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Neuberger Berman Group LLC 605 ird Avenue New York, NY 10158-3698 800.223.6448 L0317 04/15 ©2015 Neuberger Berman Group LLC. All rights reserved. www.nb.com
NB002_2014_AR_Cover_QCR_Offset_042715_UG_R2.indd 1 5/3/15 8:21 AM Neuberger Berman is a private, independent, employee-owned investment firm, managing equity, fixed income, private equity and hedge fund portfolios for institutions, advisors and individuals. Our presence is worldwide, with offices in 18 countries and more than 2,000 professionals focused on serving global clients.
Named by Pensions & Investments as a 2013 and 2014 Best Place to Work in Money Management, our firm is tenured, stable and long-term in focus. We foster an investment culture of fundamental research and independent thinking, in place since our founding in 1939.
NB002_2014_AR_Cover_QCR_Offset_042715_UG_R1.indd 2 5/1/15 10:16 AM OUR MISSION IS TO PARTNER WITH OUR 1 CLIENTS TO ACHIEVE 1,649 79 % THEIR UNIQUE RESEARCH MEETINGS OF ALL WITH COMPANY INVESTMENT MANAGEMENT TEAMS NB PRIVATE OBJECTIVES. AT OUR OFFICES IN 2014 EQUITY FUNDS RAISED BETWEEN ’02 AND ’12 OUTPERFORMED THEIR RESPECTIVE % EQUITY AUM % FIXED INCOME AUM IRR BENCHMARKS 80 77 BASED ON OUTPERFORMED THEIR BENCHMARKS OUTPERFORMED THEIR BENCHMARKS INVESTED CAPITAL1 FOR THE MOST RECENT 10-YEAR PERIOD1 FOR THE MOST RECENT 10-YEAR PERIOD1
$251BN 32 18 505 2 ,113 ASSETS UNDER OFFICES COUNTRIES INVESTMENT PROFESSIONALS NUMBER OF EMPLOYEES MANAGEMENT2 WORLDWIDE
94% 28 YRS 97% $3.3 BN OF CLIENTS’ ASSETS PORTFOLIO MANAGERS’ ANNUALIZED RETENTION INVESTED BY NB MANAGED BY LEAD AVERAGE INDUSTRY RATE OF INVESTMENT EMPLOYEES AND THEIR PORTFOLIO MANAGERS EXPERIENCE PROFESSIONALS AT SVP & FAMILIES IN NB WHO HAVE 20+ YRS MD LEVELS SINCE 2009 STRATEGIES/ACCOUNTS INDUSTRY EXPERIENCE3
TABLE OF CONTENTS
All information is as of March 31, 2015, except as otherwise noted. Firm data reflects the collective 2 A MESSAGE FROM OUR CEO data for the various subsidiaries of Neuberger Berman Group LLC. See Additional Disclosures at the end of this piece, which are an important part of this presentation, for the definition of “investment 10 GLOBAL PERSPECTIVES professionals" and certain exclusions. 16 EQUITY 1As of December 31, 2014. AUM outperformance data is asset-weighted and based on the gross of 26 FIXED INCOME 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 34 ALTERNATIVE INVESTMENTS during certain periods of time. NB Private Equity fund outperformance data is net of fees and as of September 30, 2014. See disclosures at the end of this material for additional information regarding 44 PRIVATE CLIENT AUM outperformance (including 3- and 5-year statistics) and private equity outperformance statistics. 54 PROTECTING THE FRANCHISE 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. 63 FINANCIAL HIGHLIGHTS 2Includes $115.7 billion in Equity assets, $104.4 billion in Fixed Income assets and $31.1 billion in 64 BOARD OF DIRECTORS AND MANAGEMENT Alternatives assets under management. 3As of December 31, 2014
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George Walker 2014 WAS A LANDMARK YEAR chairman and chief executive officer FOR NEUBERGER BERMAN...... as we advanced to 100% employee ownership,1 well ahead of schedule. Today the firm is owned by 465 current employees, including 84 who made their first equity purchase in Neuberger Berman this year. We are gratified by this outcome.
Our core assets are our people, our culture, on a net basis over time. These bonds are 144A for 2009 2010 2011 2012 2013 2014 our experience and our ability to focus on a single life—private, just as we intend the firm will be private mission—helping clients achieve their unique in 2045. Market participants called this offering "a Managing Directors 97% 94% 99% 96% 98% 98% investment objectives over time. Employee ownership rare bird sighting" as few private companies are able impacts those assets fundamentally as it helps drive: to participate beyond 10 years. We are grateful for Senior Vice Presidents 95% 91% 95% 97% 97% 97% the support of the financial community—largely Alignment with client interests. competitors we admire deeply—who share our conviction in the outlook for Neuberger Berman as a Revenues are not shared with a corporate parent or stable, high quality organization in the decades ahead. public shareholders, rather amongst those who are tasked with delivering for clients. In a world with Employee engagement and retention. thousands of competitors and the ability to move funds with the click of a mouse, it is crystal clear to During 2014, virtually all of our senior investment each of us that the firm can only prosper if we execute professionals remained in place, as in the past. We on that mission. are proud of our 97% annualized retention rate since 2009. Keeping great investors over time enables us to Long-term focus. have a team where more than 94% of client assets are managed by lead portfolio managers with 20 or more When decisions are made to build capabilities, years of experience—materially above industry average. employee owners tend to approach them in the Neuberger Berman is known as a place where portfolio context of our work and our career horizon (and managers can focus on investing. Managers choose to beyond), not purely financially, and with less sensitivity bring their careers to Neuberger Berman, valuing the to quarterly financial results. For example, we have investment culture and climate, resources and spirit of invested materially in upgrading our technology intellectual independence that we provide. in both our Fixed Income and Equities platforms, investments which have long payback periods but Alignment, engagement and retention are critical which help us execute day-in and day-out. That time elements to driving long-term investment performance, horizon and focus on career accomplishment better and ownership is just one element that influences them. aligns us with our clients’ objectives. We recognize that alignment emerges from multiple The same long-term focus applies to our capital factors. Our employees invest alongside clients in funds, structure. In addition to adding 84 new equity separately managed accounts and partnership vehicles. owners, we fully redeemed the 2020 5.625% senior The firm pursues no proprietary investing activities. notes we issued two years ago and replaced them Our employees and their families have invested with 4.875% bonds due in 2045. As in the past, we approximately $3.3 billion in Neuberger Berman chose the most conservative path and longest tenor accounts, partnerships and strategies—the equivalent financing available, and we plan to further deleverage of many years of compensation.
1Employee ownership includes current and former employees, directors, consultants and their permitted transferees. NEUBERGER BERMAN ANNUAL REPORT 2014
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2014 WAS A LANDMARK YEAR FOR NEUBERGER BERMAN...... as we advanced to 100% employee ownership,1 well ahead of schedule. Today the firm is owned by 465 current employees, including 84 who made their first equity purchase in Neuberger Berman this year. We are gratified by this outcome.
RETENTION LEVELS OF INVESTMENT PROFESSIONALS 2009 2010 2011 2012 2013 2014 AUM BY ASSET CLASS AS OF 12/31/14 Managing Directors 97% 94% 99% 96% 98% 98% Senior Vice Presidents 95% 91% 95% 97% 97% 97%
Alignment matters. The solutions are straight-forward but will require political will that appears lacking in the U.S., while We try hard to put ourselves on the same side of the thankfully other nations, e.g. Australia, Colombia and table as our clients. many northern European countries, will likely benefit in 47% EQUITY decades ahead from their prudence today.) 41% FIXED INCOME Anecdotally, alignment—and taking care of our 12% ALTERNATIVE INVESTMENTS employees—also explains why we increased our firm Our agenda on employee engagement (“Are you proud 401(k) payment in the United States to be 15% of to work at NB?”) and enablement (“Is NB getting your compensation, with a maximum annual contribution AUM BY CLIENT very best work or are there impediments/constraints?”) AS OF 12/31/14 of $35,000 for 2015, significantly above most peers is broad and deep. Most fundamentally, it involves and better aligned with leading non-U.S. programs. asking those questions regularly and differently of We want each of our employees to be presented with each of our employees and committing to continuous the same choices clients face—how to invest their improvement. We are also making new efforts to irreplaceable assets in challenging markets. We also want procuring quantitative and qualitative feedback on to make sure that, at all levels, if someone pursues a functions that are mission critical but don’t have the career at Neuberger Berman, they can be equipped to same performance metrics as our portfolio managers. take care of themselves and their families in retirement. In December, we were honored for the second 58% INSTITUTIONAL (As an aside, the outlook in the U.S. is grim on this 23% INTERMEDIARY consecutive year by Pensions & Investments as amongst 19% HIGH NET WORTH score. More than half of working age households are the five Best Places to Work in Money Management not saving sufficiently to maintain their standard of with 1,000 or more employees. Sixty percent of an living, up 76% in the past 25 years.* We all know the organization’s score was based on employee survey AUM BY CLIENT DOMICILE causes: increases in life expectancy/longer retirements, responses. While firms differed in the reasons they won AS OF 12/31/14 decline of defined benefit plans, rising healthcare costs, this award, they were similar in their positive cultures long-term Social Security solvency challenges, and and work environments and strong degrees of employee low interest rates, among others. 401(k)’s, which are engagement. These are all areas of focus for us, as we great programs, may not be available to all workers, look beyond our respected competitors and consider require a fair degree of effort, knowledge and financial first-rate consultants, elite law firms, leading medical understanding from the participant and tend to be faculties and other talent-based organizations, who are funded well below the levels necessary to fill the gap. setting the bar in employee practices and satisfaction.
75% U.S. *The Center for Retirement Research. 25% INTERNATIONAL
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Just as Marvin Schwartz, Judy Vale, Bob D'Alelio, Dick pressure. These positions, of course, can change with Glasebrook and so many others did decades ago, great markets and/or fundamentals. Having a broad and investors continue to pick Neuberger Berman as a home deep research team in a rapidly changing world is for the decades ahead. Over the past two years, we’ve essential to investing prudently in this asset class. added six teams: Emerging Markets Debt, Global Long- Short Credit, Private Debt, Global Long-Short Equity, Global Fixed Income: Marquee Brands and Multi-Asset Class leadership. EMD is an important component in our global Each team has a story. Each consists of great investors Fixed Income capability and process, spearheaded with long track records. None came to Neuberger by Andy Johnson and Jon Jonsson, which is of Berman for a check, but rather for an opportunity necessity becoming increasingly opportunistic. The to invest with more resources than they had before, commencement of quantitative easing in Europe and work with strong alignment with clients, and with the the withdrawal of QE in the U.S. has distorted global belief that if they performed over time, Neuberger interest rates significantly. German and French 10-year Berman clients would entrust them with some of their yields are trading barely above zero. Similar maturity irreplaceable capital. A few words on each: paper issued by Spain, to pick a peripheral country, yields 1.30% versus the U.S. Treasury of just under 2%. This untenable situation creates opportunities for EMPLOYEE OWNERSHIP managers willing to take both a longer-term view on the direction of rates and to be materially underweight/ DRIVES ALIGNMENT short some of the more egregious distortions. AND FOCUS Global Long-Short Credit: We have long admired the Orchard Square team as Emerging Markets Debt (NERIX): highly skilled portfolio managers with an average of 18 years of experience at ARX, Ramius, Morgan Stanley and 24-person strong, our experienced team has delivered Salomon Smith Barney and were excited to welcome for clients in hard and local currency mandates as them on January 1, 2015, with the overwhelming well as regional mandates (e.g., Asia credit) and approval of their clients. Given the importance of emerging market investment grade corporate credit. flexibility in the current environment, they bring Their reputation has allowed them to quickly build additional skills to our High Yield and Global Investment to $4 billion in AUM (versus their peak of over four Grade teams, which are so fundamental to our franchise. times that amount at their prior employer). Current At present we are most focused on the indiscriminate Emerging Market yields of 634 basis points, almost selling of short-term bonds with energy exposure. The 2 500 bps over their developed market counterparts, changes in the energy market have been significant and are attractive given strengthening balance fast, but investors are throwing out the proverbial “baby sheets—70% of the universe is now investment with the bathwater.” Sophisticated credit analysis reveals grade—and relatively higher growth rates than the potential opportunity in high-quality credits that developed economies. Even with volatility associated have been oversold, even if energy prices decline further. with the decline of oil prices and the inevitable Fed tightening, the fundamentals of EMD remain Private Debt: resilient. Expected dispersion of returns across nations remains wide, with policy error and economic events Today, banks are discouraged—and in some cases taking center stage. At present the EMD team has prohibited—from making attractive loans to sponsors an overweight view on hard currency bonds with a irrespective of yield, as regulators have implicitly bias to countries with low external debt and high decided these are better on non-bank balance sheets. currency reserve levels. Conversely, the team has We know this space and these private equity firms well an underweight view on corporate bonds as the because we are a limited partner in over 200 funds fundamentals of energy exporters have been under (where we now commit over $1 billion per annum) and have 28 years of private fund investing. Those 2Source: Barclays, as of 3/31/15 NEUBERGER BERMAN ANNUAL REPORT 2014
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insights are fundamental to our successful secondary, Marquee Brands: co-investing and other direct investment activities. The expansion of our private debt capability two years We felt that we had an advantage at Neuberger ago was a natural outgrowth, building on the unique Berman in sourcing and structuring brand royalty insights derived from our broad span of relationships investments. In 2014, we recruited an operating team in all corners of the market and our deep credit skills, of executives to help us grow the royalty streams and fostered by a changing regulatory landscape and via licensing and began deploying client capital into the opportunity to earn meaningfully higher returns. this area. NB Private Equity built the company’s We have stepped in and made 31 investments. Susan management team, which includes a former Iconix Kasser, who joined us two years ago from the Carlyle Brand Group executive and former President of Group, and before that, Goldman Sachs, and Elizabeth Licensing & International at Kenneth Cole Productions. Traxler from Pamlico Capital have been instrumental in The team recently completed its first deal, acquiring leading this effort. Italian luxury brand, Bruno Magli.
Global Long-Short Equity (NGBIX): Multi-Asset Class: Following on the success we’ve experienced with long- Although for some time we have had multi-asset class short investing in the U.S. led by Charles Kantor (NLSIX), mandates (in fact, some of the biggest in the world), 2014 U.S. Best 40-Act Fund – Overall by HFMWeek we wanted to add to our investment capabilities and Magazine, as well as long portfolios in Greater China deepen our engagement with clients. We were excited (NCEIX), International (NBIIX) and Emerging Markets to announce the addition of Erik Knutzen, whom we (NEMIX), managed by Frank Yao and Lihui Tang, had long admired. He was named the world’s “most Benjamin Segal and Conrad Saldanha respectively, and influential” consultant by CIO Magazine in 2013. We also our Absolute Return Multi-Manager (NABIX) and Long- added Ajay Jain and his multi-asset quantitative team Short Multi-Manager (NLMIX) programs, we added a from Barclays, who had so impressed us and many of global long-short team in early 2014 headed by Daniel our shared clients. The additional resources enabled us Geber. As with each team, they bring tremendous to support a new partnership mandate from a major experience. Daniel came to us from GLG, and before Asian insurance company, reposition the Neuberger that Goldman Sachs and Omega, and has been running Berman Global Allocation Fund (NGLIX) and launch the long-short portfolios for 10 years and been in finance Neuberger Berman Multi-Asset Income Fund (NANIX). for an additional 20. Their structure will enable them to Much of their work focuses on helping clients think capitalize on diverging trends across sectors and regions. broadly about strategic allocation frameworks such as, Some recent trends include their view that QE in Europe liability-driven investing, risk balancing, and identifying and the stabilization in leading economic indicators and capturing unique opportunities in the current suggest buying asset reflation stories—such as German environment. Examples of such dislocations today residential real estate stocks and cyclical dividend yielding would include replacing bank balance sheets in the new stocks in the media and auto sectors. Companies that regulatory environment and opportunities in the energy stand to be hurt by continuing CapEx cuts in the oil and complex (especially debt). mining sectors inform their short book. These efforts all build off of—and contribute to—our 488 professionals in research and portfolio management Royalty Strategies: around the world, efforts we continue to invest in Following our success in other private equity specialty aggressively. This past year we have added talent in strategies, including Dyal, where we purchase non- equity research in Hong Kong as well as in fixed income controlling stakes, typically 20%, in general partners and alternative strategies. We're deeper and broader of hedge funds and other alternatives managers—not as an organization. Equally important, we continue to in limited partnership interests—and Athyrium, our expand our efforts to share insights across teams and healthcare royalty strategy, which invests in cash- asset classes, while honoring independent decision yielding investments with downside protection and low making and not imposing a house view. Our in-depth correlation with traditional markets, we have recently added an additional strategy in this category.
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understanding of specific disease states, as an example, But in some markets, benchmarks were tougher, helped frame the opportunity for a private investment especially the S&P 500 which bested 82% of active in an international healthcare company with exposure to managers and most other U.S. benchmarks. As the complex markets. Through a combination of bottom-up table below highlights, this outperformance was analysis of respective addressable patient- based markets particularly acute in 2014. and valuation exercises, we were able to move forward 3 with more confidence in our assumptions, lowering the U.S. EQUITY INDICES (TR) PERFORMANCE risk profile of the investment. 2014 S&P 500 ∆ The year 2014 was solid across the platform, in terms S&P 500 Index 13.7% — of delivering positive absolute returns in the majority of our mandates. On a net basis, our clients—across Russell 1000 Index 13.2% 0.5% channels across the globe—again chose to entrust Russell 3000 Index 12.6% 1.1% us with an additional amount of their irreplaceable Russell 3000 Growth Index 12.4% 1.2% assets, resulting in a 4% organic growth rate for the Dow Jones Industrial Avg 10.0% 3.6% firm (excluding market impact). Amongst our Wealth Management clients, we again retained 95% of client Wilshire 5000 Index 10.0% 3.7% accounts. Client satisfaction (and therefore high NYSE Composite Index 6.9% 6.8% retention) remains our focus. Russell 2000 Index 4.9% 8.8% Value Line Arithmetic Index 2.7% 11.0%
DEVELOPED MARKETS EMERGING MARKETS 40 Why is that? We believe that the confluence of a 30 number of key factors led to this result—many of which 20 are the result of artificially low interest rates/financial 10 repression, which has temporarily suspended market 0 discipline. Remarkably low market volatility (fewer than -10 4% of trading days last year saw volatility levels above -20 RETURNS (%) their 20-year averages), a focus away from company -30 fundamentals (the benign environment and artificially -40 low rates rewarding quality less and not punishing the -50 marginal or leveraged competitor as would a more UK U.S india Brazil Spain normal or challenging environment), low dispersion Japan China
Turkey Russia Ireland Taiwan Tailand Mexico Norway Portugal Hungary Australia Germany MSCI EM Indonesia
Singapore of individual stock returns (the difference in the year’s
MSCI EAFE Hong Kong South Korea return between the 80th percentile-returning stock and Source: Bloomberg. 20th percentile-returning stock was 26% below the 20-year average), and a smaller percentage of stocks outperforming broader indices (figures rarely seen Equities around the globe had a mixed year and alpha since the bubble era a decade and a half ago) all made was scarce in some markets. Amongst developed 2014 challenging to realize alpha from fundamental markets (see chart above), the U.S. was one of the few analysis and security selection. The fact that large caps to produce positive returns, and the only one to exceed outperformed small caps by 8.8% in 2014 (in part 10% in U.S. dollar terms. Emerging markets, on the fuelled by self-reinforcing flows into large-cap index other hand, had wide performance dispersion—from funds), and that international equities underperformed the hope of reform led by Prime Minister Modi (+30%) U.S.-domiciled equities by 18.2%, has also created to the path of conflict and isolation chosen by President significant headwinds for managers who go outside their Putin (-42%). benchmark in order to find attractive opportunities.
3The historical performance of the indices shown is for illustrative purposes only and is not meant to forecast, imply or guarantee future performance. Indices are unmanaged and are not available for direct investment. Index performance is not intended to represent or predict performance of any fund. For recent performance information of the Neuberger Berman mutual funds please visit www.nb.com/MutualFundPerformance.aspx. NEUBERGER BERMAN ANNUAL REPORT 2014
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We believe all of these trends—mega-cap U.S. We delivered solid fixed income returns to clients equity dominance, low volatility, low dispersion and broadly in 2014. We started the year anticipating passive outperformance—are unlikely to continue. higher rates but global economic weakness, episodes The movement in Fed policy to be less (extremely) of geopolitical fears, easing by the ECB, unexpected accommodative (welcome from our point of view), drop in oil prices and the absence of inflation all starting full multiples (18.2x versus a 60-year average contributed to a continued decline in U.S. Treasury closer to 16.6x), slowing global growth, a strengthening yields. For example, the 10-year U.S. Treasury started U.S. dollar and numerous earnings pressures are real. the year at 3% and declined throughout the year to And, while we are where we are, we recognize how far close at 2.17%, almost 60 – 75 bps below our outlook. we've come—U.S. equities up 15% annualized, over Although simply extending duration and moving down the past half decade,4 a period longer than the average the quality scale worked last year, we believe such bull market, buffeted by 487 easing moves by central strategies are less likely to work moving forward and banks globally over the past three years. are certainly exposed to incremental risk. Fixed Income portfolios in the coming years—perhaps starting later Nonetheless, despite those facts, we are not amongst than anticipated—will need to be far more flexible the U.S. equity bears. While we believe the coming and opportunistic across a wide spectrum of credit years' returns will likely trail the past three, we believe including high yield, non–agency mortgages, emerging there is a greater probability that the S&P 500 will markets debt and private debt, besides being able to finish the year above its starting 2058 level, driven tactically adjust the portfolio by shorting both credit by both higher earnings (albeit, likely below analyst and duration. estimates of $125/share) and even higher multiples, not atypical in a low growth, low inflation, low rate, For U.S. investors, the classic 60%/40% portfolio likely strong dollar environment. We anticipate that small worked very well in 2014. We anticipate far more to be cap underperformance will likely abate, as they are required of us prospectively: thinking more creatively, now trading at a discount to the S&P 500 in cash flow more globally, more opportunistically, including taking terms (not yet earnings), can still expand margins and advantage of liquidity premia and avoiding (if not are less exposed to weaker global economies. Many shorting) those parts of the markets most fuelled by of our strategies focus explicitly on this market (small financial repression. We'll have to work smarter and cap value, small cap intrinsic value), have the flexibility be prepared for materially greater volatility as the to move into less trafficked areas (U.S. multi-cap environment normalizes in the years ahead. opportunities, equity income) and/or have the flexibility to short overvalued market segments (long-short, Client Coverage multi-manager long-short). Improving our alpha engines is necessary, but not Our base case assumes developed non-U.S. markets will sufficient to deliver on our mission. So, too, must have far better 2015s, driven by aggressive central bank we invest in our delivery to clients of better advice, policy in Europe and Japan, while longer-term we expect connectivity and client service—everything that it takes additional leadership from emerging market equities, to be a world-class partner. private equity and the recovery in energy equities and In 2014 we added a new head of client service commodities. (The recovery in commodities will likely globally, Céline Dufétel, who joins us from McKinsey take years—we do not see a V-shaped recovery in where she was a partner and led their U.S. asset energy prices. And while rig count is likely to plummet management franchise. We also added 63 external field from 1600 throughout 2015, oil supply will remain representatives to better partner with advisors, and robust long thereafter, as was the case with natural gas introduced a head of financial planning for U.S. private seven years ago, albeit with the occasional supply shock.) clients. We continue to invest in our client coverage Across the equities complex, we anticipate modestly outside North America, going where our business takes higher values, higher volatility and a greater us. 2014 saw key hires in Paris, Bogota, Dubai, Hong opportunity to outperform. Kong, Singapore and Tokyo. 3The historical performance of the indices shown is for illustrative purposes only and is not meant to forecast, imply or guarantee future performance.
Indices are unmanaged and are not available for direct investment. Index performance is not intended to represent or predict performance of any fund. 4 For recent performance information of the Neuberger Berman mutual funds please visit www.nb.com/MutualFundPerformance.aspx. 1/1/2010 - 3/31/2015
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Our technology organization continued to evolve In Tom’s stead we have been fortunate to recruit Steve with key hires. We welcomed Ian Peckett as our chief Kandarian, the current Chairman, CEO and President technology officer and Dan Whelan as our chief business of MetLife. We have admired Steve for years from his technologist supporting our client-facing organization. days as Executive Director of the PBGC to his service as Earlier this year Pat Lomelo joined the firm to head CIO of MetLife, overseeing their $450 billion general global operations and Brendan Potter came on board to account through the financial crisis, to leading one of lead our data management and alternatives operations the most admired financial services firms in the world. team. Having now completed the systems upgrade for There is much we can learn from Steve as we continue the front end of our fixed income franchise, in 2015 we to further develop and strengthen our platform— will begin the process of transitioning to a new High focused on long-term, sustainable success for clients. Net Worth clearing provider. As always, our goal is to focus on improving, globalizing and modernizing our As we look years ahead, we envision a path that is systems, processes and technology to meet the needs consistent with the road we currently travel—we seek of our investors as well as the institutions, advisors and to remain a private, employee-owned, stable, client- individuals who are our clients. focused, high-quality investment manager. We aspire to grow prudently, through great performance, adding A Year of Transition additional capabilities in service to our clients, not for growth’s sake and not through acquisition. It is a path While employee retention is a hallmark of the firm, we are excited about. individuals move on—despite our best efforts to the contrary! This will be the final year in Ann Benjamin’s To those clients who were with us in the difficult storied investment career. She joined the firm in times, we again extend our deep thanks. For you and 1997 and has built a great team and a wonderful those who have joined us more recently, we pledge to partnership with Tom O'Reilly. The 20 person continue our abiding focus on delivering for you. credit research team they have nurtured together Sincerely, is responsible for our $28 billion in non-investment grade strategies. Her transition has been well planned with her colleagues and with clients. We’ll toast her in the year ahead and we know that in 2016 and beyond, she’ll continue to hold our feet to the fire as a client. We are excited for her as she and her husband embark on a new chapter in their lives.
We also said goodbye to our final board member from the Lehman Brothers Estate, Tom Knott. Like each of his predecessors, Tom was charged with looking over our shoulder to protect their minority interest in the firm— something they each did with great commitment, delivering, I suspect, returns that far exceeded their expectations. But their advice over the past six years was broader than their narrow mandate. It was outstanding and it made the firm better. We thank them not only for their excellence but also for the spirit of partnership and the commitment to the firm and our clients that they brought to the boardroom.
NEUBERGER BERMAN ANNUAL REPORT 2014
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NEUBERGER BERMAN 9 SERIOUS INVESTING SINCE 1939
1939 — 1949 1939: 1946: Firm founded by Offices Roy Neuberger and moved to Robert Berman 160 Broadway
1993 1950: 1955: 1958: 1977: Launched one of Launched Energy Research Launched the first no-load Mutual Fund (now department institutional ’40 Act mutual funds Neuberger Focus Fund) formed business
2004 1994: 1999: 2003: Established Neuberger Fixed Income (Lincoln Capital), Trust Berman Inc. Private Investment Portfolios (Crossroads), Company1 IPO and Equities (Neuberger Berman) Combined at Lehman Brothers2
2009 2005: 2006: 2007: 2008: 2009: London office UCITS Funds Launched Opened offices in Became a private, established platform first European Singapore, Tokyo, independent, employee- created listed fund Shanghai and controlled asset Hong Kong management firm
2015 2010 — 2013: 2011 — 2012: 2013: 2014: 2014: Opened offices in Melbourne, Launched single- Emerging Markets Debt Global Long-Short 100% Frankfurt, Seoul, Buenos Aires, and multi-manager Team joins Credit, and Global Employee-owned3 Milan, Toronto, Taipei, alternatives funds Long-Short Equity Dubai and The Hague added
1Neuberger Berman Trust Company is a trade name used by Neuberger Berman Trust Company N.A. (NBTCNA) and Neuberger Berman Trust Company of Delaware N.A. (NBTCDE), which are subsidiaries of Neuberger Berman Group LLC. Predecessors in interest of NBTCNA and NBTCDE were established in 1994 and 1996, respectively. 2In 1981, the Fixed Income business was established. The Crossroads Group, a predecessor entity to the Private Investment Portfolios business, was founded in 1981. 3As of December 31, 2014. Employee ownership includes current and former employees, directors, consultants and their permitted transferees.
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IN 2014, WE SAW DIVERGENCE AND SURPRISES...
Today, investors are grappling with multiple dynamics that may complicate the search for risk-adjusted return—the divergence of central bank policies, the precarious state of the European economy, the weakness of oil prices and the strength of the dollar.
The good news is that this array of influences reflects the opportunities created in the current global landscape, underscoring the importance of research and analysis and contributing to a growth in investment choices.
Despite the seeming end of the secular bull market in bonds, for example, investors can now seek yield potential through private markets or the growing emerging markets debt sector.
NEUBERGER BERMAN ANNUAL REPORT 2014
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IN 2014, WE SAW DIVERGENCE AND SURPRISES...
clockwise Joseph V. Amato Erik L. Knutzen, CFA Anthony D. Tutrone Bradley C. Tank
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Erik L. Knutzen, CFA, CAIA
ongoing knowledge transfer LOW INTEREST RATES, have all been part of the process. Examples of recent work with LOW ECONOMIC GROWTH, strategic partners include exploring alternative risk premia and their AND LOW INFLATION: potential for improving portfolio return and diversification, delving In 2014, the global economic outlook posed many challenges. into the nuances of socially responsible investing, and seeking to identify and capture opportunities In this environment, investors balanced benchmark, as well as associated with the dislocation in were looking for more from their absolute return portfolios designed energy markets. And as the strategic portfolio managers: to help unlock to generate positive returns over partnering process unfolds, our additional sources of return, manage cash at targeted risk levels. As part clients inevitably push us to be an an increasingly complex array of of this process, we have sought to even better asset management firm. risks, and provide unique and apply the broadest possible set of customized solutions. Over the past investment tools from innovative As we look ahead, the challenges year, we partnered extensively with risk-balanced strategic asset of this “low, low, low” environment our clients to meet these challenges allocation to tactical shifts across remain extensive. At the same time, in multi-asset class portfolios. These markets to actively managed stock, we anticipate multiple opportunities mandates have included managing bond and alternative strategies. to add value across asset classes as assets across stocks, bonds, and we partner with clients to achieve Our partnerships have extended inflation-sensitive assets seeking to their unique investment objectives. beyond these investment mandates, add value above a specific global however, to helping our clients become better, more insightful, and responsive investors. Capital market summits, joint research projects, training programs and
NEUBERGER BERMAN ANNUAL REPORT 2014
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INVESTMENT STRATEGY QUANTITATIVE MULTI-ASSET CLASS GROUP INVESTMENT GROUP
Uncertainty is becoming the Separating the signal Blurred Lines
only certainty today in the from the noise We believe that a systematic approach is particularly sensible as the lines global capital markets. Private clients and families continue between top down, bottomup and risk to benefit from our expanded palette Divergent economies and monetary management are increasingly blurred. of strategies. The ability to invest policy, the strengthening dollar, weak globally in developed and emerging oil prices and geopolitics are among the Today, we couple our screening of markets broadens the solution set wildcards facing investors. thousands of global equity names for and complements the firm's core U.S. attractively valued, quality companies As investors, we take a holistic view, portfolios. In recent years, we have with improving prospects with a covering individual industries, sectors, introduced long-short equity and credit top-down macro regional view. Our markets and asset classes, and collect- hedge funds as well as an absolute systematic approach adds rigor in ively integrate the risk and return return strategy that can diversify returns commodities where reward may lie characteristics across that gamut to and help mitigate risk. Along with in actively managing risk. Individual capitalize on market inefficiencies and our suite of private equity and debt commodity markets can be very volatile. improve overall outcomes. strategies, our portfolio solutions are Building a diversified portfolio that more exactingly tailored than ever. We have expanded our multi-asset captures their diversification benefits team, enabling us to work on a While we find U.S. businesses is complex but potentially rewarding, bespoke basis with large institutions attractive in 2015, investors need as it involves simultaneously navigating and to introduce multi-asset products to employ a diversified, nimble and return drivers—macroeconomics, for general investors that capitalize long-term approach. One can expect geopolitics, weather, fundamentals— on portfolio level asset allocation and opportunities and challenges in a world as well as their risks. risk expertise, as well as the deep of uneven growth, diverging policy and We believe the investment impact fundamental investment research ongoing volatility. We believe volatility of these complex and dynamic and investment capabilities that we dampening solutions and diversified relationships can be well managed have developed over many years as a sources of income—MLPs and emerging using some quantitative muscle. portfolio manager. market debt—should be considered.
from left: from left: from left: Lori L. Holland, Erik L. Knutzen, CFA, Ahmad Farah, CFA and Matthew L. Rubin Hakan Kaya, PhD, Wai Lee, PhD and Alexandre Da Ajay Singh Jain, CFA and Tokufumi Kato, PhD Silva
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14 A CLOSER LOOK AT: STRATEGIC PARTNERSHIPS
Ajay Singh Jain, CFA Lori L. Holland
demand an organization that is EARNING OUR able to open itself to its partner, to engage honestly and freely, and PARTNERS’ CONFIDENCE— to continually evolve its processes, analysis and investment thinking.”
RELATIONSHIP BY For example, Neuberger Berman has a long-standing relationship with RELATIONSHIP one well-established institutional client that not only looks to us for our management across specific Our collaborative interactions with recognize the exacting and deeply asset classes, but also seeks our clients are highly customized and committed quality of a partnership. insights and ideas related to many depend greatly on the specific And we value these relationships. broad investment issues. “We character of the organization, the Demanding, consuming and have conducted many research level of expertise they bring to the stimulating, strategic partnerships projects for them, some lasting table and their needs for strategic define alignment between parties. a few months, some as many as input or support. “The opportunities realized by two years,” says Wai Lee, Head of a genuine strategic partnership While the term “partnership” is Neuberger Berman’s Quantitative are multiples of a traditional Investment Group. These have perhaps too freely used when relationship,” observes Lori Holland, discussing client needs, we resulted in published papers as well a member of Neuberger Berman’s as new investment solutions to Multi-Asset Class team focusing on address client challenges, such as strategic partnerships. “But they using multiple asset classes to help mitigate inflation risk while seeking
NEUBERGER BERMAN ANNUAL REPORT 2014
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15
Wai Lee, PhD Junjie Watkins, CFA
to generate attractive returns. “This and private equity arenas, where to bring the firm’s broad expertise is a living, breathing relationship that our experience and deep research to bear on each, whether it be on continues to evolve—a true strategic bench have been instrumental risk budgeting, asset allocation, partnership,” observes Lori Holland. in developing a framework for or decision making across asset evaluation, implementation and classes. We have also been Another client, in this case a review. “We were privileged to steadfast in the commitment of sovereign wealth fund, originally help one of our clients, a Fortune our senior investment personnel to came to the firm with a much more 50 company, build its private equity solve those client issues,” Holland basic need—for help in establishing program. As the knowledge transfer says. “As the investment backdrop a framework for strategic asset and shared research activities changes, the specific issues and allocation. “This was very much an progressed over several years of challenges will evolve, but the educational process and many of close partnership, the management commitment will remain.” their team visited and worked with of the program fully transitioned us in our offices for months at a to our client. Now, we're exploring time,” Lee says. The move to actual other areas together, and they have management of their assets was a invested into two of our direct gradual process, where intellectual private equity funds,” comments collaboration evolved into a mandate Tony Tutrone, Head of Alternatives with unique, customized parameters at the firm. across individual asset classes. “Regardless of the investment Other partnerships have highlighted challenges our clients bring to us, the firm's ability to provide guidance we remain steadfast in our desire in helping clients enter new asset classes, in particular, the hedge fund
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INVESTORS CONTINUE TO WIDEN THEIR EQUITY— LENS.
The divergence in world economies, central bank policy and individual theme-driven results suggests a varied and dappled picture for equity investors.
Neuberger Berman’s equity portfolio management serves clients around the world. For institutions, advisors and individuals, they deliver individual strategies that reflect hands-on, independent research and active management customized for specific client objectives.
There is no house view at Neuberger Berman. Our firm is, at its core, a research organization dedicated to serving clients. We value the diversity of opinion and the ensuing outcomes that derive from a culture that prioritizes new ideas and sound investment decisions.
NEUBERGER BERMAN ANNUAL REPORT 2014
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INVESTORS CONTINUE TO WIDEN THEIR EQUITY LENS.
clockwise:
Benjamin H. Nahum Sandy M. Pomeroy Conrad A. Saldanha, CFA Richard S. Nackenson
10
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of crosscurrents driven by a rising dollar, low oil prices, and inconsistent structural reform. This will certainly make 2015 another interesting year.
In an environment of shifting monetary policies and growth trends, we believe that the support of our Global Equity Research department is essential, as are the insights we garner from the more than 1,500 meetings we hold with company managements each year Joseph V. Amato in our offices. Further, each of our president and chief investment officer – equities strategies develops complementary research and in a true, fundamental, bottom-up style, engages directly with the companies they evaluate. CONTINUED LOW This leads to uniquely informed, in-depth insight into those INTEREST RATES DRIVEN businesses and management teams. BY ACCOMMODATIVE... Our equity investment capabilities are global, varied and have evolved ...central bank policies provided a reasonable investment to include a suite of emerging and developed markets, global and environment across a number of global equity markets during long-short equity strategies geared 2014. Our strong research platform enables us to focus on select toward absolute returns. We also have a range of income-oriented opportunities on a bottom-up basis, business-by-business. strategies such as MLPs and REITs. Our in-depth fundamental approach has helped drive our attractive There was, however, a wide range was down 1.8%. For example, India’s long-term results. We continue to of outcomes driven by varying equity index was up 28.9% and focus on our investment disciplines degrees of economic growth. For China’s A-share domestic market in seeking excess returns and are the year, the MSCI All-Cap World was up 52.08% (CSI 300 Index). In actively engaged with managements Index provided a 4.7% total return, our opinion, modest growth of the as advocates for our clients. reflecting strong performance in the global economy should provide a U.S. (the S&P 500 returned 13.7%) good foundation for equity markets and more challenged dollar-based as we move forward. The U.S. results for the MSCI EAFE (-4.48%). continues to gain momentum but We also saw certain emerging will likely face higher policy rates in markets produce significant returns 2015. Europe is slowly moving on even though the overall EM index its path to recovery with a weak euro and quantitative easing helping the cause. Other developed and emerging markets face a number
NEUBERGER BERMAN ANNUAL REPORT 2014
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SMALL CAP VALUE INTRINSIC VALUE THE NACKENSON GROUP
We were surprised by oil’s Large cap investors 2014 reinforced the sharp decline in 2014. generally enjoyed 2014; importance of remaining
We reduced our long-held energy small cap investors had focused on fundamentals. overweight to roughly market weight less to cheer about. The ongoing improvement in the U.S. in 2012, recognizing that slowing economy is translating into strong emerging markets’ growth and rapid The economy and employment grew corporate earnings and cash flow. North American supply growth would nicely. However, as the year progressed, Companies with identifiable free cash likely cap oil prices. That said, in 2014 risks emerged from outside the U.S. flow and prudent management teams we anticipated the continuation of oil’s The consensus view now is that global have a significant opportunity to create $80 – $100 price band (West Texas growth has slowed. value for shareholders. benchmark) of the past five years. The crosscurrents of improving This is being accomplished through We suspect that geopolitical risk domestic business conditions offset by investing in the business, returning perceptions were a factor in propping weakening growth overseas had several cash through dividends and share up oil prices prior to the downturn. implications. The foremost was a decline repurchases, making selective and If so, they appear to be ignored now, in interest rates across the world. The highly accretive acquisitions and despite the risks perhaps being even international economic deceleration led improving the capital structure. Looking higher than before due to OPEC’s policy to the biggest surprise of the year—a forward, we believe the combination (e.g., greater instability in the Middle collapse in oil prices. As we contemplate of continued economic growth, strong East, the Russian economic crisis). 2015, decent momentum in the company fundamentals, and reasonable These events reinforce our long-held domestic economy should help drive valuations provide an opportunity for appreciation of the importance of sales and earnings, but international attractive equity returns. investing in high-quality businesses to business conditions will likely challenge help mitigate against unpredictable profit growth. In short, we anticipate a macroeconomic outcomes such volatile year until greater clarity emerges as these. with respect to the global economy.
from left: from left: Richard S. Nackenson Robert W. D’Alelio and Judith M. Vale, CFA Benjamin H. Nahum and Michael C. Greene
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EMERGING MARKETS EQUITY INTERNATIONAL EQUITY GREATER CHINA EQUITIES THE MLG GROUP
12 Coming into 2014, many Keeping the quality Investors will look back at EM countries were hosting focus for 2015. 2014 as a watershed for
elections and geopolitical Although markets were up for much of China equities. 2014, our portfolios were less geared tensions were rising. A key event was the landmark to policy optimism in Europe and Shanghai-Hong Kong Stock Connect We knew we would have to focus on Japan, and lagged. We stuck with our program, opening part of China’s more than just corporate earnings. quality focus, however, which paid off domestic equity market to foreign The sheer scale and frequency of later as the U.S. dollar strengthened, investors. We also saw the surge of headlines driving markets from Russia commodity prices fell, and well- China A-shares, which due to a more to Brazil challenged our fundamental managed multinationals started to stable economic outlook, historically focus in the short term. Markets outperform. low valuations and supportive monetary continue to be driven by policy and we policy, resulted in the CSI 300 Index have to understand where there are Looking to 2015, we remain optimistic returning over 50%. opportunities—as when challengers on U.S., British and Swiss economies, which should support their currencies. won the recent Indian and Indonesian Still, it is the structural reforms and We expect growth to disappoint elections—and the risks—like Putin’s improving business fundamentals that in Japan, Australia and several Russia and investors chasing Brazilian are more exciting to us. In our view, emerging markets. We are closely election polls. the focus of current leadership in monitoring energy and Asian markets establishing the right policies creates a With oil’s precipitous decline joining for opportunities, though their risks strong foundation as China transitions to this mix, we enter 2015 with a tailwind remain relatively high. We believe that a period of quality growth. Meanwhile, for several EM economies. But over the companies failing to meet expectations company profits are stabilizing long term, earnings and secular growth will struggle—so our focus remains on while valuations remain inexpensive. are what tends to drive returns, and those with high returns and recurring Altogether, the climate appears ripe with 2014’s growth markets need to prove revenue streams. opportunities and particularly conducive themselves in 2015 and beyond. to fundamental stock picking.
Conrad A. Saldanha, CFA Benjamin E. Segal, CFA from left: Lihui Tang, CFA and Frank Yulin Yao
NEUBERGER BERMAN ANNUAL REPORT 2014
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MASTER LIMITED THE MLG GROUP PARTNERSHIPS GLOBAL REITS
There were many surprises Low oil and natural gas prices Logic suggests that an in the investment world are a result of U.S. success improving economy and during 2014. in developing its vast energy low rates should be positive
For example, despite expectations resources, “the shale for commercial real estate for higher interest rates at the start revolution.” and single-family housing. of the year, rates moved lower; this helped REITs and Utilities to be the This growth in production has In 2014, U.S. commercial real estate best performing sectors in 2014, after temporarily, in our view, created an continued its recovery led by higher underperforming in the prior year. Also, oversupplied market that has depressed occupancies and rents; asset values oil prices came down dramatically in the prices. Nevertheless, we cannot predict climbed due to strong global demand second half of 2014, despite increased prices with precision, we will continue for U.S. real estate. However, hostilities in the Middle East; as a result, to invest in businesses that are largely the recovery in the U.S. housing energy was the worst performing fee-based, generate stable cash flows disappointed. Housing starts remain sector in 2014. and can grow over market cycles. below average and price has slowed.
The lesson: macro events are hard to These companies provide the Although low interest rates have predict and we shouldn't spend our infrastructure and services needed to improved affordability, we remain time trying. Instead, we should focus move oil and natural gas to market. As diligent in our focus on potential hurdles on picking good companies with investors, we look beyond short-term for the U.S. housing recovery: slowing strong free cash flows and reasonable volatility to identify long-term trends. global growth, a less accommodating valuations, and build diversified The development of the abundant Fed, and reluctant first-time home portfolios that don't depend on having U.S. resource base is such a trend and buyers. Positive economic trends and a macro view. should continue to provide growth modest new construction could lead opportunities. We think the opportunity to increased cash flows and attractive to add value through well-researched return potential for investors in REITs stock selection is in its early innings. and commercial real estate in 2015.
from left: from left: from left: from left: Lihui Tang, CFA and Frank Yulin Yao David S. Portny, Tony M. Gleason, CFA, Yves C. Siegel, CFA and Douglas A. Rachlin Steve S. Shigekawa, Brian C. Jones, CFA, Richard S. Levine and Sandy M. Pomeroy Gillian Tiltman and Anton Kwang, CFA
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LARGE CAP MID CAP GROWTH LARGE CAP VALUE DISCIPLINED GROWTH
2014 was a tough year for After 2014, another good year Our thought process leads us active equity managers like us. for U.S. equity returns, but to a consumer “relieved” in
So what did we learn during a rather difficult for stock picking with so many ways because of the tough period? Number one, while we only 10% of large cap value decline in energy costs. They favor companies with strong balance managers outperforming, we should feel it broadly across sheets and usually not burdened with debt, debt is not a four-letter word. think active management can their everyday life. Cheap money emboldened many return to outperformance. companies to lever up their balance We believe that relief will unleash a consumer who has been hogtied to sheets and repurchase stock and/or This could be driven by a pickup in higher basic living costs for so long that make acquisitions. The market seemed market volatility, which we have already the opposite will unleash a rebirth in to embrace this financial maneuvering. started to see with the Federal Reserve true consumer confidence. So we look We’ll see if it is a viable long-term finishing its latest round of quantitative for consumer confidence to skyrocket. positive. easing. We maintain a cautiously optimistic outlook for equities in 2015 What we are definitely looking forward We’ll accentuate the consumer followed with uncertainty and volatility that may to in 2015 is the prospect of a return to by a focus on information technology. present an opportunity to add value normalcy in monetary policy and the Businesses that benefit from lower for clients. potential for a return to fundamental energy inputs will be on our radar screen, particularly those in which growth investing and appreciation We will remain focused on our discipline we can identify a catalyst that could of companies that bring unique and of finding undervalued stocks based on create alpha. competitive products and services to normalized earnings with a catalyst that the market. Fundamentals do matter in can help create alpha. Looking ahead, the long term, and we are anticipating we believe that the opportunity for investors will revisit those companies adding value through well-researched that possess solid business models. stock selection is in its early innings.
Kenneth J. Turek, CFA Eli M. Salzmann John J. Barker
NEUBERGER BERMAN ANNUAL REPORT 2014
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Ingrid S. Dyott Céline Dufétel
have a strong sense of community, SRI/ESG: PART OF THE on a local and global basis.1 Both idealistic and practical, they want to INVESTMENT FABRIC make a difference while also seeking economic security. "Doing right by investing well" has become more than a murmur “As managers who have been in the conversations of private clients, advisors and institutions. deeply involved with ESG issues for two decades, we believe this creates a real opportunity to serve a In the last few years, not just suitability but the quality of growing constituency,” adds Dyott. investors seeking exposure a business. In practical terms,” she Companies can gain key advantages to “sustainability” strategies adds, “mission and materiality are by paying close attention to ESG have become more visible and coming together and investors are concerns and find new opportunities significant. Once associated taking notice.” for growth tied to environmental and primarily with aligning values or other issues. By extension, she says, missions with investment goals, “We are finding that more and more portfolio managers can capitalize socially responsive investing (SRI) clients recognize the importance on these trends by integrating ESG and, increasingly, the integration of investments that align with analysis into their processes. of environmental, social and both their goals and beliefs,” explains Céline Dufétel, head of governance (ESG) factors in “We’re encouraged that many the firm’s client service group. investment strategy, are offering investors have moved beyond “They understand that attractive viable solutions with attractive traditional notions about SRI. Still, performance can be achieved within performance potential to a range we continue to connect the dots a socially responsible investing of investor segments. between the integration of ESG framework.” factors and seeking alpha,” says Ingrid Dyott, portfolio manager This surge in SRI/ESG is being driven Dufétel. “It’s a portfolio solution for the SRI/Core Equity Team that makes social sense and can comments, “The ESG framework is not just by longtime investors, but by deliver attractive outcomes.” integral to the investment process. millennials and other new voices who It provides analytic reference are influencing in the marketplace. According to U.S. SIF, millennials points that help investors evaluate 1Source: “U.S. Sustainable, Responsible and Impact Investing Trends,” U.S. SIF, 2014.
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Robert W. D'Alelio Scott E. Kilgallen
small cap sector have led to wider TAKING A CLOSER LOOK EPS dispersions and provided active managers with opportunities to AT DC FUND MENUS... add value.” ...we are seeing plan sponsors focus increased time and “Our experience in managing small cap assets for over two decades has attention on the plan and investment menu design. Many shown us that a focus on a long- sponsors are looking to provide investment options that help term, buy-and-hold approach and investing in high-quality companies participants build portfolios that can achieve better at reasonable valuations can generate retirement outcomes. attractive long-term returns with lower volatility than the broader market,” he adds. “Plan sponsors are reassessing complexity of building a retirement “Clearly, small cap is an asset class the entirety of their lineup to and portfolio,” says Bob D’Alelio, that has and will continue to play analyzing the role each investment portfolio manager for the Small Cap an important role in participants’ option can play in a portfolio,” Value Equity team. “Participants are retirement portfolios,” says Kilgallen. according to Scott Kilgallen, Head faced with growing their savings “Our discussions with plan sponsors of Financial Institutions Group. and accumulating enough assets to and advisors who support them focus “Advisors working with plans are replace their income in retirement on the importance of diversification sensitive to these same issues.” while managing downside risk for the and breadth of investment options assets they have worked so hard to “Today’s markets are challenging that can help participants reach their accumulate. This is not an easy task.” for participants. Prolonged low long-term retirement goals.” interest rates combined with high “Small cap is an asset class that can market volatility have increased the add diversification and enhance the return profile of a participant’s overall portfolio,” explains D’Alelio. “The lack of research coverage and information on companies in the
NEUBERGER BERMAN ANNUAL REPORT 2014
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CORE EQUITY/SOCIALLY RESPONSIVE INVESTING EQUITY RESEARCH
We live in a time of unprecedented change 2014 marked another year of significant and uncertainty. publicity for shareholder "activism"; and given
Rapid innovation is giving birth to disruptive business models low interest rates, building corporate cash that threaten old ways, while connectivity has made companies balances, and ongoing investor demand for yield, more vulnerable to cyber threats. Since the financial crisis, macroeconomics have, at times, had a disproportionate we would expect the headlines around public impact on market returns. Arguably, 2014 was such a year as shareholder activism to continue in 2015. Treasury bond yields declined, defying market expectations. Against this evolving backdrop, our investment philosophy While Neuberger Berman is not an “activist” shareholder that remains unchanged. seeks to change or influence control over a company, we have long prided ourselves on our role in constructive engagement and We believe that, over the long term, a company's stock price dialogue with the companies in which we invest client assets. should be driven by underlying business performance; so, we Last year we hosted over 1,650 meetings with company spend most of our time researching business plans looking management teams in our offices and another 1,850+ meetings for companies likely to deliver industry-leading growth. outside our offices. In these meetings we will continue to engage Technology and macro change are but some of the inputs with companies around their focus on long-term value creation we consider. While change and uncertainty are unsettling, we (as opposed to short term financial engineering), working to think long-term equity investors are well served by focusing ensure that the companies we invest in are focused on creating on bottom-up fundamentals while valuing stocks with a long-term value for shareholders. consistent valuation framework.
from left: Timothy F. Creedon, CFA Ingrid S. Dyott, Mamundi Subhas, CFA, Arthur Moretti, CFA and Sajjad S. Ladiwala, CFA
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INVESTORS CONTINUED TO FACE A DUAL CHALLENGE...
...of low rates and shifting monetary policies in 2014, as well as market volatility tied to geopolitics and oil. In this environment, we continued to work with clients to deliver total return and yield across a range of strategies.
Flexibility is at the core of fixed income investing today, and having a toolset that can provide exposure across geographies and sectors, as well as the ability to capitalize on different credits and duration positioning is essential in seeking to achieve investment goals.
We built on our existing program, across our global investment grade, high yield and emerging market sectors, while expanding our long-short capabilities to leverage the broad opportunities we are seeing around the world.
NEUBERGER BERMAN ANNUAL REPORT 2014
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clockwise from top left:
Andrew A. Johnson Rob J. Drijkoningen Patrick H. Flynn, CFA Jon B. Jonsson Thomas P. O’Reilly, CFA
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energy credits within the high yield space began to show recovery late in the year.
To capitalize on the multiple areas of opportunity requires detailed knowledge across a range of asset segments and geographies. “The time when one or two portfolio managers could navigate the available investment universe is simply over,” Tank observes. “There is simply too much information to Bradley C. Tank absorb and too many risks that need chief investment officer – fixed income to be addressed.” Neuberger Berman has worked systematically to expand its A KEY SURPRISE FOR capabilities to access the full breadth of the fixed income market. In recent FIXED INCOME MARKETS... years, this has included the addition of our Emerging Markets Debt team ...in 2014 was the continued decline in U.S. Treasury yields, and Jon Jonsson as senior portfolio manager for Global Fixed Income as investors demonstrated periodic risk aversion triggered by in London; most recently, the firm geopolitical issues and fears about global growth. Indeed, the welcomed Orchard Square Partners, which specializes in long-short credit ongoing challenge of lower yields and consequent limitation on investing, to further provide investors potential fixed income returns has only increased as the yields with global flexibility that extends on many developed markets bonds are near all-time lows. across sector and duration. Says Tank, “We started with a core of exceptional talent and have carefully For investors, this creates a major The value of flexibility is evident built upon that foundation based on puzzle for a key component from a survey of recent market the needs of clients.” of portfolios—one that active performance. In 2013, for example, managers everywhere are trying the range of outcomes within to address. “We believe there are fixed income was quite dramatic— considerable opportunities out parts of emerging markets had there,” says Brad Tank, Neuberger negative returns, developed market Berman’s chief investment officer for investment grade bonds were Fixed Income. “You just have favorable and high yield enjoyed to be flexible about the asset relatively strong outcomes. In 2014, classes you invest in, and selective in contrast, local currency emerging as to when and how you choose to markets debt (EMD) was at the access them.” low end of the spectrum but hard currency EMD was at the upper end; and after sharp declines,
NEUBERGER BERMAN ANNUAL REPORT 2014
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GLOBAL INVESTMENT GRADE FIXED INCOME INTEREST RATES
Consensus expectations were for interest rates Central bankers remain patient in exiting the to move higher in 2014 and negatively impact Zero Interest Rate Policy (ZIRP) regime during global fixed income markets. 2014, as global consumer demand was moderate
However, bouts of risk aversion—often triggered by concerns and the global inflation trend remained weak. over global growth and geopolitical issues—caused rates The normalization of monetary policy over the next three years to generally decline. Looking ahead, we anticipate further will likely be slow, perhaps half the historical Fed response rate divergence in terms of growth and monetary policy. We with the terminal value about 1% – 2% below the prior peak in believe the U.S. and U.K. should expand at a solid pace, the Fed Funds rate. The black swan associated with the dramatic while the eurozone and Japan struggle to gain economic collapse in oil prices enhanced the correlation of expected momentum. From a monetary policy perspective, the Federal inflation rates across many developed markets and induced Reserve and Bank of England are likely to begin a slow path to strong co-movements in the long end of the yield curve. policy normalization, while the European Central Bank and the Bank of Japan intensify their quantitative easing campaigns. The global consumer stands to be the main beneficiary of this unexpected development, thus brightening the prospects Elsewhere, emerging markets represent a wide array of for stronger growth and eventually rising inflation expectations. economic profiles, with potential winners and losers both 2015 could easily be considered the year of the U.S. consumer tied to lower oil prices. Our base case scenario calls for a comeback, and we anticipate that the bond market will take continuation of the global recovery, but we expect to see notice. periods of heightened volatility. Still, we believe there will be numerous pockets of opportunity. Markets often exaggerate or misinterpret developments which, in turn, can breed meaningful investment opportunities.
We believe flexibility, active management and navigating the ever-changing economic environment will be especially critical in 2015
from left: Thanos Bardas, PhD Andrew A. Johnson and Jon B. Jonsson
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NON-INVESTMENT GRADE SENIOR FLOATING FIXED INCOME RATE LOANS EMERGING MARKETS DEBT
After a strong start, the high yield market experienced Fixed Income markets increased volatility in the second half of 2014. broke from the consensus
The environment worsened in November and December, as sharply falling oil prices expectations in 2014 as dragged down the energy sector—a large component of the high-yield market. Despite interest rates declined. this setback, fundamentals in the overall high-yield market remained intact, a trend we see continuing in 2015. The markets, including senior floating rate loans, experienced a heightened Corporate balance sheets generally appear strong and flush with cash. In addition, volatility. Despite solid fundamentals for significant refinancing activity has allowed many issuers to push back their maturities. corporate credit, technical conditions In our view, these factors, along with continued growth in the U.S., should bode well for created most of the turbulence. the vast majority of lower quality companies to meet their debt obligations. Loan managers contended with external Against this backdrop, our default outlook in the U.S. is approximately 2.5% for 2015 factors including retail flows, surging as a whole. This would compare favorably to their long-term average of 3.8%. We also supply and strong CLO demand. We anticipate demand to lend support to the asset class, as the search for yield may attract believe senior floating rate loans, with investors seeking incremental yields. That being said, volatility could be elevated at times their floating rate coupons and relatively as we progress throughout the year. This, in turn, could impact the technicals in the high high yields, should see strong investor yield market. demand in 2015.
Overseas, we see a positive backdrop for European high-yield bonds and the potential Their short duration nature should help for another year of attractive total returns. As is the case in the U.S., we believe credit buffer against negative price movement research will be critical to identifying attractive opportunities and avoiding potential associated with fixed-rate instruments underperformers. in a rising rate environment. This technical backdrop should be supported by strong fundamentals, buoyed by an expected low default rate, and will drive our portfolio positioning.
from left: from left: Dan J. Doyle, CFA, Thomas P. O’Reilly, CFA, Stephen J. Casey, CFA and Joseph P. Lynch Russ Covode, Ann H. Benjamin and Andrew Wilmont, CFA
NEUBERGER BERMAN ANNUAL REPORT 2014
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EMERGING MARKETS DEBT CURRENCY DISTRESSED DEBT
Fixed Income markets 2014 was volatile, even The end of QE was a turning Global banks accelerated broke from the consensus by emerging markets debt point for the U.S. dollar. their disposal of distressed expectations in 2014 as standards. The U.S. economy had been leading loans, a trend we expect to other major economies for some time, interest rates declined. The sell-off that started in May continue in 2015. but until summer the Fed’s balance 2013 extended into January, when The markets, including senior floating sheet expansion prevented the dollar Despite the passage of over five years a meaningful recovery began and rate loans, experienced a heightened from adjusting higher. since the peak of the financial crisis, extended into June as sentiment towards volatility. Despite solid fundamentals for many banks have yet to clean up their emerging markets improved. Towards corporate credit, technical conditions Dollar gains were rapid in the fourth balance sheets and shed legacy assets. midyear, renewed fears of Fed tightening created most of the turbulence. quarter, driven by relative growth (as Nonperforming loans (NPLs) continue and frequent geopolitical conflicts all but the eurozone slowed) and a wave of to increase in Europe and remain over Loan managers contended with external dominated the asset class. risk aversion. The dollar story remains three times pre-crisis levels in the U.S. factors including retail flows, surging compelling but its appreciation could In the final quarter, the sharp drop of oil Increasing capital requirements and supply and strong CLO demand. We ultimately hurt U.S. exports. prices mainly caused weakness in credit heightened regulatory scrutiny have believe senior floating rate loans, with spreads and currencies in oil-dependent provided catalysts for banks to dispose their floating rate coupons and relatively Monetary policy will remain hard to countries and sectors, but given the of NPLs in larger amounts each year. high yields, should see strong investor predict as disinflationary pressure has speed and magnitude of the shift, took intensified and currency swings will demand in 2015. Additionally, the recent volatility a larger toll on the whole universe. This affect prices. Dollar strength, combined in oil prices has presented new Their short duration nature should help overshadowed the positive impact on with cheap energy, should increase the opportunities in the U.S. As a result buffer against negative price movement growth in energy-importing economies, downside risk to U.S. inflation. We see of all of these dynamics, we are associated with fixed-rate instruments and the gains from local bond yields, potential change in Fed policy as a risk experiencing a robust pipeline of in a rising rate environment. This which tightened given lower inflation that could derail the dollar rally. More distressed debt in asset-intensive technical backdrop should be supported expectations. On a positive note, a year broadly, we think, the currency market sectors such as real estate, energy, by strong fundamentals, buoyed by an crowded with general elections across is undergoing an important structural transportation and infrastructure. expected low default rate, and will drive regions ended mostly with encouraging shift in volatility. our portfolio positioning. outcomes.
. from left: from left: Ugo Lancioni from left: Stephen J. Casey, CFA and Joseph P. Lynch Rob J. Drijkoningen and Gorky Urquieta Patrick H. Flynn and Michael J. Holmberg
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Alison B. Delgado Andrew A. Johnson INSIGHTS INTO rethinking their income models, THE PRACTICAL APPROACH the industry is moving to unique benchmarks and customized ranges IS OPPORTUNISTIC, for volatility, duration, geography and credit quality.”
FLEXIBLE AND DYNAMIC. For example, absolute return and unconstrained bond strategies More recently, the prolonged low rate environment has forced dispense with a traditional index, changes in the way bond investors help clients reach their goals particularly in terms of duration of achieving meaningful total return and income while seeking to positioning. They have the flexibility to have a negative duration buffer portfolios against the impact of potential rate increases. exposure. The manager’s results are judged solely in relation to the return on cash, and their ability to Andrew A. Johnson, head of the there is extraordinary. Managers generate positive returns, regardless firm's investment grade business, have to have expertise in far of benchmark. comments, "We are identifying more sectors and across far more opportunities across a wider set of geographies." While yields are still low globally, income-oriented asset classes and the trend is a gradual upward path. Customization is moving center bond sub-sectors, geographies and Johnson agrees. "What this means, stage. Alison B. Delgado, Head investment instruments.” to me, is that managers have to be of Institutional Consultant more creative and flexible in doing "The landscape is far more complex Relations, explains, "Institutions, their jobs, in seeking to both achieve now," Johnson continues. "Markets with their very specific income investor goals related to income and in peripheral Europe, for example, and risk parameters, are looking total return while offering some can have rapid impacts half a world for managers who can deliver buffer on the downside as rates away. And the amount of data out bespoke, particular solutions.” She move up.” adds, “From strategic partnerships and large public plans to advisers
NEUBERGER BERMAN ANNUAL REPORT 2014
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STRUCTURED PRODUCTS MUNICIPAL FIXED INCOME FIXED INCOME RESEARCH
2014 was a year of the ugly A global perspective helps Credit cycles do not impact “global” picture and the inform our decisions and everyone equally, as shown “Goldilocks” U.S. picture. anticipate trouble spots. by the energy sector last year.
It was difficult to focus on U.S.-centric We have made a concerted effort since The decline in energy prices and ensuing strategies without considering the the financial crisis to pay even closer market volatility created uncertainty and global commotion. Still, the U.S. attention to events outside the U.S. as pressured security prices. This volatility economy and consumers, in particular, markets and economies have become should continue near-term, as it will continue to strengthen through far more interconnected. Being part of likely take time for the supply/demand rising incomes and job growth. This a global fixed income franchise gives us imbalance to correct. While this is not portends well for our credit-intensive unique insight into market signals that optimal, it creates opportunities for strategies, especially those focused on may ultimately impact municipal bonds. those who can differentiate between legacy mortgage-backed securities and the noise and core fundamentals. In 2014, the decline in the price of mortgage loans. oil was originally thought to be a Quality fixed income investment Lessons from last year are: 1) it takes geopolitical and energy industry event. research involves a thorough a lot to stop the U.S. economy once it As time passed, the potential impact to understanding of macroeconomic and builds momentum, 2) consider global municipal credit quality in U.S. states industry trends as well as deep analysis news but don’t be overwhelmed by it, with exposure to the energy industry of corporate credit quality. and 3) domestic jobs and interest rates came into focus. It is a reminder that By using all the firm’s resources through should be the focal point for investing in in order to prudently invest in today’s collaboration between our fixed income securities that rely on consumer credit. world, one’s focus cannot rest solely on research teams and our our Global your chosen marketplace. For 2015, we continue to believe in the Equity Research Department, we U.S. economy but recognize potential In 2015, we will continue to watch believe we are well positioned to take critical “tipping” points elsewhere. events abroad and across markets to advantage of sell-offs and recoveries in make informed decisions at home. global oil prices.
from left: James L. Iselin from left: Thomas A. Sontag and Terence J. Glomski Vivek Bommi, CFA and David M. Brown, CFA
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ALTERNATIVE INVESTING CONTINUES TO MOVE CENTER STAGE.
Private and public pensions, global funds and increasingly, private advisory clients, look to Neuberger Berman's range of private equity and hedge fund solutions to help achieve portfolio return, income and risk mitigation objectives.
Our private equity and hedge fund practices, both long established, serve institutions throughout the world via a range of strategies and structures. From private placements to registered funds, we offer private equity and debt, single strategy and multi-manager hedge fund solutions, real estate and commodities.
Today, we see our liquid alternative strategies included in defined contribution plans as advisors and sponsors recognize the importance of non-correlated, lower volatility offerings. We are making available to a wider population a range of alternative portfolios that seek to address a range of practical investor outcomes—from risk mitigation to income and growth.
NEUBERGER BERMAN ANNUAL REPORT 2014
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ALTERNATIVE INVESTING CONTINUES TO MOVE CENTER STAGE.
clockwise:
Susan B. Kasser, CFA Peter J. von Lehe Maura Reilly Kennedy Patricia Miller Zollar
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Anthony D. Tutrone global head of alternatives CONDITIONS CALL FOR CAREFUL RISK ASSESSMENT. During 2014, private equity fundraising reached near record levels while hedge fund assets under management continued to increase year over year for the sixth year in a row.
Investors favored asset classes such brand licensing. The team also as private equity and hedge funds distributed approximately $2 billion that were uncorrelated to traditional in 2014 back to investors. markets and had the potential to On the Hedge Fund Solutions generate higher returns in a low yield side, Neuberger Berman continues environment. to expand its liquid alternatives The private equity industry was platform through ‘40 Act and UCITS particularly active in 2014, with funds and has now raised nearly $2 robust fundraising on one hand, billion in assets under management and distributions reaching new highs across these products. These liquid on the other. Neuberger Berman alternatives solutions continue to Private Equity followed the industry gain strong traction among the trends, raising over $5.5 billion in investor community, particularly with 2014 across separate accounts and third-party platforms and defined commingled funds with strategies benefit plans, for their emphasis focused on primaries, secondaries, on absolute return, daily liquidity, co-investments, private debt, portfolio transparency and lower minority stakes in asset management minimums compared to more firms, healthcare investments and traditional alternative investments.
NEUBERGER BERMAN ANNUAL REPORT 2014
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PRIVATE EQUITY PRIVATE EQUITY SECONDARY INVESTMENTS CO-INVESTMENTS
In a highly competitive private equity secondary Focus on sustainable capital structures market, we believe buyers need to be able to and "midlife" investments.
differentiate themselves from the pack. The transaction environment in 2014 presented unique challenges and opportunities. Mirroring 2013, we continued to By leveraging the resources of Neuberger Berman, our secondary observe in 2014 elevated leverage levels and rising asset prices. team can quickly adapt to changing market conditions and With this backdrop, however, we believed placing an emphasis develop customized liquidity solutions that can help us execute on high-quality, non-cyclical businesses with sustainable capital on attractive investment opportunities. structures was an appropriate approach to the environment. In 2014, the secondary market experienced record deal volume. In particular, we believed investments in companies with The primary drivers of growth, namely the expansion of the identified and achievable value creation plans, often with universe of sellers, changing regulation at financial institutions, tangible opportunities for near-term exits, represented the most more active portfolio management and the general growth of attractive opportunities. the private equity asset class are, in our opinion, sustainable, long-term trends that will continue to drive supply. With an eye towards valuation sensitivity, we believe "midlife" investments (opportunities where investments are made in We believe the secondary market will continue to offer existing portfolio companies of private equity firms after the compelling buying opportunities in 2015, with the potential date of their initial investment) offer greater potential for muted to generate attractive returns with low correlation to other valuation levels and greater upside. investments.
from left: from left: Tristram C. Perkins, Brian G. Talbot, David H. Morse, Joana Rocha Scaff, Ethan A. Falkove and Benjamin Perl David S. Stonberg and Michael S. Kramer
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PRIVATE INVESTMENT HEDGE FUNDS DYAL CAPITAL PORTFOLIOS PRIVATE DEBT SOLUTIONS GROUP
Our business at Dyal Capital In 2015, continued emphasis Credit market volatility set an is to build diverse portfolios is on discipline and unexpected opportunity...
of stakes in strong alternative operational value creation. ...to purchase private debt securities asset management businesses. Over the past year, private equity on the secondary market in late 2014. transaction volume, liquidity and Although private debt is an illiquid This diversification served us and our performance were strong, and the asset class, it has attracted “crossover” investors well in 2014. Although we Private Investment Portfolios team saw investment from high yield and loan invest in firms, not their underlying attractive developments across private investors looking for yield. funds, we are often asked if we select equity portfolios. partners based on what strategy or Faced with more volatility, many of asset class we think will outperform in Going into 2015, we remain optimistic these investors sought to sell their non- the coming year. We do not; we look across small- and mid-cap buyout, core, illiquid assets in the secondary for firms with long track records of large-cap buyout, special situations, market. This gave private debt investors focusing on their clients and delivering growth equity and venture capital. an opportunity to invest in high-quality returns across market cycles. companies at attractive yields. However, valuations continue to rise We expect a positive economic As true long-term investors, we intend and global GDP growth is uneven. As backdrop in 2015 with ongoing volatility not to get caught up in whatever such, we believe the most attractive in liquid credit markets. Private debt segment of the market is currently opportunity set is with investment may benefit in three ways: (i) higher outperforming, and we believe that this managers who are disciplined on priced new issuances in response to mentality can serve our investors well in price and who are able to generate volatility in high yield; (ii) new secondary 2015 and beyond. strong returns through well-defined value creation strategies within their buying opportunities should crossover underlying companies. investors exit private debt; and (iii) increased appeal of private debt to issuers seeking certainty of close.
from left: from left: from left: from left: Michael D. Rees and Sean Ward John P. Buser, Jonathan Shofet, Susan B. Kasser, CFA and Elizabeth Traxler David G. Kupperman, PhD and Jeff A. Majit, CFA Peter J. von Lehe and Brien P. Smith
NEUBERGER BERMAN ANNUAL REPORT 2014
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HEDGE FUNDS SOLUTIONS GROUP THE KANTOR GROUP
Credit market volatility set an Broadly speaking, 2014 was a difficult year Entering the sixth year of economic recovery, unexpected opportunity... for hedge funds, particularly in event-driven we still anticipate modest expansion.
...to purchase private debt securities strategies. We started 2014 with a constructive view of equities and high on the secondary market in late 2014. yield. Equities did well but high yield volatility gave us pause. Though the volume of corporate activity was robust, a few Although private debt is an illiquid 2014 was one of the weakest periods for U.S. corporate credit, trades involving tax inversion mergers and the litigation of Fannie asset class, it has attracted “crossover” especially high yield, in the absence of recession. and Freddie moved against event-driven managers, forcing some investment from high yield and loan to deleverage their portfolios and adding to their losses. To us, Still, we are mindful that a constructive view of risk assets is not investors looking for yield. this highlighted the value of investing with those who use limited without risks. For 2015, a rise in the Fed Funds rate may occur if Faced with more volatility, many of leverage and have differentiated positions. the United States continues on its current path. While the Federal these investors sought to sell their non- Reserve will likely take a gradual approach, a change from Another key theme was monetary policy. After several years of core, illiquid assets in the secondary current robust liquidity may have unintended consequences. We coordinated easing and related low market volatility, we finally market. This gave private debt investors think a mix of higher-risk assets such as U.S. equities and high began to see some dispersion among central banks late in an opportunity to invest in high-quality yield bonds can provide attractive risk-adjusted returns over the 2014. The Federal Reserve ended its quantitative easing program companies at attractive yields. long term. We believe the U.S. economy will continue to grow in the United States. and began taking steps toward a period of steadily and that the Fed may create a longer-than-expected We expect a positive economic rising interest rates, while easing continued in Japan and was set upswing in the business cycle. backdrop in 2015 with ongoing volatility to begin in Europe. in liquid credit markets. Private debt As investors with a relatively longer-term view, we are unwilling These dynamics have led to higher currency and interest rate may benefit in three ways: (i) higher to bet against the ingenuity of the corporate managers who lead volatility across regions, creating what we think is a more priced new issuances in response to our businesses. However, we are very mindful of the world's attractive opportunity set for most hedge funds moving forward, volatility in high yield; (ii) new secondary complexities. The long-term inflationary risk of continued in particular, global macro and managed futures strategies. buying opportunities should crossover government intervention remains top-of-mind as do ongoing investors exit private debt; and (iii) geopolitical issues. Given the uncertainties of the global increased appeal of private debt to economy, we will remain flexible in our decisions and open to issuers seeking certainty of close. new ideas across asset classes and geographies as we strive to deliver attractive risk-adjusted returns. from left: from left: Charles C. Kantor Susan B. Kasser, CFA and Elizabeth Traxler David G. Kupperman, PhD and Jeff A. Majit, CFA
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Charles C. Kantor David G. Kupperman, PhD
Explains Jason Ainsworth, Head NEW TIMES of the Advisor Solutions Group, “Our partners are increasingly DEMAND NEW TOOLS goals-based and that aligns with our historical focus on outcomes. In recent years, advisors and retail investors have begun Managing risk is a central focus for most advisors today. It’s important embracing nontraditional hedge fund strategies to address that we have a wide offering of income, growth and portfolio volatility. single-manager, multimanager, U.S. and global portfolios across asset classes.” As traditional stock and bond It was Benjamin Graham, the strategies have faced a range of patriarch of value investing who Adds Kantor, “Our investing headwinds, low volatility hedge explained, “The essence of investing philosophy has always been about funds with a bias toward managing is the management of risks, not the utilizing deep fundamental research exposure to the full risks of the management of returns.” on the individual security level market have garnered attention. in search of strong risk-adjusted “We’ve been managing a long-short returns.” We have high conviction New structures, particularly “liquid strategy since 2008,” comments in our strategy—on both sides of alternative” ’40 Act and UCITS Charles Kantor, long-short portfolio the trade. funds, have opened the doors of manager. “At a certain point, it hedge fund strategies to retail made sense to offer our style of Complementing Kantor’s strategy is investors. investing and risk management, the firm’s multimanager platform, seeking a ‘smoother ride,’ if you will, co-managed by David Kupperman, to a broader client base.”
NEUBERGER BERMAN ANNUAL REPORT 2014
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Jason Ainsworth Daniel Geber Norman Milner
PhD, and Jeffrey Majit. “When you their strategies in structures that technological and healthcare consider the dispersion among are more reasonably priced than themes, we’re uncovering investable hedge fund managers, you realize traditional hedge funds.” ideas through our global research the importance of manager capabilities.” Adds Ainsworth, “There is also selection. For decades, we’ve been a clearer sense of the untapped The opportunity set is similarly analyzing mid- and small-sized hedge demand for multimanager liquid wide open for the firm’s Global managers to identify managers alternatives, not only from Long-Short Credit strategy, explains that have demonstrated the ability individuals who previously couldn’t Norman Milner, Global Long- to outperform in specific market access hedge fund strategies, but Short Credit co-manager with Rick environments. Managers with also from defined contribution plans Dowdle, “We are nearing the end insight, replicable processes and that recognize the complementary of a 30-year bull market for fixed effective results that pass our review nature of these types of products.” income and have entered a time may be selected to participate in of unprecedented, differentiated our multimanager program.” The In the last year, the firm has central bank policy on a global team currently manages two multi- expanded its long-short range basis. This has already led to a manager strategies: long-short and with two global strategies. “Our pickup in volatility and, in our view, absolute return. ability to execute our investment a fantastic global opportunity set for themes across borders allows Fees, too, have been shown the ‘credit pickers’ like us.” clients to participate in a range light of a new day. “Hedge fund of new opportunities,” explains managers are recognizing the value Daniel Geber, Global Long-Short of distribution, the importance of Equity portfolio manager. “From being vetted and validated,” adds demographic to economic to Kupperman. “Hedge managers are evolving along with us, offering
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Nick Hoar Samuel N. Porat
DELIVERING NONTRADITIONAL SOLUTIONS ACROSS THE GLOBE Nick Hoar, managing director and head of the firm’s Asia-Pacific business, well understands that there is room for nontraditional strategies alongside traditional investment mandates.
From his experience in the UK and Neuberger Berman has been series of contractual payments made EMEA, he has traversed the globe increasingly seeing demand from its by one party to another for the with a bias toward finding bespoke clients for investments structured ongoing right to the use an asset, solutions that resonate with around or derived from royalties. often intellectual property such as institutions and advisors. Explains Sam Porat, managing patents, trademarks or copyrights. director in the Private Equity “We are finding that organizations business, “As investments, royalties Hoar adds, “We have been able to challenged by income requirements are a relatively niche asset class, engage with a range of institutions are keen to engage with us to and intermediary distributors in but royalty cash flow streams can explore newer, less conventional Asia who find the royalty stream represent an attractive source of ideas. Royalty stream income is strategy attractive. Whether it’s yield to investors who are seeking a compelling alignment of an pharmaceuticals or now, brand alternative sources of income given royalties, this is a concept that investment solution—current income the challenges presented by the allows our clients to participate in —with a modern business model, low-rate environment.” the delivery of royalties as a tangible new solutions. Simply put, these are cash flow.” Porat notes, “A royalty is a right very real asset strategies that have to a payment stream derived the potential to deliver meaningful from an underlying asset.” They income, noncorrelated to traditional exist in industries as diverse as fixed income benchmarks.” oil & gas exploration, music and pharmaceuticals. Royalties are a
NEUBERGER BERMAN ANNUAL REPORT 2014
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MARQUEE BRANDS GLOBAL LONG-SHORT GLOBAL LONG-SHORT CREDIT
Marquee Brands LLC is an As investors, we apply an High yield credit spreads, operating company created exacting framework in particularly where linked to in 2014... deciding... raw materials and energy...
...to acquire and grow a diversified ...where and how much capital to ...widened in late 2014. We believe portfolio of intellectual property assets allocate across the globe. We assess opportunity exists in identifying unloved across consumer sectors. macroeconomics, policy, and bottom- quality companies and securities within up business prospects across industry these sectors. Quantitative easing in As a brand owner, Marquee can benefit sectors while factoring in investor parts of the globe may cause investors from global demand from licensees positioning and sentiment. to divert yield-seeking capital away seeking product differentiation through from sovereign bonds and towards our trademarks and brand aesthetic. After U.S. market strength in 2014 and credits with greater return potential— High-quality brands have seen increased Japan's gains in 2013, we are intrigued and corporate credit stands to benefit. demand worldwide from potential with the prospects for Europe in 2015, licensees with an interest in geographic given accommodative policies and a Fixed income investors are balancing brand expansion and retailers who want possible bottoming of fundamentals. the need for yield, interest rate risk to form exclusive relationships with With our perspective from last year's and shifting capital to more volatile brands to elevate their product offerings. market action and our investment or less liquid risk assets. We seek to experience (including the 1990s invest fundamentally in credit securities In creating diversified portfolios, pure- emerging markets crisis, the bursting and mitigate the increasing variety of play brand licensing companies have of the Internet bubble, and the most investment risks. often received attractive valuations recent global financial crisis) we in public markets and in trade sales. anticipate further volatility this year. In our view, industry concentration, Despite favorable industry dynamics, credit selection and position sizing will, there are few institutional class licensing We believe 2015 could provide an more than in recent years, be key drivers companies, and we believe Marquee is attractive environment for investment of alpha in 2015. well positioned for 2015 and beyond. strategies like ours that emphasize risk management and hedging.
from left: from left: from left: Cory M. Baker, Michael DeVirgilio, Alan Freeman, CFA, Daniel Geber and Thuy Tran Itai Baron, Rick Dowdle, Norman Milner Zachary Sigel and Samuel N. Porat and Darren L. Carter
NEEDS TO BE COMPOSED
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THE ESSENCE OF OUR MISSION IS TO PROTECT AND GROW ASSETS.
In 2014, we served more private clients and their families than ever before. For many, their relationship with Neuberger Berman reaches back years, decades and even generations, while others are now discovering the firm, choosing to bring their assets to an independent, employee-owned and singularly focused investment manager.
While our private client business reflects our heritage, it also affirms our commitment to serving this market into the future as we continue to expand our platform, our services and the ways in which we engage with our clients.
Every day, our investors and client management professionals engage with families across generations to help them realize their goals for income, growth and preservation.
NEUBERGER BERMAN ANNUAL REPORT 2014
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clockwise from top left:
Daniel P. Paduano Michael W. Kamen, CFA Marvin C. Schwartz Nikki Marshall David R. Pedowitz
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Joseph V. Amato Kenneth G. Rende
Teaming with the Neuberger EVERY RELATIONSHIP IS Berman Trust Company, we are able to provide meaningful direction for UNIQUE; EVERY SOLUTION our clients in the trust and estate planning process, often serving as IS TAILORED. fiduciary. Experienced, thoughtful, patient and deeply versed in asset We collaborate with every client directly, focusing on their specific management and wealth solutions, our advisors are able to bring investment objectives and needs, as we balance their preservation solutions from every part of the firm and growth objectives, income needs and risk tolerances within a to their client relationships. customized tax-efficient investment framework. A varied program of investment forums, research papers and market insights, including our Age of Ideas We have a full range of traditional to look beyond stocks and bonds events bringing wide-ranging voices and nontraditional investment to nontraditional investments, such from education to journalism to strategies at our disposal, as well as as low-correlated, low-volatility technology, serve to strengthen our access to the investment advisory, hedge funds and less liquid private holistic relationships with clients. Our wealth planning and personal and equity investments, to help mitigate commitment to each relationship institutional fiduciary services of portfolio risk. runs deep as we continue to engage Neuberger Berman Trust Company. We deliver this broad platform with families across a range of All these services are delivered to through our locally-based wealth planning and investment topics, our clients with a high-quality and advisors as well as through helping to inform and guide long- personalized level of service and individual portfolio teams, all of term investment strategies. communication. whom work closely with each client In 2014, we expanded our range to build and allocate customized of investment solutions, global portfolios in a tax-sensitive research and advice-driven framework designed to address capabilities as investors continued specific needs across generations.
NEUBERGER BERMAN ANNUAL REPORT 2014
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THE STRAUS GROUP
Last year was a humbling experience for our portfolios, heavily attributable to the unexpected decline in the world price of crude oil.
We didn’t foresee the sharp magnitude of this geo-politically dictated event nor was it supported by major worldwide supply/demand imbalances. Today, we are completely focused on the future and have a bullish outlook for the stock market in 2015. Our domestic unemployment rate is expected to further decline as GDP growth improves over year earlier levels. Automobile sales are strong. Residential housing trends are improving and inflation is under control. Declining gasoline prices are translating into a significant tax decrease for the average American consumer.
Corporate balance sheets are strong, corporate share repurchase authorizations are increasing and merger and acquisition activity are likely to remain at high levels. The European and Japanese economies are expected to improve over year earlier levels while the Chinese economy may experience a measured but not extreme weakening.
One important negative relates to the strong dollar and the relatively modest expected improvement that dollar strength will have upon reported corporate earnings. Most importantly, the economists who we respect and follow see no signs of a recession in the foreseeable future, and this should lend support to stock prices.
from left: Stephanie J. Stiefel, David I. Weiner, Jeremy R. Kramer, Marvin C. Schwartz, Henry Ramallo and Richard J. Glasebrook, CFA
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William J. Peterson Michael J. Kaminsky
INVESTING FOR GENERATIONS— FOR GENERATIONS OF INVESTORS. Seven decades after opening our doors, we have significantly expanded our capabilities and presence globally, but our focus on private clients and their families hasn’t wavered.
“We’ve grown alongside our clients family counselors. We build earliest days and continue to work and their families, deepening these relationships because we with the same clients today. relationships and developing new understand that managing money solutions to meet their evolving is more than building toward Explains Kaminsky, “Understanding needs,” explains Bobby Conti, retirement goals; it’s establishing— the importance of succession managing director and President of and carrying on—a family’s legacy,” planning is an essential business the firm’s fund company. expresses Michael Kaminsky, practice. We have added team portfolio manager, Team Kaminsky. members who help us to provide “We don’t view ourselves as seamless service to current clients investment advisors only. We Adds Conti, “Our firm fosters a and the next generations of their become our clients’ confidants, unique environment where multiple families. This is basic business their sounding boards, their generations of professionals work management: to know our alongside each other. Several of our clients at every stage and to be advisors and portfolio managers able to relate to them, thereby have been here since the firm’s
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Robert Conti Diane E. Lederman
offering solutions tailored for “Just as investment management primary client to meet their spouse them. Our clients can take should not follow a universal and children and bring them into the comfort in knowing that we have approach, neither should trust and wealth management conversation, a multigenerational team in place estate planning. Wealth transfer particularly when it begins to involve so that not only their assets, but plans should reflect every individual estate planning. Adds Peterson, also their values and legacy are or family situation—their goals and “Clients are often hesitant and understood and served for years specific needs and preferences. To unsure of how to discuss their to come.” do this well, which is our mission wealth with their families. They and calling at Neuberger Berman, value our experience and willingness “While many view successful wealth we are charged with providing to facilitate these conversations management as securing assets to thoughtful planning and execution,” and take comfort in knowing that maintain a desired lifestyle, we take explains Diane Lederman, President their trusted advisor will continue a longer-term view, a perspective and CEO, Neuberger Berman Trust to oversee their assets as they are consistent with our mission and Company N.A. “With a myriad of transferred and help ensure their our heritage.” Comments veteran tax-efficient trust vehicles available financial goals remain intact.” wealth advisor, Bill Peterson, “It’s to assist in the transfer of assets not just planning for our clients’ to individuals and charities, we daily needs, it’s also about their work with each family to customize legacy to future generations and a comprehensive estate plan any philanthropic interests.” In the designed to achieve their unique Phelan/Peterson Team, we have requirements.” multiple generations of families with unique and personal requirements It’s difficult, if not impossible, to fully and preferences. We know them grasp our clients’ financial needs well and they know our ability to without understanding all facets meet their needs well, too.” of their lives—most importantly, their families. We reach beyond the
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TEAM KAMINSKY THE PADUANO GROUP
A number of factors stand out as we In spite of profoundly disturbing and distracting reflect on 2014. geopolitical events—the takeover of Crimea, the
The fall in interest rates—although we had believed that as the seemingly sudden rise of ISIS, eruptions of terror U.S. economy continued to improve and quantitative easing and pestilence in Africa among others—focus came to an end, rates would rise, not fall. Secondly, the velocity and patience proved to be the winning takeaways of the precipitous drop in the price of oil and the ramifications to our Select Equities and All-Cap Opportunistic Growth and of 2014. Income strategies, given our exposure to “equity income” type securities. The focus was on our principal themes; the patience was to allow the companies we identified as potential beneficiaries to show Finally, the divergence of different stock indices, with the S&P their worth with price appreciation. turning in strong performance yet small cap indices just slightly positive, all certainly were unexpected. While there are a number Throughout the year, markets increasingly distinguished of fundamental issues and crosscurrents facing investors today, between the better companies and the also-rans, a movement we believe it is important that we understand the potential for contrary to the previous four years and one that we believe a “Black Swan,” especially given the proliferation of ETFs and plays to our strengths. 2015 will likely bring a continuation of high-frequency trading, which has the potential to significantly geopolitical distractions, but we will continue our course of increase volatility as we move forward. 2014 reminded us of the diligence and seek to take advantage of the improving business importance of risk management and the need to continue to outlooks for our portfolio firms and the economies of the hone and enhance techniques to deal with it. developed world.
We believe our portfolios are well-positioned for 2015 and are optimistic that we can deliver for our investors in 2015.
from left: from left: Richard M. Werman, Mindy Schwartzapfel, Michael J. Kaminsky, David A. Wilson, Jr., CFA, Daniel P. Paduano, CFA, Gerald P. Kaminsky, David G. Mizrachi and James J. Gartland Sherrell J. Aston, Jr. and Jason H. Vintiadis
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THE BOLTON GROUP THE KSE VALUE GROUP
Stock markets and global economies in 2014 As long-time, experienced investors, we produced some major surprises, and several of continue to manage accounts the old fashioned them continue to defy complete explanation. way: seeking long-term performance over market
The dollar soared against the Euro after the middle of the year, cycles. and was up broadly more than 10% according to the Fed’s Trade We build portfolios “one stock at a time” based on intensive Weighted U.S. Dollar Index. Economic growth came in well short fundamental analysis, evaluation of potential catalysts and stress of expectations in Europe, China, Japan and most emerging testing against multiple economic scenarios. We look for superior economies. By midyear, early optimism anticipating synchronized managements that can navigate rough waters but also maximize economic growth was replaced by recession concerns. Interest opportunities during periods of smoother sailing. Each year rates declined sharply in the U.S. despite solid domestic growth brings new challenges and new opportunities. in the last three quarters of the year. We expect 2015 to be no different. It is important to stay The 10-year Treasury yield dropped from 3.04% to 2.17% focused but flexible. Roy Neuberger, our mentor, said many during 2014, and down to 1.82% in mid-January 2015. Saudi times, “People should fall in love with ideas, with people, Arabia abandoned its historic role as OPEC’s oil price stabilizer, or with idealism based on the possibilities that exist in this contributing to a decline in oil prices of more than 50% in the adventuresome world. The last thing to fall in love with is a second half of the year. Brent crude peaked over $111/bbl in June particular security.” 2014 and fell below $50/bbl in January 2015. So as we embark on 2015, we take with us all our decades of It is particularly notable that each of these surprises, among experience and apply it once more to the future. others, arose almost “in the blink of an eye.” They serve as reminders to investors that the foundation upon which investment cases are built can shift very quickly. More than ever, investing seems to require 24/7 awareness and analysis.
from left: not pictured: from left: John D. DeStefano, Christian F. Reynolds, Leo D. Bretter, Mark D. Sullivan, Michael N. Emmerman, CFA, Brooke Johnson, Michelle B. Stein, Darren M. Fogel, David R. Pedowitz, Brian M. Case, CFA, Miles Price, Richard Wesolowski, CFA, and Kenneth M. Kahn, CFA James C. Baker, Maria Pappas John A. Kauffmann and Linda J. Ludwig
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THE FRAENKEL GROUP THE KAMEN GROUP
As we exited 2014, we noted that the Our takeaways from 2014 reinforced our view that S&P 500 has experienced double-digit returns going forward, stock prices would likely be primarily in five of the last six years. driven by corporate earnings progress, and that
Such a period of above-average returns gives us pause as the significant valuation (P/E) increases for the stock markets may experience some profit-taking. This downward market as a whole were likely behind us. volatility may be initiated by the uncertainty of dramatically lower oil prices, the continuation of recent terrorism or myriad Given our modest overall equity return outlook heading into exogenous factors. 2014, we sought to capitalize on our recognition of several market developments. Industry consolidation, such as in specialty However, the U.S. economy remains solid, as lower gasoline pharmaceuticals, made the remaining high quality merger and prices stimulate consumer spending, employment continues to acquisition targets even more attractive. Shareholder activism, strengthen and housing maintains its recovery. an increasingly important trend, played a significant role in our As earnings growth for most U.S. companies are highly portfolios. Lastly, a weakened commodity price environment dependent on the performance of the domestic economy, we caused us to recalibrate our exposure in the energy sector. are confident that any near-term volatility could present long- For 2015, our basic investment tenets remain—stick with term investment opportunities. high quality businesses and managements, effect portfolio changes when macroeconomic shifts become evident, and be opportunistic when short term stock-specific dislocations provide attractive entry points.
FROM LEFT: from left: Robert H. Pearlman, Francis L. Fraenkel, Kenneth Y. Amano, CFA, Michael W. Kamen, CFA, and Lee J. Tawil, CFA Ann Marie Foss, CFA, and David M. Ross
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BROAD RESOURCES GENERATE BESPOKE SOLUTIONS
Our private client investment managers deliver unique, tailored solutions to individuals, families and their organizations. Customization and a deeply ingrained service culture help explain the longevity and depth of our relationships.
Our commitment to the full range of relationships—over generations, for charities and organizations, through trusts and estates—was further strengthened this year by our return to full independence. The very qualities that had defined the firm for years—customized solutions, personalized service, and a passion for investing—are fully resonant today with our clients and their children and grandchildren.
Advice is active. Hands-on portfolio management is, by definition, an active demonstration of personalized solutions, careful portfolio management and monitoring, and long-term focus on goals, estate issues and tax planning.
“We have a truly diversified client base—each portfolio we manage speaks to a different, unique relationship,” says Yolanda Turocy. “The platform at Neuberger Berman is more akin to a think tank or centralized generator. We are able to plug into the energy—research, trust, fiduciary, custody— but are able to make independent decisions.”
“Among the most significant investments we can make is the investment in truly knowing our clients,” explains Axel Schupf, “and that translates into deep relationships, thoughtful solutions and planning.”
THE THE THE THE THE THE KOPLIN LLOYD ANDERSON SLOATE SCHUPF CAPITAL EISMAN GROUP GROUP GROUP GROUP GROUP GROUP
from left: FROM LEFT: FROM LEFT: Laura J. Sloate, CFA H. Axel Schupf Yolanda R. Turocy FROM LEFT: Michael W. Kamen, CFA, and Lee J. Tawil, CFA Cary A. Koplin Bradley M. Anderson & “Gizmo” Steven Eisman, Dana E. Cohen and Melinda L. Lloyd and John E. Terzis, CFA and Michael E. Cohen
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INVESTING FOR THE LONG TERM IN OUR FIRM, OUR PEOPLE.
Throughout the past six years, we have been strategically building the organization. While our investment capabilities are central to our mission, so too is our commitment to risk management, technology, client service and employee engagement.
Investing is a verb—and so too is the business of serving clients beyond the portfolio. We continue to invest in risk management and the systems and technology that enable our investors to deliver portfolio solutions tempered to each client's requirements. This investment focus is complemented by our commitment to building out enterprise-wide solutions in technology, operations, legal and compliance, finance and of course—client service.
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INVESTING FOR THE LONG TERM IN OUR FIRM, OUR PEOPLE.
clockwise from top left:
William A. Braverman David J. Eckert Alan H. Dorsey, CFA William A. Arnold Heather P. Zuckerman
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Andrew S. Komaroff chief operating officer
For institutions, private clients and AT NEUBERGER BERMAN, advisors across geographies, in 2014 we added 20 new investment WE DEFINE THE VALUE OF... vehicles, including separate accounts, U.S. mutual funds, UCITS funds, ...global client coverage as something to be experienced as Collective Investment Trusts, local, relevant and engaged. With our client coverage team registered listed funds and private partnerships, to the tool kit our team based in 16 countries covering a diverse mix of client segments, brings to clients. This innovation of the nature of our relationships is increasingly tailored. course ultimately drives growth of our client franchise—as a tangible example, 72% of 5-year net flows In 2014, we continued to develop Our team could not remain into our core long-only U.S. mutual our client organization in this relevant to clients if it were not for fund business came from funds 1 spirit, focused on our mission of our commitment to continuous launched over the past five years. a) staying close to clients, b) tailoring innovation of our investment We followed up our 2013 office customized solutions for them based platform. In 2014, we continued additions in Taipei and The Hague, on their unique objectives, and our disciplined approach of adding and our significant expansions c) delivering research, insights investment capabilities with the in London and Singapore to and new ideas that can make a addition of Daniel Geber’s global accommodate our growth, with difference in their longer-term long-short equity team, the new offices in Paris and Bogota investing. We continued to attract expansion of our royalty stream in 2014. In total, across Europe, great talent to the firm, hiring 63 solutions set with Marquee Brands, the Middle East, Africa and Asia, client coverage professionals in 2014 and additional emerging market we added 15 people to the client that brought perspectives from debt strategies managed by the coverage team. As highlighted on nearly 40 different firms. team we recruited in 2013. Further, the accompanying pages, our client we welcomed the global long-short coverage commitment is universal, credit team from Orchard Square regardless of the language in which Partners at the end of the year. it is expressed.
1Neuberger Berman-managed, long-only, open-end, U.S. mutual funds in operation as of 12/31/2014.
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EAST ASIA CLIENT ORGANIZATION
SEOUL In the region, our investment strategies and client coverage Takashi Ikushima model have continued to help deepen our engagements and HEAD OF PRODUCT MANAGEMENT (TOKYO) provide tailored solutions.
In Japan, there has been a decline in interest rates, especially as a result of bold monetary easing policies by the central bank, in response to one of the Abenomics arrows. Komei Asaba
Further, due to concern about future inflation, the demand of institutional investors HEAD OF INSTITUTIONAL SALES (especially financial institutions) for foreign equities and foreign bonds has risen. As a (TOKYO) result, we have been able to provide various strategies to a wider range of institutional investors.
In the retail business area, we continue to focus on supporting our current strategies as well as introducing new portfolio solutions. In many instances, this calls for partnering Takashi Maki strategically with our clients to develop customized solutions – including many domestic EQUITY PRODUCT SPECIALIST (TOKYO) asset management companies who are responding to the current trend of “From Deposit to Investments” (including NISA—Japanese ISA). As a result, the size of the business and the distribution channels are expanding and this translates into a number of new mandates, including a Japanese mutual fund mandate. Across many relationships, liquid alternatives strategies were of particular focus. Takashi Ueda HEAD OF INTERMEDIARY SALES In the Republic of Korea, DaeYeon Kim was appointed as country head, following the (TOKYO) growth of the business and the team. Marking the kick-off of retail market penetrations, a strategic partnership was signed in October 2014 with one of the largest financial groups in Korea. We also further reinforced our solid business base in Korea, including the expansion of the team and product offerings. DaeYeon Kim
HEAD OF KOREA BUSINESS (SEOUL)
Ryo Ohira
Youngsun Na SEOUL INTERMEDIARY SALES (SEOUL)
TOKYO
Jungwoo Ahn
INSTITUTIONAL SALES (SEOUL)
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ASIA-PACIFIC CLIENT ORGANIZATION
2014 was another year in which Neuberger Berman made Paul D. O’Halloran significant progress in Asia Pacific. CO-HEAD OF INSTITUTIONAL BUSINESS DEVELOPMENT, AUSTRALIA We continue to expand our client franchise and now serve over 150 investors including (MELBOURNE) sovereign wealth funds, pension funds, family offices, insurance companies and distributor banks. Among the key changes are customer diversification, providing a balance of institutional and intermediary clients. In 2014, we extended our UCITS offering Lucas J. Rooney
to retail investors in Hong Kong and Singapore, and we now partner with all the major CO-HEAD OF INSTITUTIONAL consumer banks and some of the largest IFAs in both locations, as well as key financial BUSINESS DEVELOPMENT, AUSTRALIA institutions in Taiwan and China. (MELBOURNE) In Australia, we expanded our pooled vehicle offerings, and retail investors can now access our liquid alternative strategy. These are important milestones as we continued to expand in the Asian market. Vincent Lim HEAD OF BUSINESS To support this growth, we continued to invest in our people and infrastructure. Our DEVELOPMENT, FINANCIAL INSTITUTIONS, headcount has increased in Client Coverage, Product and Marketing/Client Service SOUTH EAST ASIA from five professionals three years ago to around 40. To enhance our local investment (SINGAPORE) capabilities, we made key appointments in areas including Alternatives, REITs, China Equity and Equity Trading, all of whom are based in the region. Mark Serocold We continued to raise our brand awareness with our clients, and are pleased with the DIRECTOR, BUSINESS DEVELOPMENT, industry awards and recognition we have received. FINANCIAL INSTITUTIONS, ASIA (HONG KONG)
Thomas Holzherr
INSTITUTIONAL BUSINESS DEVELOPMENT, ASIA-PACIFIC (SINGAPORE) Nick Hoar
Junjie Watkins HONG KONG HEAD OF INVESTMENT SOLUTIONS, TAIPEI GREATER CHINA (HONG KONG)
Johnny HY Wong
CHAIRMAN & GENERAL MANAGER, TAIWAN (TAIPEI)
Marco Tang
HEAD OF RETAIL BUSINESS, CHINA & HONG KONG (HONG KONG)
SINGAPORE
MELBOURNE
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EMEA CLIENT ORGANIZATION
Paul D. O’Halloran In 2014, we continued to invest in our client organization, Fabio Castrovillari CO-HEAD OF INSTITUTIONAL deepening relationships through strategic hires and the expansion head of switzerland BUSINESS DEVELOPMENT, (zurich) AUSTRALIA of our local presence (MELBOURNE) Throughout the year we also broadened our portfolio platform, providing clients with a wider more diversified selection of outcome-oriented solutions. Lucas J. Rooney Cas Peters
CO-HEAD OF INSTITUTIONAL Amidst market gyrations, we ended the year with positive net client flows reflecting the HEAD OF BENELUX BUSINESS DEVELOPMENT, increased diversity of our business. The response to our Emerging Market Debt team hire (THE HAGUE) AUSTRALIA (MELBOURNE) in 2013 remains very favorable with the team building $4bn in AUM. Consistent with our strategy to grow our non-U.S. investment capabilities, we hired Andrew Wilmont to lead our Euro High Yield strategy, Gillian Tiltman as part of our Vincent Lim Global REITS team, and Ajay Jain to strengthen our Global Tactical Asset Allocation and Tom Douie HEAD OF BUSINESS Multi Asset Class initiative. HEAD OF INTERMEDIARY EMEA FPO DEVELOPMENT, (LONDON) FINANCIAL INSTITUTIONS, SOUTH EAST ASIA Our client footprint continues to expand with new offices in France and Colombia – both (SINGAPORE) areas where we have significant client traction. In 2015 we continue our recruitment adding to the team with Jahangir Aka joining as Head of MENA and Mauricio Barreto heading up our Colombian efforts in our newly opened Bogota office. Edward Jones Unsurprisingly, after a period of strong market performance and a moderating return outlook HEAD OF INSTITUTIONAL UK (LONDON) we see growing client demand for unconstrained strategies, particularly in transparent, fund formats. We are meeting this demand with our growing range of liquid alternatives.
To support the ongoing growth of the business we have added significant staff in client service, marketing and support and control including a dedicated COO, Drake Dubin, for Robert Ryan
the EMEA LatAm region. HEAD OF OFFICIAL INSTITUTIONS (LONDON)
Dik van Lomwel, CFA
Jahangir Aka LONDON SCANDINAVIA HEAD OF MIDDLE EAST AND NORTH AFRICA ZURICH BUENOS AIRES (DUBAI) FRANKFURT
Bruce Crystal
MIDDLE EAST AND NORTH AFRICA (BOSTON)
Marco Tang
HEAD OF RETAIL BUSINESS, CHINA & HONG KONG (HONG KONG) MIDDLE EAST
MILAN THE HAGUE
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INFRASTRUCTURE AND TECHNOLOGY LEGAL AND COMPLIANCE FINANCIAL RISK MANAGEMENT
This year saw the culmination Our long-term success is Our culture supports effective of a best-of-breed infra- due not just to investment financial risk management.
structure investment... acumen but to our core value We have invested prudently in our platform to support clients globally, ...in our fixed income portfolio of putting clients first. which has improved product and management systems as we rolled out That central imperative—acting as platform diversification and increased Blackrock’s Aladdin technology platform. their fiduciary—is at the center of stability. The introduction of this tool set was everything we do. Employee ownership Our long-term capital structure a game-changing investment for our helps to ensure that our more than 80 and liquid balance sheet reflect our portfolio management teams, offering Legal and Compliance professionals, dedication to stewardship. Employee enhanced data quality, broader located globally, are able to focus ownership provides stability and instrument coverage and optimized, on the alignment of our policies and alignment; since 2012, more than 60% real-time views into accounts, positions procedures with regulatory standards, of its growth has come from voluntary and risk. The platform also lends and that our innovations in investing are purchases. Having seasoned portfolio itself to cross-product portfolios, properly structured and overseen. managers as partners is invaluable as an enormous benefit for our many As new rules emerge and our business we seek to fine-tune decision making. teams that manage accounts across evolves, our team must adapt. Whether instruments and currency types. ensuring that derivative trades are Aladdin enables us to onboard new documented and reported, bringing portfolio management teams with far global anti-corruption policies to new less one-time cost than in the past. standards, applying for trading licenses, Perhaps most important, by streamlining or facilitating new alternative funds, the data management and oversight we partner with other departments process for our investment teams, they to ensure that our firm's growth and can spend more time on investing. development go smoothly.
David J. Eckert William A. Braverman William A. Arnold
head of infrastructure general counsel chief financial officer
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Alan H. Dorsey, CFA chief risk officer
The endeavor also is fully staffed RISK MANAGEMENT IS and overseen by the Operational A CORNERSTONE IN... Risk Committee. During 2014, two highlighted areas ...serving our clients and protecting the Neuberger Berman of risk focus by the organization were investment liquidity risk franchise. The focus of this endeavor includes enterprise, and cyber security. The firm’s investment and operating risk identification, mitigation investment strategies are monitored relative to the liquidity provided to and monitoring. investors and the liquidity inherent in various asset classes. As well, our cybersecurity process focuses Enterprise risk management focuses Investment risk management on bolstering our fortress through on the five pillars of the company: evaluates the risks and exposures the identification, mitigation and Strategic (organization, products, of our strategies across our global monitoring of potential threats. clients), financial (liquidity and asset classes. It is supported by capital), investment (beta and alpha various risk tools and a robust, risk in the equity, fixed income and credentialed staff. Guidelines are alternatives asset classes), operations set relative to agreed-upon risk (infrastructure, information tolerances, and both ex-post and technology, business continuity ex-ante risk statistics are monitored. planning, and cybersecurity) and The process is reviewed by the compliance (legal and regulatory). Investment Risk Committee.
Operational risk management focuses on enterprise-wide risks, as well as counterparty risk, model risk, and valuation oversight.
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Enablement We’re a meritocracy. Employees have a voice and the platform to explore new ideas, improve existing practices and get involved. Sharing feedback is engrained in our culture, reflected in both our firm-wide employee survey— conducted every 18 months—and our more frequent Pulse Surveys (focusing on the effectiveness of Heather P. Zuckerman various functions). chief administrative officer Enablement demands professional development. Over the last five years, we have dramatically grown A CULTURE BUILT ON our learning and development efforts to provide a wide array of ENGAGEMENT, ENABLEMENT learning opportunities. & ALIGNMENT Alignment Our portfolio management Throughout our 75-year evolution—especially during our teams and senior leaders are invested alongside our clients, re-emergence as an independent, employee-owned firm— including through our Contingent nurturing our core culture has been a top priority. Compensation Program. And, our Employee Investment Solutions program offers employees more Our commitment to clients is Engagement opportunities to invest in Neuberger fundamental and is grounded in Berman strategies. Our 401(k) To us, engagement is about building reciprocal commitment between contributions enable them to invest in and growing relationships, which we our firm and our employees to their future consistent with the firm’s believe furthers our ability to partner ensure we provide meaningful focus on helping policemen, firemen, and collaborate for clients. opportunities and resources—both teachers and others build theirs. professional and personal—thereby It’s our running group enjoying When combined, these programs enabling us to attract and retain Central Park. It’s our employees plus the personal accounts of our talent at every level. celebrating the Lunar New Year employees and their families have and the Year of the Goat. It’s over $3.3 billion invested in NB our Women’s Forum fostering strategies/accounts. discussions of workplace challenges. And it’s annual Celebration with The message to clients and Service where we donate our time employees: we’re in this together. and talents to help our communities.
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NEUBERGER BERMAN OPERATING ENTITIES DEC 2014 DEC 2009 AUM By Asset Class ($ in billions) Equity $ 118 $ 81 Fixed Income $ 103 $ 78 Alternatives $ 29 $ 14 Total $ 250 $ 173
AUM By Client ($ in billions) High Net Worth $ 48 $ 32 Institutional $ 144 $ 112 Intermediary $ 58 $ 29 Total $ 250 $ 173
AUM By Client Domicile ($ in billions) U.S. $ 188 $ 142 International $ 62 $ 31 Total $ 250 $ 173
SUMMARY FINANCIAL INFORMATION ADJUSTED NET REVENUES ($ IN MILLIONS) ($ IN MILLIONS)
Cash and Cash Equivalents $ 473
Investments 412 $1,548 Receivables 223
Goodwill and Other Intangibles 595 $1,316 Other Assets 128 $1,105
Total Assets $ 1,831 $1,031
$916 Senior Notes Payable $ 800 Accrued Comp and Benefits 393 Payables and Other Liabilities $ 269 Total Liabilities $ 1,462
Common Equity $ 369
Total Liabilities and Equity $ 1,831 2014 2013 2012 2011 2010
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Joseph V. Amato Robert W. D’Alelio Richard B. Worley
PRESIDENT OF NEUBERGER BERMAN; PORTFOLIO MANAGER, FORMER CEO AND CIO OF CHIEF INVESTMENT OFFICER – SMALL CAP VALUE MORGAN STANLEY INVESTMENT EQUITIES MANAGEMENT; FORMER CHAIRMAN OF MILLER ANDERSON & SHERRERD
George H. Walker Larry Zicklin Steven A. Kandarian
CHAIRMAN AND CHIEF EXECUTIVE FORMER MANAGING PARTNER AND CHAIRMAN, PRESIDENT AND OFFICER OF NEUBERGER BERMAN CHAIRMAN OF NEUBERGER BERMAN; CEO OF METLIFE; FORMER CIO CLINICAL PROFESSOR AT THE STERN OF METLIFE; FORMER EXECUTIVE SCHOOL AT NEW YORK UNIVERSITY; DIRECTOR, PENSION BENEFIT SENIOR FELLOW AT THE WHARTON GUARANTY CORPORATION (PBGC) SCHOOL AT THE UNIVERSITY OF PENNSYLVANIA; CHAIRMAN OF THE RAND CENTER FOR CORPORATE ETHICS AND GOVERNANCE
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Tom D. Seip Robert J. Conti Joseph V. Amato Faith Colish Martha C. Goss
INDEPENDENT NON-EXECUTIVE PRESIDENT, CEO PRESIDENT AND CIO, SECURITIES REGULATORY FORMERLY, CORPORATE CHAIRMAN OF THE BOARD MUTUAL FUNDS NEUBERGER BERMAN ATTORNEY TREASURER AND ENTERPRISE RISK OFFICER, FORMERLY, SENIOR EXECUTIVE TRUSTEE OF THE YEAR THE PRUDENTIAL WITH THE CHARLES SCHWAB (2001, 2008) MUTUAL FUND INSURANCE COMPANY OF CORPORATION INDUSTRY AWARDS AMERICA
Michael M. Knetter Howard A. Mileaf George W. Morriss Candace L. Straight Peter P. Trapp
PRESIDENT AND CEO, FORMERLY, VICE PRESIDENT ADJUNCT PROFESSOR, DIRECTOR, MONTPELIER RE FORMERLY, FORD MOTOR UNIVERSITY OF WISCONSIN AND GENERAL COUNSEL, COLUMBIA UNIVERSITY COMPANY EXECUTIVE FORMERLY, PRINCIPAL, FOUNDATION WHX CORPORATION SCHOOL OF INTERNATIONAL HEAD AND PARTNERS FORMERLY, PRESIDENT, AND PUBLIC AFFAIRS FORMERLY, DEAN, SCHOOL SENTRY LIFE INSURANCE OF BUSINESS, UNIVERSITY FORMERLY, EXECUTIVE COMPANY OF WISCONSIN VICE PRESIDENT AND CFO, PEOPLE’S BANK, CT
The Mutual Fund Board, comprised of ten Board members, eight 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.
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Ann H. Benjamin Robert W. D’Alelio 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 Marvin C. Schwartz
Benjamin E. Segal Anthony D. Tutrone Judith M. Vale Dik van Lomwel
The Partnership Committee serves as an advisory board for senior management on material decisions and the strategic direction of the firm.
NEUBERGER BERMAN ANNUAL REPORT 2014
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Jason R. Ainsworth Joseph V. Amato Robert Arancio William A. Arnold William A. Braverman
Robert J. Conti Timothy F. Creedon Alison B. Delgado Alan H. Dorsey Céline Dufétel
Robert L. Eason David J. Eckert Margaret E. Gattuso Joseph K. Herlihy Nick J. Hoar
Scott E. Kilgallen Lawrence J. Kohn Andrew S. Komaroff Jacques G. Lilly Ryo Ohira
Michael D. Rees Kenneth G. Rende Neil S. Siegel Bradley C. Tank Anthony D. Tutrone
The Operating Committee is engaged in the day-to-day management of the firm.
Dik van Lomwel George H. Walker Heather P. Zuckerman
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Jason Ryan Ainsworth Alison B. Delgado Jennifer R. Gorgoll Jahangir Aka John D. DeStefano Alan I. Greene Joseph V. Amato Teresa M. Donahue Michael C. Greene Bradley M. Anderson Alan H. Dorsey Neill Groom Robert Arancio Thomas W. Douie Virginia M. Guy William A. Arnold David R. Dowdle Brian E. Hahn Komei Asaba Daniel J. Doyle Aisha S. Haque Sherrell J. Aston Rob Johan Drijkoningen Todd E. Heltman Amit Baid Drake Lowey Dubin Jason Henchman James C. Baker Céline Dufétel Joseph K. Herlihy Athanassios Bardas Ingrid S. Dyott Nick John Hoar John J. Barker Robert L. Eason Edward P. Hobbie Itai Baron David J. Eckert Lorraine L. Holland Gregory P. Barrett Elliott H. Eisman Michael J. Holmberg Ann H. Benjamin Lillian Eisman Takashi Ikushima Vivek Bommi Steven Eisman Frederick Roy Ingham Michael L. Bowyer E. Scott Elphingstone James L. Iselin Randal R. Boyts Michael N. Emmerman Marshall W. Jaffe Richard N. Bradt Ethan A. Falkove Ajay Singh Jain Mary M. Brady Seth J. Finkel Andrew A. Johnson William A. Braverman Stephen J. Flaherty Brian C. Jones Leo Bretter Daniel J. Fletcher Edward John Murray Jones David M. Brown Patrick H. Flynn Jon Birgir Jonsson Jeffry P. Brown Darren M. Fogel Kenneth M. Kahn Brian S. Bruman Ann Marie Foss Michael W. Kamen David H. Burshtan Drew D. Fox Gerald P. Kaminsky John P. Buser Kristina C. Fox Michael J. Kaminsky Vasantha Butchibabu Francis L. Fraenkel Charles C. Kantor Darren L. Carter Gregory P. Francfort Susan B. Kasser Brian M. Case Gordon K. Froeb John A. Kauffmann Stephen J. Casey Kenneth G. Fuller Judith Ann Kenney Fabio L. Castrovillari James J. Gartland Brian P. Kerrane Brad E. Cetron Dmitry Gasinsky Kashif R. Khan Dana Eisman Cohen Margaret E. Gattuso Scott E. Kilgallen Michael E. Cohen Daniel Geber Erik L. Knutzen Robert J. Conti Maxine L. Gerson Lawrence J. Kohn William Russ Covode Amy S. Gilfenbaum Andrew S. Komaroff Timothy F. Creedon Michelle A. Giordano-Valentine Cary A. Koplin Christopher Crevier Theodore P. Giuliano Jeremy R. Kramer Robert T. Croke Richard J. Glasebrook Michael S. Kramer Bruce A. Crystal Anthony M. Gleason David G. Kupperman Robert W. D’Alelio Terrence J. Glomski Anton Kwang Daniel R. Darst Carolyn S. Golub Sajjad S. Ladiwala
NEUBERGER BERMAN ANNUAL REPORT 2014
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Ugo Lancioni Samuel N. Porat Gregory G. Spiegel Andrew C. Laurino Michael S. Poremba Sara Jill Sprung Joseph W. Lawrence David S. Portny Dimitrios N. Stathopoulos Diane E. Lederman Brendan J. Potter Michelle B. Stein Wai Lee Joseph F. Quirk Stephanie J. Stiefel Richard S. Levine Douglas A. Rachlin David S. Stonberg Jacques G. Lilly Henry Ramallo Emma A. Sugarman Melinda L. Lloyd Michelle L. Rappa Raymond A. Sullivan Patrick C. Lomelo Elizabeth Reagan Richard J. Szelc Elisabeth S. Lonsdale Matthew Rees Brian G. Talbot Linda J. Ludwig Michael D. Rees Lihui Tang Raoul Christian Luttik Brett S. Reiner Bradley C. Tank James A. Lyman Kenneth G. Rende Anthony J. Taranto Joseph P. Lynch Carter P. Reynolds Lee J. Tawil David Lyon F. Christian Reynolds Howard T. Taylor Jeffrey A. Majit Joana Palhava Rocha Scaff Terri L. Towers Thomas Marthaler Lucas J. Rooney Kenneth J. Turek Martin E. Messinger David J. Rosa Carlton R. Turner Stephen Miller David M. Ross Yolanda R. Turocy Woolf N. Milner Martin James Rotheram Anthony D. Tutrone Arthur Moretti Matthew L. Rubin Gorky Urquieta David H. Morse Robert J. Ryan Judith M. Vale Richard S. Nackenson Sevan N. Sakayan Bart Anton Van der Made John D. Nadell Conrad A. Saldanha Dik van Lomwel Benjamin H. Nahum Eli M. Salzmann Peter J. von Lehe Christian Neira Martin A. Sankey George H. Walker Holly Newman Kroft Paul A. Sauer Sean J. Ward Kevin J. O’Friel Henri A. Schupf David I. Weiner Paul D. O’Halloran Marvin C. Schwartz Eric D. Weinstein Ryo Ohira Mindy Schwartzapfel Richard M. Werman Bradley Franklin Okita Benjamin E. Segal Obadiah J. Wilford Thomas P. O’Reilly Saurin D. Shah Andrew Wilmont Mark A. O’Sullivan Monica L. Sherer David A. Wilson Daniel P. Paduano Steve S. Shigekawa Rhonda Wiswall Maria Pappas Jonathan D. Shofet Johnny YH Wong Robert H. Pearlman Neil S. Siegel Kristen Chen Yang Ian D. Peckett Yves C. Siegel Frank Yulin Yao David R. Pedowitz Ronald B. Silvestri Patricia Miller Zollar Tristram C. Perkins Prashant Singh Heather P. Zuckerman Cas A.H. Peters Laura J. Sloate Peter B. Phelan Brien P. Smith Alexandra M. Pomeroy Amit Solomon Nish Vinayakrai Popat Thomas A. Sontag
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This material is provided for informational purposes only and nothing total firm fixed income (PAM, ISA and MAG combined) assets reflected. herein constitutes investment, legal, accounting or tax advice, or a The performance of the individual PAM equity teams/strategies is recommendation to buy, sell or hold a security. Information is obtained generally shown as a supplemental exhibit to the PAM Equity Composite. from sources deemed reliable, but there is no representation or warranty The respective ISA, MAG and PAM composite reports, as well as the PAM as to its accuracy, completeness or reliability. All information is current Management Team supplemental performance exhibits are available as of the date of this material and is subject to change without notice. upon request. Individual strategies may have experienced negative Any views or opinions expressed may not reflect those of the firm as a performance during certain periods of time. Hedge fund, private equity whole. Neuberger Berman products and services may not be available in and other private investment vehicle assets are not reflected in the AUM all jurisdictions or to all client types. and product outperformance results shown. AUM outperformance for ISA, PAM and MAG strategies is based on gross of fee returns. Gross This material may include estimates, outlooks, projections and other of fee returns do not reflect the deduction of investment advisory fees “forward-looking statements.” Due to a variety of factors, actual and other expenses. If such fees and expenses were reflected, AUM events may differ significantly from those presented. Investing entails outperformance results would be lower. Investing entails risk, including risks, including possible loss of principal. Investments in hedge funds possible loss of principal. Past performance is no guarantee of and private equity are speculative and involve a higher degree of risk future results. than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes Private Equity Outperformance Note: The performance information are unmanaged and are not available for direct investment. Past includes all funds, both commingled and custom, managed by NB performance is no guarantee of future results. Alternatives Advisers LLC with vintage years of 2002 - 2012, with the exception of a closed-end, public investment company registered All information as of the date indicated, except as otherwise noted. Firm under the laws of Guernsey (the “Funds”). Vintage years post 2013 are data, including employee and assets under management figures, reflect excluded as benchmark information is not yet available. collective data for the various affiliated investment advisers that are subsidiaries of Neuberger Berman Group LLC (the “firm”). Firm history/ Percentages are asset-weighted, calculated as the total invested capital timeline information dates back to the 1939 founding of Neuberger of the funds whose performance exceeds their respective benchmarks & Berman (the predecessor to Neuberger Berman LLC). Investment divided by the total invested capital of all funds with vintage years professionals referenced include portfolio managers, research analysts/ of 2002 through 2012. Performance is measured by net IRR and is associates, traders, and product specialists and team dedicated compared to the respective index's median net IRR. The Cambridge economists/strategists. Secondary Index was used for NB Secondary Opportunities Funds I, II and III; the Cambridge Buyout and Growth Equity for US and Developed This material is being issued on a limited basis through various global Europe was used for NB Co-Investment Partners I and NB Strategic Co- subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit Investment Partners Fund II; the Cambridge Fund of Funds Index was www.nb.com/disclosure-global-communications for the specific entities used for the Private Investment Portfolio group's commingled fund and and jurisdictional limitations and restrictions. custom portfolios; and the Cambridge Global Private Equity was used for Equity and Fixed Income AUM Benchmark Outperformance Dyal Capital Partners Fund I and Athyrium Opportunities Fund I. Note: For the period ending December 31, 2014, the percentage of total The Cambridge Associates LLC indices data is as of September 30, 2014, firm equity and fixed income Assets Under Management (“AUM”) that which is the most recent data available. The Cambridge Associates Fund outperformed the benchmark on 10-yr; 5-yr and 3-yr basis was as follows: of Funds Index is the benchmark recommended by the CFA Institute Total Equity and Fixed Income AUM: 10-year: 78% ; 5-year: 42%; and for benchmarking overall private equity fund of funds performance. 3-year: 43%; Total Equity AUM: 10-year: 80% 5-year: 29%; and 3-year: The benchmark relies on private equity funds self-reporting data for 26%; and Total Fixed Income AUM: 10-year: 77%; 5-year: 63%; and compilation and as such is subject to the quality of the data provided. 3-year: 67%. Firm equity and fixed income Assets Under Management The median net multiple of Cambridge Associates Fund of Funds Index (“AUM”) outperformance figures are based upon the aggregate assets is presented for each vintage year as of September 30, 2014, the most for all Neuberger Berman LLC and Neuberger Berman Fixed Income recent available. Cambridge Associates data provided at no charge. LLC traditional equity and fixed income strategies that are included in the firm’s institutional separate account (“ISA”), managed account/ While NB Secondary Opportunities Fund II (“NB SOF II”) closed in wrap (“MAG”) and private asset management/high net worth (“PAM”) 2008, Cambridge Associates classifies NB SOF II as a 2007 vintage year composites. The results are based on the overall performance of each fund (the year of NB SOF II's formation) and, therefore, the Cambridge individual investment strategy against its respective strategy benchmark, Associates benchmarks used herein are for 2007 vintage year funds. and results are asset weighted so strategies with the largest amount of An investor should consider a fund’s investment objectives, assets under management have the largest impact on the results. As of risks and fees and expenses carefully before investing. This 12/31/2014, eight equity teams/strategies accounted for approximately and other important information can be found in each fund’s 53% of the total firm equity (PAM, ISA and MAG combined) assets prospectus and summary prospectus, which you can obtain reflected, and eight strategies accounted for approximately 57% of the by calling 877.628.2583. Please read the prospectus and summary prospectus carefully before making an investment. Investments could result in loss of principal.
NEUBERGER BERMAN ANNUAL REPORT 2014
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Mutual funds are only available to U.S. investors. Mutual funds Additional information about the risks of Neuberger Berman distributed by Neuberger Berman Management LLC. Member FINRA. Long Short Fund, Neuberger Berman Global Long Short Fund, Neuberger Berman Global Allocation Fund and Neuberger A word about certain risks associated with investments in the Berman Multi-Asset Income Fund Neuberger Berman mutual funds: Short sales involve selling a security the Fund does not own in Funds that invest in equity securities involve the risk associated with anticipation that the security’s price will decline. Short sales may help the stock markets, which may be volatile. Small- and mid-capitalization hedge against general market risk to the securities held in the portfolio stocks trade less frequently and in lower volume than larger company but theoretically present unlimited risk on an individual stock basis, since stocks and thus may be more volatile and more vulnerable to financial the Fund may be required to buy the security sold short at a time when and other risks. Large capitalization stocks may be less responsive to the security has appreciated in value. The Fund may not always be able changes in the market place and may lag in performance. to close out a short position at a favorable time and price. If the Fund Foreign securities involve risks in addition to those associated with covers its short sale at an unfavorable price, the cover transaction is comparable U.S. securities, including exposure to less developed or likely to reduce or eliminate any gain, or cause a loss to the Fund, as a less efficient trading markets; social, political or economic instability; result of the short sale. fluctuations in foreign currencies; nationalization or expropriation Derivative instruments and short sales may also have an effect similar of assets; settlement, custodial or other operational risks; and less to that of leverage and can result in losses to the Fund that exceed the stringent auditing and legal standards. Exchange rate exposure and amount originally invested in the derivative instruments. Leverage may currency fluctuations could erase or augment investment results. These amplify changes in the Fund’s net asset value (“NAV”). ETFs are subject risks are magnified in emerging or developing markets. The governments to tracking error and may be unable to sell poorly performing stocks of emerging market countries may be more unstable and more likely that are included in their index. ETFs may trade in the secondary market to impose capital controls, nationalize a company or industry, place at prices below the value of their underlying portfolios and may not be restrictions on foreign ownership and on withdrawing sale proceeds of liquid. Through its investment in exchange traded funds, the Fund is securities from the country, and/or impose burdensome taxes that could subject to the risks of the ETF’s investments, as well as to the ETF’s adversely affect security prices. expenses. The Fund may engage in active and frequent trading and Funds that invest in fixed income securities are subject to the associated may have a high portfolio turnover rate, which may increase the Fund’s risks including the risk that a bond’s value may fluctuate based on transaction costs and may adversely affect the Fund’s performance. interest rates, market conditions, credit quality and other factors. You Additional Risks for the Neuberger Berman Absolute Return may have a gain or a loss if you sell your bonds prior to maturity. Bonds Multi-Manager Fund and Neuberger Berman Long Short Multi- are subject to the credit risk of the issuer. High-yield bonds, also known Manager Fund as “junk bonds,” are considered speculative and carry a greater risk of default than investment-grade bonds. Their market value tends to be Each Fund’s performance will largely depend on what happens in the more volatile than investment-grade bonds. Sovereign debt securities are equity and fixed income markets. The actual risk exposure taken by subject to the risk that a governmental entity may delay or refuse to pay each Fund will vary over time, depending on various factors, including, interest or repay principal on its sovereign debt. Neuberger Berman’s methodology and decisions in allocating the Fund’s assets to subadvisers, and its selection and oversight of subadvisers. Additional Risks for the Neuberger Berman Absolute Return Multi-Manager Fund, Neuberger Berman Global Allocation The subadvisors’ investment styles may not always be complementary, Fund, Neuberger Berman Global Long Short Fund, Neuberger which could adversely affect the performance of the Funds. Some Berman Long Short Fund, Neuberger Berman Long Short Multi- subadvisors have little experience managing registered investment Manager Fund, Neuberger Berman Emerging Markets Debt companies which, unlike the hedge funds these managers have been Fund and Neuberger Berman Multi-Asset Income Fund managing, are subject to daily inflows and outflows of investor cash and are subject to certain legal and tax-related restrictions on their Derivatives involve risks different from, or greater than, the risks investments and operations. associated with investing in more traditional investments, as derivatives can be highly complex and volatile, difficult to value, highly illiquid, and Each Fund’s returns may deviate from overall market returns to a greater a Fund may not be able to close out or sell a derivative position at a degree than other mutual funds that do not employ an absolute return particular time or at an anticipated price. Non-U.S. currency forward focus. Thus, the Fund might not benefit as much as funds following other contracts, options, swaps, or other derivatives contracts on non-U.S. strategies during periods of strong market performance. A subadviser currencies or securities involve a risk of loss, even if used for hedging may use strategies intended to protect against losses (i.e., hedged purposes, if currency exchange rates move against the Fund. strategies), but there is no guarantee that such hedged strategies will be used or, if used, that they will protect against losses, perform better than Investments in the over-the-counter market introduce counterparty non-hedged strategies or provide consistent returns. risk due to the possibility that the dealer providing the derivative may fail to timely satisfy its obligations. Investments in the futures markets also introduce the risk that its futures commission merchant (FCM) may default on its obligations, which include returning margin posted to a Fund. Derivative instruments can create leverage, which can amplify changes in the Fund’s net asset value and can result in losses that exceed the amount originally invested.
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Event Driven Strategies that invest in companies in anticipation of The Fund’s yield and share price will fluctuate in response to changes in an event carry the risk that the event may not happen or may take interest rates. In general, the value of investments with interest rate risk, considerable time to unfold, it may happen in modified or conditional such as fixed income securities, will move in the direction opposite to form, or the market may react differently than expected to the event, movements in interest rates. in which case the Fund may experience losses. Additionally, event- The Fund’s performance could be affected if borrowers pay back principal driven strategies may fail if adequate information about the event is on debt securities before or after the market anticipates such payments, not obtained or such information is not properly analyzed. The actions shortening or lengthening their duration. Floating rate securities can be of other market participants may also disrupt the events on which less sensitive to prepayment risk. event driven strategies depend. Arbitrage Strategies involve the risk that underlying relationships between securities in which investment Lower-rated debt securities (commonly known as “junk bonds”) involve positions are taken may change in an adverse manner or in a manner greater risks than investment grade debt securities. Lower-rated debt not anticipated, in which case the Fund may realize losses. The Fund’s securities may fluctuate more widely in price and yield than investment use of event-driven and arbitrage strategies will cause it to invest in grade debt securities and may fall in price during times when the actual or anticipated special situations—i.e., acquisitions, spin-offs, economy is weak or is expected to become weak. reorganizations and liquidations, tender offers and bankruptcies. These Loans generally are subject to restrictions on transfer, and the Fund may transactions may not be completed as anticipated or may take an be unable to sell loans at a time when it may otherwise be desirable to excessive amount of time to be completed. They may also be completed do so or may be able to sell them only at prices that are less than what on different terms than the subadvisor anticipates, resulting in a loss to the Fund regards as their fair market value. Loans may be difficult to the Fund. Some special situations are sufficiently uncertain that the Fund value. Therefore, there is a risk that the value of the collateral securing may lose its entire investment in the situation. a loan may decline after the Fund invests and that the collateral may not Short sales, selling a security a fund does not own in anticipation that be sufficient to cover the amount owed to the Fund. In the event the the security’s price will decline, theoretically presents unlimited risk on borrower defaults, the Fund’s access to the collateral may be limited or an individual stock basis, since a fund may be required to buy the security delayed by bankruptcy or other insolvency laws. sold short at a time when the security has appreciated in value. Leverage Non-U.S. currency forward contracts, options, swaps, or other derivatives may amplify changes in a fund’s net asset value. contracts on non-U.S. currencies involve a risk of loss if currency exchange ETFs are subject to tracking error and may be unable to sell poorly rates move against the Fund. Forward contracts are not guaranteed by performing stocks that are included in their index. ETFs may trade in the an exchange or clearinghouse and a default by the counterparty may secondary market at prices below the value of their underlying portfolios result in a loss to the Fund. and may not be liquid. The value of a convertible security typically increases or decreases with the The Fund may engage in active and frequent trading and may have a high price of the underlying common stock. In general, a convertible security portfolio turnover rate, which may increase the Fund’s transaction costs is subject to the risks of stocks (and its price may be as volatile as that of and may adversely affect the Fund’s performance. the underlying stock) when the underlying stock’s price is high relative
Additional Risks for Neuberger Berman Global Long Short Fund to the conversion price and is subject to the risks of debt securities (and and Neuberger Berman Long Short Multi-Manager Fund is particularly sensitive to changes in interest rates) when the underlying Leverage amplifies changes in the Fund’s net asset value (“NAV”). stock’s price is low relative to the conversion price. Borrowing derivative instruments, short positions and securities lending Leverage amplifies changes in the Fund’s net asset value (“NAV”). may create leverage and can result in losses to the Fund that exceed Derivative instruments that the Fund uses create leverage and can result the amount originally invested and may accelerate the rate of lasses. in losses to the Fund that exceed the amount originally invested. There can be no assurance that the Fund’s use of any leverage will be successful and there is no specified limit on the amount that the Fund’s The use of options involves investment strategies and risks different investment exposure can exceed its net assets. from those associated with ordinary portfolio securities transactions. If the Fund’s Portfolio Managers apply a strategy at an inappropriate time Additional Risks for the Neuberger Berman Emerging Markets or judge market conditions or trends incorrectly, options may lower the Debt Fund Fund’s return. The value of an individual security or particular type of security can be The Fund may engage in active and frequent trading and may have a high more volatile than the market as a whole and can perform differently portfolio turnover rate, which may increase the Fund’s transaction costs from the value of the market as a whole. In addition, the Fund is classified and may adversely affect the Fund’s performance. as non-diversified. As such, the percentage of the Fund’s assets invested in any single issuer or a few issuers is not limited by the Investment Additional Risks for the Neuberger Berman Long Short Fund Company Act of 1940. Investing a higher percentage of its assets in any and Neuberger Berman Global Long Short Fund one or a few issuers could increase the Fund’s risk of loss and its share Short selling is borrowing a security and then selling it in anticipation price volatility, because the value of its shares would be more susceptible that the price will decline, so it can be bought back at a lower price, thus to adverse events affecting those issuers. generating a profit. Short selling involves the risk that the value of the security sold short will rise, in which case losses may exceed that of the original amount invested and are theoretically unlimited.
NEUBERGER BERMAN ANNUAL REPORT 2014
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Additional Risks for the Neuberger Berman Greater China Currency fluctuations could negatively impact investment gains or add Equity Fund to investment losses. The value of an individual security or particular type of security can be Derivatives involve risks different from, and in some respects greater more volatile than the market as a whole and can perform differently from than, those associated with more traditional investments. Derivatives the value of the market as a whole. In addition, the Fund is considered can be highly complex, can create investment leverage and may be non-diversified. As such, the percentage of the Fund’s assets invested highly volatile, and the Fund could lose more than the amount it invests. in any single issuer is not limited by the Investment Company Act of Derivatives may be difficult to value and may at times be highly illiquid, 1940. Investing a higher percentage of its assets in any one issuer could and the Fund may not be able to close out or sell a derivative position at a increase the Fund’s risk of loss and its share price volatility, because the particular time or at an anticipated price. Recent legislation calls for new value of its shares would be more susceptible to adverse events affecting regulation of the derivatives markets and could limit the Fund’s ability to that issuer. pursue its investment strategies. The extent and impact of the regulation are not yet fully known and may not be for some time. New regulation The Greater China region consists of mainland China, Hong Kong, Macau of derivatives may make them more costly, may limit their availability, or and Taiwan, among other locations, and the Fund’s investments in the may otherwise adversely affect their value or performance. region are particularly susceptible to risks in that region. Events in any one country within the region may impact the other countries in the An equity-linked investment provides exposure to an underlying foreign region or the Greater China region as a whole. As a result, events in investment and may include participatory notes and other structured the region will generally have a greater effect on the Fund than if the notes, swaps, including total return swaps and contracts for differences, Fund were more geographically diversified, which could result in greater and LEPOs. Equity-linked investments are subject to the same risks as volatility and losses. Markets in the Greater China region can experience direct investments in securities of the underlying foreign investment. If significant volatility due to adverse securities markets, exchange rates the underlying investment decreases in value, the value of the equity- and social, political, regulatory, economic or environmental events and linked investment will decrease in correlation; however, the performance natural disasters which may occur in the Greater China region. of such investments will not correlate exactly to the performance of the underlying investment that they seek to replicate. Equity-linked The Greater China region is a developing market and demonstrates investments are also subject to counterparty risk, which is the risk that significantly higher volatility from time to time in comparison to the issuer of such investment may be unwilling or unable to fulfill its developed markets. The Chinese government has implemented economic obligations. While some equity-linked investments may be listed on an changes and changes to market practices emphasizing the utilization of exchange, there is no guarantee that a liquid market will exist or that the market forces in the development of the Chinese economy. However, counterparty or issuer of such investments will be willing to repurchase Chinese markets generally continue to experience inefficiency, volatility them when the Fund wishes to sell them. and pricing anomalies resulting from governmental influence, a lack of publicly available information, higher level of control over foreign The Fund may engage in frequent and active trading and may have a high exchange, a less effective allocation of resources and/or political and portfolio turnover rate, which may increase its transaction costs, may social instability. China remains a totalitarian country with continuing adversely affect its performance and/or may generate a greater amount risk of nationalization, expropriation or confiscation of property. The of capital gain distributions to shareholders than if the Fund had a low legal system is still developing, making it more difficult to obtain and/ portfolio turnover rate. or enforce judgments. Further, the government could at any time alter or Risk is an essential part of investing. No risk management program can discontinue economic reforms. eliminate the Fund’s exposure to adverse events; at best, it can only reduce Taiwan and Hong Kong do not exercise the same level of control over the possibility that the Fund will be affected by such events, and especially their economies as does the mainland China, but changes to their those risks that are not intrinsic to the Fund’s investment program. political and economic relationships with the mainland China could adversely impact the Fund’s investments in Taiwan and Hong Kong. The financial crisis in the U.S. and many foreign economies over the past Military conflicts, either internal or with other countries, are also a risk. several years, including the European sovereign debt and banking crises, In addition, inflation, currency fluctuations and fluctuations in inflation has resulted, and may continue to result, in an unusually high degree and interest rates have had, and may continue to have, negative effects of volatility in the financial markets, both domestic and foreign, and in on the economy and securities markets of China. China’s economy may the net asset values of many mutual funds, including to some extent the be dependent on the economies of other Asian countries, many of which Fund. are developing countries. Each of these risks could increase the fund’s Additional Risks for Neuberger Berman Absolute Return Multi- volatility. The tax laws and regulations in the Greater China Region are Manager Fund subject to change, possibly with retroactive effect. The Fund’s performance could be affected if borrowers pay back principal To the extent the Fund invests more heavily in particular sectors, on certain debt securities, such as mortgage- or asset-backed securities, its performance will be especially sensitive to developments that before or after the market anticipates such payments, shortening or significantly affect those sectors. lengthening their duration. Illiquid investments may be more difficult to purchase or sell at an advantageous price or time, and there is a greater risk that the investments may not be sold for the price at which the Fund is carrying them.
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Generally, bond values will decline as interest rates rise. You may have a gain or a loss if you sell your bonds prior to maturity. Bonds are subject to the credit risk of the issuer. Additional Risks for Neuberger Berman Strategic Income Fund Lower-rated debt securities involve greater risks than investment grade debt securities. Lower-rated debt securities may fluctuate more widely in price and yield than investment grade debt securities and may fall in price during times when the economy is weak or is expected to become weak. Foreign securities involve risks in addition to those associated with comparable U.S. securities. Additional risks include exposure to less developed or less efficient trading markets; social, political or economic instability; fluctuations in foreign currencies; nationalization or expropriation of assets; settlement, custodial or other operational risks; and less stringent auditing and legal standards. Shares in the Fund may fluctuate based on interest rates, market condition, credit quality and other factors. In a rising interest rate environment, the value of an income fund is likely to fall. The Fund may invest in Underlying Funds, including funds in the Neuberger Berman fund family. The investment performance of the Fund is directly related to the investment performance of the Underlying Funds in which it invests and the allocations among those Underlying Funds. The Fund is exposed to the same principal risks as the Underlying Funds as well as to the Underlying Funds’ expenses in direct proportion to the allocation of its assets to the Underlying Funds, which could result in the duplication of certain fees, including the management and administration fees. Additional information about the Neuberger Berman Long Short Fund’s HFM Award: The HFM Week U.S. Hedge Fund Performance award winners and short list nominees were selected by a panel of independent judges of industry professionals. The Fund was chosen as the winner from a group of four funds that had been selected by the judges for the short list from a group of approximately 63 nominees. All nominees or their managers must be located in the U.S. or Canada. Nominees for “Best 40 Act Fund – Overall” were required to invest primarily in securities over the last 12 months ending June 2014. The judging panel was comprised of representatives from HFMWeek and leading institutional and private investors and industry experts. Each judging panel member had an equal vote in selecting a winner in each category. Judging decisions were based on investment performance, qualitative information and certain structural criteria. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. Neuberger Berman Management LLC, is the distributor of the Neuberger Berman mutual funds and a wholly- owned, indirect subsidiary of Neuberger Berman Group LLC. Neuberger Berman Management LLC, member FINRA. ©2015 Neuberger Berman Group LLC. All rights reserved.
NEUBERGER BERMAN ANNUAL REPORT 2014
NB002_2014_AR_Text_Final_QCR_Offset_042715_UG_R1.indd 74 5/6/15 9:49 PM Neuberger Berman is a private, independent, employee-owned investment firm, managing equity, fixed income, private equity and hedge fund portfolios for institutions, advisors and individuals. Our presence is worldwide, with offices in 18 countries and more than 2,000 professionals focused on serving global clients.
Named by Pensions & Investments as a 2013 and 2014 Best Place to Work in Money Management, our firm is tenured, stable and long-term in focus. We foster an investment culture of fundamental research and independent thinking, in place since our founding in 1939.
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