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Rating:Asset Managers are in a Good Spot, and so is Neuberger Berman, Says Walker Not Rated 5.0 Email Routing List Email & Route  Print Print
Thursday, May 12, 2011

Asset Managers are in a Good Spot, and so is Neuberger Berman, Says Walker

Reported by Sean Hanna, Editor in Chief

CEO George Walker and the rest of the top portfolio management team at Neuberger Berman [see profile] gathered a gaggle of reporters to its Manhattan headquarters Thursday for its annual media luncheon.

Joe Amato
Neuberger Berman
President and CIO
Walker took the opportunity to reaffirm the success that the money manager has achieved since gaining its independence from Lehman Brothers two years ago. Walker pointed out that Neuberger Berman has pulled in $10 billion from new institutional clients in the past 12 months. The firm has also raised its global AUM to $199 billion from $155 billion two years ago. Part of the growth stems from recovering markets, but Neuberger Berman has also been helped by its renewed sales efforts.

That tailwind also makes other asset managers a good place to invest, Tony Gleason, PM for the MLG Group at Neuberger, told reporters. He explained that financial services stocks are less attractive than others at the moment. Investment banks that had relied on leverage are deleveraging, cutting into their return on capital while retail banks are still reliant on the mortgage market that has yet to recover. That leaves asset managers as the one slice of financial services that is catching Gleason's eye.

"That is a nice sandbox to play in. Globally it is the simplest business because there are no capital requirements ... and their free cash flow is wonderful," said Gleason. "It is a good enough business that almost anyone can run it."

He likes the business at Franklin Resources [see profile], which currently boasts a seven to eight percent free cash flow yield. Yet, he added that Franklin's success may have a down side. Gleason feels that the company is carrying to much capital at current levels. Asked if he would like to see a dividend or stock buyback, Gleason said that a dividend would be a nice surprise.

"If they paid a dividend out while there was still a 15 percent tax rate, that would be nice," he explained.

Gleason would also like to see Greg Johnson's team at Franklin further build out its equity product line to catch some of the assets that he expects are about to flow from fixed income back into equities. Catching that flow would provide a good boost to earnings.

"When people shift back from bonds to equities, the incremental margin is driven by tremendous leverage," he pointed out, adding that the typical fixed income manager charges 8 bps while an equity manager may charge as much as 80 bps, so for every dollar that moves there is a ten fold increase in revenue on a fixed expense base, meaning tremendous leverage on the upside. Gleason has labeled this his "money in motion" investment theme.

He also has been a buyer of BlackRock [see profile] and Legg Mason [see profile]. Ironically, he sees the value-focused Legg Mason as a value play in his own fund's portfolio. "They need to keep on track with their ability to manage down their expenses, and manage their capital and do what they say they were going to do," he said. Last quarter Mark Fetting's team at Legg Mason disclosed some expenses that were a surprise.

Joseph Amato, president and chief investment officer at Neuberger Berman, said that supporting PMs such as Gleason is at the core of the firm's business strategy.

"The thing that we are focused on 99.9 percent of the time is investment performance. Growing assets is terrific. Growing assets is arguably a byproduct of doing good work for clients. If you do good work for clients you perform well. Everything that we do in terms of our internal resource allocations is all about making sure that our folks like Tony have the resources to do their job well," Amato explained.

Neuberger Berman has spent the past year building its Forty Act business, including expanding what Amato admits had been a relatively under-resourced wholesaling team, bringing in Scott Kilgallen from Goldman Sachs to oversee DC I-O, RIA and subadvisor distribution and most recently launching a number of new funds, including a global allocation fund and a pair of global equity funds.

Don't look for a lot more change in the coming year as Amato related that he is "pretty comfortable" with his current mix of products." Two areas where he sees opportunity are the RIA market and DC I-O. 

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