Firm rebuilding itself as mutual fund powerhouse

A new management team has shaken up the old-line value management firm Neuberger Berman Inc. in the past three years, bringing in new blood and reversing an asset outflow.

The revamped firm saw a $4 billion inflow of assets in 2002, compared with a $7.4 billion outflow in 1999.

To turn the flows around by $11 billion, the management of the New York-based mutual fund company fired more than half a dozen of its own portfolio managers and replaced them with better-performing ones it had lured away from rivals.

At the time of its initial public offering in the fall of 1999, it also completed a changing of the guard in its own executive ranks.

Jeffrey B. Lane, a veteran of Salomon Smith Barney Inc. in New York, replaced Lawrence Zicklin, managing partner, as the firm’s chief executive, and Peter E. Sundman was named executive vice president to replace Richard A. Cantor as head of the institutional business and Stanley Egener as head of the mutual fund subsidiary. Mr. Zicklin, Mr. Cantor and Mr. Egener retired.

Over the past year, Neuberger, which has $56 billion in assets under management, also enlisted the help of the Merrill Lynch & Co. Inc. selling machine to crank up the sales of closed-end funds.

Meanwhile, Mr. Lane gave these strategies a tail wind by choosing to emphasize investing in fixed-income and real estate investment trusts – a departure from the company’s value investing heritage.

Bonds and REITs have enjoyed a bull run during the three-year stock slough.

Mr. Lane, who is 61, used other weapons at his disposal, too. He was able to attract star portfolio managers by offering restricted stock as an incentive. Neuberger’s shares have spiked about 50% since the company went public in 1999.

Even before Mr. Lane’s arrival, Neuberger had begun putting its prestigious name to greater use by re-energizing its marketing efforts in separate accounts.

Managed-account assets had ballooned to $6.5 billion by March 31, from $1.7 billion in 1999.

But whether the old-line partnership turned new-age stock-wielding tiger can keep up its momentum is another story.

“Right time, right place,” says Robert Powell, a Boston-based independent consultant to the mutual fund industry, of the string of success enjoyed by Neuberger during past three years.

“The challenge there is to create new funds.”

building on success

Indeed, Mr. Sundman, 44, says he isn’t standing still, because he recognizes the ephemeral nature of some of the past three years’ successes. “We tried to take advantage of our niche while we concentrated on fixing our core,” he says. “It wasn’t rabbits out of hats. It was good, solid decisions, and well executed.”

But he says that most of his efforts today are being dedicated to getting Neuberger up to speed as a mutual fund powerhouse after its 1999 stumble.

The damage was done because the competing value funds outperformed the company’s famous value funds at a time when investors were looking for growth stock funds anyway.

The turnaround in the company’s core mutual fund business will depend on whether it can reinstate its Guardian, Partners and Focus funds to positions of prestige in the mutual fund industry.

All three have charged out of the gate in 2003. Guardian and Partners were both up 20%, and Focus up 30% as of last Thursday, after performing poorly last year.

The first two funds are large-cap-value funds. The Focus Fund concentrates on a small number of companies of all capitalizations.

The difficulty of trying to make the core strategy work has Russel Kinnel, a senior analyst with Morningstar Inc. of Chicago, taking a wait-and-see attitude.

“I would say it’s pretty aggressive, and turnarounds are difficult things,” Mr. Kinnel says. “We see a lot of shops trying, and even with a lot of resources, they don’t always succeed.”

One of Mr. Sundman’s bets is on mutual funds that invest in growth stocks.

He lured away a growth investing team of five portfolio managers and two analysts from Northern Trust Corp. of Chicago, and gave pink slips to nine of his own people.

He also boasts of canning Neuberger Berman Guardian Fund’s portfolio managers, Rick White and Kevin Risen, in December.

The fund’s new manager, Arthur Moretti, has already improved the fund’s performance since the beginning of the year.

But one key Neuberger constituency – independent financial advisers – remains elusive despite changes, which is frustrating to Mr. Sundman.

“Sometimes I feel with the fee-based community, it’s difficult to get them to listen to the changes we’ve made,” Mr. Sundman says.

“They’re geographically dispersed, and if they think they know your story, why should they listen to you?”

Wall Street crowd

It’s the Wall Street crowd that’s coming through in the clutch, however. “We have a large relationship with Merrill Lynch,” he says.

That relationship soared to new heights in September, when Merrill successfully took public a Neuberger closed-end fund dedicated to intermediate-duration bonds.

Merrill then gave Neuberger reps the opportunity to pitch the bond fund, called the Intermediate Municipal fund, to hundreds of Merrill offices. It now has $783 million in assets.

Neuberger had similar success in November and April, when it had A.G. Edwards & Sons Inc. of St. Louis take public two closed-end funds that are invested in REITs.

The Real Estate Income Fund, which has $105 million in assets, went public in November, and the Realty Income Fund, which has $407 million, went public in April.

The April IPO was followed by 600 Neuberger presentations at brokerage firms, including A.G. Edwards, Merrill Lynch, and Smith Barney Inc. and Prudential Securities Inc. of New York – all of whom participated in the underwriting syndicates.

“People questioned whether we could be successful in that business,” Mr. Sundman says. “We had never done closed-end funds.”

One financial adviser, requesting not to be identified, questions whether some of the old Wall Street quid pro quo wasn’t at work in the promotion of these funds.

But Mr. Sundman says it was a careful reading of the market, where income production is at a premium, and these firms needed REIT and bond funds for the production of high returns.

“We spend more time trying to protect our reputation than leveraging it,” he says.