm could be well positioned to survive, and thrive, in an environment that will be characterized by more intense scrutiny from investors, regulators, and lawmakers alike. “I think, by far, the most significant thing that has changed is that our employees have a direct stake in the success of the business,” Amato told FRC recently. “We have a business model that is focused solely on asset management and is aligned with the interests of our clients.” Just as importantly, NB is no longer a cog in the corporate machinery, so it is free from the competing goals, conflicting priorities, and political pressures that were part of everyday life within the fabric of the Lehman Brothers infrastructure. “While employees seem encouraged by this newfound freedom, it also resonates well with institutional investors and their consultants, who have always been a bit leery of asset managers owned by larger entities,” said Amato.
Independence Day
Neuberger Berman was considered the crown jewel of Lehman Brothers’ asset management business until Lehman crashed and burned in September of 2008. After several well-known private equity firms lined up to capture Neuberger, veteran portfolio managers and other senior professionals joined together to convince a bankruptcy court judge that Lehman creditors would be better served in the long term by selling the firm to the management team. So, in May of 2009, Neuberger became a private partnership, just like it was before going public in 1999 (Lehman bought the firm a few years later, in 2003). Employees now own 52% of NB and the Lehman estate owns the remaining 48%.
While the firm operates independently now, NB’s business model remains unchanged. It is still headquartered where it has been since the early 1990s, at the corner of 40th Street and Third Avenue, a 10-minute cab ride across town from Lehman’s offices on 7th Avenue. Amato offered, “That short physical distance between offices has provided employees with some measure of comfort while Lehman Brothers struggled through the turbulence of 2007 and ultimately filed for bankruptcy protection.”
“The asset management business isn’t always driven by the same factors as the broker/dealer business, commercial lending, or insurance, for example. And when those interests diverge, that can create real problems,” stated Amato. For example, while many asset managers are under pressure from their corporate owners to aggressively expand and innovate, NB can focus on fundamentals like enhancing client servicing capabilities and, most importantly, producing consistently strong risk-adjusted returns. “Of course, we always look to learn from competitors and, if possible, we’ll emulate their success,” said Amato.
Quantitative Measures
Today, Neuberger Berman’s corporate DNA includes investment management capabilities inherited from three firms that Lehman Brothers acquired in 2003-2004: legacy Neuberger Berman (equity), Lincoln Capital Fixed Income Management Company, LLC, and Crossroads (alternatives). About half of the firm’s assets are from purely institutional clients while the other half are from accounts that are associated with individuals in one way or another (funds or separate account), according to Amato.
Statistics on the firm today:
• Manages roughly $180 billion, versus $155 billion in March 2009.
• Employs 1,600, including 400 investment professionals.
• Is the 8th largest manager of Socially Responsible Investing (SRI) funds (see FRC Monitor April 2010).
• Is the 12th fastest-growing manager in the Direct Channel, with $18 million in AUM, according to FRC’s
Mutual Fund Sales Review for February 2010.
• Still operates its flagship Guardian Fund, one of the first no-load funds in the U.S., launched by Roy Neuberger
in 1950.
Corporate Culture
Most NB employees still with the firm today trace their introduction back to Lincoln, Crossroads, or the old Neuberger Berman; where NB chairman and CEO George H. Walker, and president Joe Amato came from. Most seem thrilled to be free from the yoke of Lehman Brothers. “My pens, computers, coffee mugs, binders all say Neuberger Berman, a Division of Lehman Brothers,” one employee laughed. “There's a running joke that we'll all pool our collectables some day and post a listing on Ebay to sell it all. The headline would read: Own a Piece of Wall Street History."
The firm’s portfolio managers are known as outspoken, opinionated, and independent. Consider, for example, the moxie of portfolio manager Judith Vale, who suggested in a 2008 e-mail to Lehman Brothers executives that they forgo their annual bonus, considering the financial unsteadiness of the firm at that time. The idea was rejected out of hand, but Vale continues to co-manage Neuber Berman’s $9.4 billion Genesis Fund to this day. Amato describes the investment management culture as one of autonomy, respect for the investment management process, “more bottom-up than topdown,” and sharply focused on managing risk. “This autonomy is very attractive to investment professionals, and allows us to attract many points of view,” he stated. Company founder and former portfolio manager Roy R. Neuberger, also an avid art collector, still has an office in the NB building and stops by occasionally. He will be 107 years old this July.
What Does the Future Hold?
While employees own 52% of Neuberger Berman, the Lehman Brothers estate still holds 48% of the company, along with two of the firm’s seven board seats. At some point, the estate will look to realize a return on that investment probably by taking NB public. “The estate has been very patient and supportive, making sure the business is well positioned for the long term,” says Amato. “At some point, maybe many years from now, they’ll look to realize a benefit for creditors of the Lehman estate, but we don’t sense any urgency on their part.” — Michael Hayes
(michael.hayes@frcnet.com)
Life after Lehman
Judging by its recent performance, the 70-year-old firm could be well positioned to survive, and thrive, in an environment that will be characterized by more intense scrutiny from investors, regulators, and lawmakers alike. “I think, by far, the most significant thing that has changed is that our employees have a direct stake in the success of the business,” Amato told FRC recently. “We have a business model that is focused solely on asset management and is aligned with the interests of our clients.” Just as importantly, NB is no longer a cog in the corporate machinery, so it is free from the competing goals, conflicting priorities, and political pressures that were part of everyday life within the fabric of the Lehman Brothers infrastructure. “While employees seem encouraged by this newfound freedom, it also resonates well with institutional investors and their consultants, who have always been a bit leery of asset managers owned by larger entities,” said Amato.
Independence Day
Neuberger Berman was considered the crown jewel of Lehman Brothers’ asset management business until Lehman crashed and burned in September of 2008. After several well-known private equity firms lined up to capture Neuberger, veteran portfolio managers and other senior professionals joined together to convince a bankruptcy court judge that Lehman creditors would be better served in the long term by selling the firm to the management team. So, in May of 2009, Neuberger became a private partnership, just like it was before going public in 1999 (Lehman bought the firm a few years later, in 2003). Employees now own 52% of NB and the Lehman estate owns the remaining 48%.
While the firm operates independently now, NB’s business model remains unchanged. It is still headquartered where it has been since the early 1990s, at the corner of 40th Street and Third Avenue, a 10-minute cab ride across town from Lehman’s offices on 7th Avenue. Amato offered, “That short physical distance between offices has provided employees with some measure of comfort while Lehman Brothers struggled through the turbulence of 2007 and ultimately filed for bankruptcy protection.”
“The asset management business isn’t always driven by the same factors as the broker/dealer business, commercial lending, or insurance, for example. And when those interests diverge, that can create real problems,” stated Amato. For example, while many asset managers are under pressure from their corporate owners to aggressively expand and innovate, NB can focus on fundamentals like enhancing client servicing capabilities and, most importantly, producing consistently strong risk-adjusted returns. “Of course, we always look to learn from competitors and, if possible, we’ll emulate their success,” said Amato.
Quantitative Measures
Today, Neuberger Berman’s corporate DNA includes investment management capabilities inherited from three firms that Lehman Brothers acquired in 2003-2004: legacy Neuberger Berman (equity), Lincoln Capital Fixed Income Management Company, LLC, and Crossroads (alternatives). About half of the firm’s assets are from purely institutional clients while the other half are from accounts that are associated with individuals in one way or another (funds or separate account), according to Amato.
Statistics on the firm today:
• Manages roughly $180 billion, versus $155 billion in March 2009.
• Employs 1,600, including 400 investment professionals.
• Is the 8th largest manager of Socially Responsible Investing (SRI) funds (see FRC Monitor April 2010).
• Is the 12th fastest-growing manager in the Direct Channel, with $18 million in AUM, according to FRC’s
Mutual Fund Sales Review for February 2010.
• Still operates its flagship Guardian Fund, one of the first no-load funds in the U.S., launched by Roy Neuberger
in 1950.
Corporate Culture
Most NB employees still with the firm today trace their introduction back to Lincoln, Crossroads, or the old Neuberger Berman; where NB chairman and CEO George H. Walker, and president Joe Amato came from. Most seem thrilled to be free from the yoke of Lehman Brothers. “My pens, computers, coffee mugs, binders all say Neuberger Berman, a Division of Lehman Brothers,” one employee laughed. “There's a running joke that we'll all pool our collectables some day and post a listing on Ebay to sell it all. The headline would read: Own a Piece of Wall Street History."
The firm’s portfolio managers are known as outspoken, opinionated, and independent. Consider, for example, the moxie of portfolio manager Judith Vale, who suggested in a 2008 e-mail to Lehman Brothers executives that they forgo their annual bonus, considering the financial unsteadiness of the firm at that time. The idea was rejected out of hand, but Vale continues to co-manage Neuber Berman’s $9.4 billion Genesis Fund to this day. Amato describes the investment management culture as one of autonomy, respect for the investment management process, “more bottom-up than topdown,” and sharply focused on managing risk. “This autonomy is very attractive to investment professionals, and allows us to attract many points of view,” he stated. Company founder and former portfolio manager Roy R. Neuberger, also an avid art collector, still has an office in the NB building and stops by occasionally. He will be 107 years old this July.
What Does the Future Hold?
While employees own 52% of Neuberger Berman, the Lehman Brothers estate still holds 48% of the company, along with two of the firm’s seven board seats. At some point, the estate will look to realize a return on that investment probably by taking NB public. “The estate has been very patient and supportive, making sure the business is well positioned for the long term,” says Amato. “At some point, maybe many years from now, they’ll look to realize a benefit for creditors of the Lehman estate, but we don’t sense any urgency on their part.” — Michael Hayes
(michael.hayes@frcnet.com)
Today is 529 Day (5/29). Does Anyone Care?
In case it isn’t marked on your calendar, Saturday is 529 College Savings Day (5/29)… a day most states have designated as a day to promote 529 college savings plans and raise awareness levels. For example, Iowa, Missouri, and Nevada are among the states giving away $529 to put towards saving for college; Virginia and Pennsylvania are offering free enrollment for certain 529 programs during the month of May, and Upromise is offering a 529 College Savings Day toolkit on its website (www.529.com) for anyone interested in advertisements, posters, fact sheets and the like. But for an industry that suffers from rock bottom levels of public awareness, which is especially frustrating given the huge tax benefits 529 plans offer, it’s disappointing to see that there is still no coordinated, nationwide marketing or advertising campaign to promote the benefits of 529 college savings plans or 529 College Savings Day among the investing public. To be fair, the College Savings Foundation (www.collegesavingsfoundation.org) and the College Savings Plan Network (www.collegesavings.org) are both working diligently to educate the media, legislators, and the public about 529 plans. The CSF is even working on radio spots for members (predominantly investment management firms). And CSPN says it has been working with each of its members to promote 529 Day in their states for the past three years. But so far, program managers and state administrators have been unwilling to contribute to a single, cohesive nationwide marketing campaign. So, state-specific marketing messages are haphazard and disjointed, at best. With such a lack of unity and such a steep learning curve, it’s no wonder 60% of the financial advisors FRC surveyed for FRC’s Evaluating the College Savings Market Opportunity Consumer Survey last September said they would rather tell their clients to sign up for a direct-sold 529 program on the Web than spend the time and energy it would take to incorporate an advisor-sold plan into their portfolio.
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