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)

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.