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Coming full circle

So much for market timing.

So much for market timing.

No sooner had executives at Neuberger Berman decided to take the company public in the summer of 1998 than the Russian ruble collapsed and Long-Term Capital Management blew up. The IPO, not surprisingly, was quietly shelved. In October 1999 Neuberger's $232 million offering made it out the door, but investors, still smitten by fresh-faced dot-coms, shrugged off the then 60-year-old money manager with its quaint devotion to value investing. Shares opened at $32 and promptly slid to $24. To keep a floor under the price, CEO Jeffrey Lane felt compelled to buy back $50 million worth of shares just one month after the IPO.

What a difference a burst bubble makes. Today Neuberger trades at about $45, or 21 times trailing 12 month earnings, compared with a multiple of 18 for the average money manager. Since January 1, 2000, Neuberger shares have risen more than 150 percent, making it the top-performing money management stock. While many of its rivals are losing assets at a sobering rate , prompting them to slash staff and close or consolidate funds , Neuberger is growing apace. Since the end of 2000, assets are up 11 percent, to $62 billion. And thanks to the ministrations of the cost-conscious Lane, Neuberger is earning good money, boasting an operating margin of 38 percent, versus the industry average of 35 percent.

What's behind the sharp turnaround for this midtier player whose glory days seemed long gone just a few years back? The firm profited handsomely from the resurgence of value investing, of course, but that's just part of the story. Neuberger has transformed itself into a growing, profitable asset management company that is sharply, and quite shrewdly, focused on high-net-worth customers.

The push into the high-net-worth market marks a return to the firm's roots. Founder Roy Neuberger, who still makes it to the office a few days a week at the age of 98, built the business in the 1940s and '50s catering to the well-heeled residents of New York City, especially the tightly knit community of German Jews.

Despite the considerable wealth obliterated by the Nasdaq rout and two years of back-to-back declines in the Standard & Poor's 500 index, the U.S. high-net-worth market remains huge , $8.8 trillion in assets under management, according to the Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2001 , and enticing. Banks, brokerages and money managers are fighting fiercely to increase their piece of a market in which no single firm claims more than a 1 percent share. Amid all this competition, few are doing as well as Neuberger. As of the end of March 2002, the firm's $25.7 billion in private client accounts represented 41 percent of total assets, up from $9.5 billion and 25 percent in 1995. In the first quarter private asset management accounted for 66 percent of Neuberger's $33.2 million in net income, up from 62 percent of $34.2 million in the first quarter of 2001.

The firm's success begins on the ground, with an attentive, aggressive sales force whose members boast strong ties to their local communities. Once a client signs on, Neuberger treats him to an effective if somewhat unorthodox organizational structure in which 67 portfolio managers across 30 product teams are left to their own devices, with no top-down company directives about how to invest. They deliver the goods: For the past three years, the private client equity composite gained an average annual 6 percent, versus a 1 percent loss for the S&P 500.

"Asset management is the best business in the world, and within asset management the best place to be is high net worth," says CEO Lane. "We love all of our businesses, but high net worth is by far the crown jewel. It's the most profitable and fastest growing."

A manager's manager and a longtime top lieutenant to Sanford Weill at both Shearson Lehman Brothers and Travelers Corp., where he served as head of asset management, Lane joined Neuberger in July 1998 as chief administrative officer.

Under executive vice president Heidi Schneider, head of the private asset management division, Neuberger had been steadily building up a private client sales force and slowly growing assets since the early 1990s. But once Lane took over as CEO in October 1999, that drive accelerated, as he engineered a series of small strategic acquisitions and lift-outs of seasoned portfolio management teams. Last October Neuberger acquired New York,based Oscar Capital Management, which manages $900 million in private client assets, including some of computer mogul Michael Dell's money. Last month Neuberger snapped up the high-yield bond team from Lipper & Co. (which had to shut down two hedge funds following heavy losses). The team is expected to bring the $500 million it now manages for Lipper to Neuberger.

As the Nasdaq neared its peak in 1999, Neuberger's sales force landed $640 million in new private client assets, bringing the total up to $21.5 billion; in 2000 it pulled in a further $800 million. And last year, while most rivals suffered outflows, Neuberger attracted $1.7 billion in new high-net-worth accounts. In the first quarter of 2002, the firm pulled in $473 million in new private client accounts and expects to reach its goal of $2 billion for the year. By contrast, even such a high-net-worth powerhouse as Northern Trust Corp. saw private assets under management decline from $98 billion at the end of 2000 to $94 billion at the end of 2001.

"Neuberger is growing its private client business like crazy," says Russ Prince, a Shelton, Connecticut,based strategic marketing consultant. "They've got the currency to hire strong people and make acquisitions. They are going head-to-head with the Northern Trusts and the U.S. Trusts and winning business."

As its private client group has been flourishing, Neuberger's other main business, mutual fund and institutional asset management, has been lackluster. (The company, which has 1,200 employees working in 18 offices across the country, also operates a small clearing operation in its professional securities services group, which kicks in 15 percent of total revenues.) Between January 1997 and the end of March 2002, combined pension and mutual fund assets fell from $38 billion to $36 billion, reflecting both sweeping client defections and mutual fund redemptions ($7 billion walked out the door in 1999 alone). As of the end of the first quarter 2002, Neuberger reported institutional assets of $24 billion and mutual fund assets of $12 billion. After years of struggle, though, the businesses are showing signs of a turnaround. In the first quarter retail and institutional assets reported a combined inflow of $1.4 billion, versus $1.8 billion in net inflows for all of last year.

The craze for growth stocks was only part of the problem in recent years: Many of Neuberger's equity fund managers underperformed their benchmarks. For the three years ended December 31, 1999, for example, Neuberger's flagship Guardian Fund produced an average annual return of 9.4 percent, compared with 18.8 percent for the Russell 1000 value index. During that same period, the firm's institutional equity portfolio returned 14.4 percent. Of the 16 Neuberger funds rated by Morningstar, one gets five stars and four earn four stars.

"Put it this way, you wouldn't want to build a portfolio around Neuberger's funds," says Kelli Stebel, an equity fund analyst at Morningstar.

One shining exception: the firm's $4 billion Genesis Fund, a small-cap value equity portfolio that returned an average annual 15.6 percent over the past three years, versus the 13.3 percent average for the Morningstar small-cap value universe.

All told, about 70 percent of Neuberger's assets are in equities, 23 percent are in fixed income, and the rest are in money market funds or alternative investments. Although its four largest retail funds , Guardian, Partners, Genesis and Focus , are value equity, Neuberger also offers three growth equity funds, three core equity funds and a specialty tech fund, as well as international equity and bond funds. Most of the equity portfolios are either value or growth at a reasonable price.

In addition to spearheading the push into high net worth, Lane put his stamp on the firm with a drive to cut costs. Stunned to discover that Neuberger had six information technology units, he immediately consolidated them into one. Before his arrival, the mutual fund group maintained separate legal and human resources departments and even a separate phone system. "If I wanted to call down to our fund company, it wasn't an internal call , I had to go through the AT&T switchboard," recalls Lane, who ordered that the systems be integrated, saving several hundred thousand dollars. "It was more than just saving 20 cents a call," he adds. "It was a signal that we were tearing down the walls that separated the funds business from the rest of the company."

In this campaign Lane has been assisted by Robert Matza, who left his job as deputy treasurer of Citigroup to join Neuberger as a principal in April 1999, becoming chief operating officer in January 2001. Matza serves as Lane's aide-de-camp, much as Lane had for Sandy Weill. His tenure has not been without strife: Matza immediately instituted rigid reporting controls, which were not popular. All told, 70 operations management and administrative staffers resigned.

But Lane is convinced that a leaner Neuberger can better exploit the great potential of the high-net-worth market. A recent Merrill Lynch/Cap Gemini study projects that the North American high-net-worth market will hit $13 trillion by the end of 2005. And as an added sweetener, high-net-worth customers tend to stick around. The industry turnover rate on private client assets is just 3 percent a year, compared with 20 percent for mutual fund assets.

An old-school value manager, Neuberger Berman traces its roots back to a classic contrarian bet: Just before the 1929 crash, Roy Neuberger, a 26-year-old stockbroker who had spent years in Paris studying art, decided to short Radio Corporation of America, the Microsoft Corp. of its day.

That prescient play helped Neuberger survive the Great Depression. Ten years after the crash, he had cobbled together a $64,000 grubstake to co-found a brokerage with his friend Robert Berman, a 29-year-old New York Stock Exchange floor broker. In 1939 the two men began trading stocks out of a small room at the famed Biltmore Hotel, building a substantial roster of rich clients. In 1950 Neuberger launched a low-cost balanced mutual fund called Guardian, considered to be one of the industry's first no-loads. Today the fund has $2.5 billion in assets and has returned an average annual 12.3 percent since its inception, about even with the S&P 500.

In 1954, four years after the Guardian debut, Berman died of leukemia at the age of 44. But Neuberger soldiered on, surrounding himself with skilled stockbrokers like Philip Straus, Phillip Steckler and Howard Lipman, who claimed personal connections to wealthy New Yorkers. Among Neuberger's clients of the postwar era was Alfred W. Jones, who went on to become the father of hedge fund investing.

Early and extremely lucrative investments in American Telephone & Telegraph Corp. and Minute Maid Corp. in the late 1950s and early 1960s gave the Neuberger brand cachet, placing the firm on a par with market leaders like U.S. Trust Corp. "Word traveled that Neuberger was a good place to put your money," says Marvin Schwartz, a 41-year veteran Neuberger value portfolio manager who currently oversees $5 billion in high-net-worth accounts.

The firm operated as a private partnership, with Roy Neuberger extending equity stakes to new partners. By the 1960s there were some 15.

After holding on to most of its clients during the ferocious bear market of 1973,'74, in which the S&P 500 fell 47 percent, Neuberger, under former Merrill Lynch institutional sales executive Lawrence Zicklin, was ready to reposition itself to take advantage of 1974's ERISA. The law defined the fiduciary obligations of plan sponsors, requiring that corporations prudently invest their pension money.

To boost returns and diversify their holdings, pension funds began to shift money from large bank trust departments to small, independent shops, many of them run by professionals who had previously managed pension portfolios at banks. Neuberger, like many investment firms, maneuvered to capitalize on the trend. In 1973 the firm, which by then was being run by managing partner Zicklin, hired Richard Cantor, a former Chase Manhattan Bank portfolio manager who in 1968 had launched his own firm targeting pension funds. Cantor joined Neuberger as a portfolio manager and partner to lead a charge into pension management.

By the late 1970s, under Zicklin and Cantor (their titles changed to CEO and president in 1996), Neuberger began winning its own small share of the new pension mandates. Among its first victories: the Milford Police Retirement Fund in Connecticut and New York Hospital's endowment. In 1979, with total assets of $2.2 billion, Neuberger ranked 126th in Institutional Investor's annual listing of the top 300 U.S. money managers.

Around the mid-1980s, both the pension account and mutual fund businesses took off. Neuberger sold no-load funds directly through ads in personal finance media, while Cantor continued to snare large corporate and public pension fund accounts. Between 1983 and 1986 Neuberger's assets more than doubled, to $11.5 billion.

By 1990 Neuberger had amassed $18 billion in assets , about half institutional, half in mutual funds. As the money management industry began consolidate in the mid-1980s, Neuberger found itself caught in a size trap, too small to compete effectively with the behemoths being formed. Moreover, the firm's top leadership were in their 60s and eager to cash out, so in late 1995 the firm put itself on the block. Several European banks and insurers expressed interest, but no one made any serious offers. Neuberger insisted on maintaining its independence and culture, which the would-be buyers could not guarantee. "The talks never went anywhere," Cantor recalls.

Two years later Zicklin and Cantor decided to take the company public instead. They felt certain that Neuberger would need a new CEO, someone with experience as a senior executive at a public company.

As it happened, longtime partner Howard Ganek had a family connection to Jeffrey Lane, who was then Travelers' asset management chief. (Decades before, Ganek had been introduced to his wife, Judie, by Lane's father-in-law.) "I always respected Jeff's grasp of the business," recalls Ganek. "I remember saying to Larry Zicklin, 'I don't know if he'd do it, but I'd sure love to get him as our CEO.'"

A native of Lawrence, New York, an affluent section of Long Island, Lane graduated from New York University in 1964. Two years later he enlisted in the army and was stationed at Fort Knox. After serving two years, Lane enrolled in Columbia Business School. In 1969, during his final semester, he landed a job as an airlines analyst at Cogan, Berlind, Weill & Levitt. More than a decade and numerous acquisitions later, Lane had risen to president of Shearson Lehman in the mid-1980s.

Between 1995 and 1998 Lane oversaw Travelers' $100 billion in asset management units, including Smith Barney; he was named Travelers' vice chairman in 1996. But by the spring of 1998, Lane was running Travelers' corporate affairs and investor relations division. "I'd drifted away from the asset management business," he says, "a business I had come to love and wanted to get back into." Says former boss Weill: "Jeff knows the money management business as well as anybody. But his strongest attribute is that he cares about people."

Ganek introduced Lane to Zicklin and Cantor in 1997. After a yearlong courtship, Lane, though ambivalent about leaving his longtime boss, signed on with Neuberger.

Says Lane: "I told Sandy, I have to do this. I have to be a CEO."

He joined the firm as chief administrative officer, with the understanding that he would eventually become CEO. Lane claimed that title in the autumn of 1999, just before the IPO. His early days were spent presiding over a tanking stock price and precipitous drain in assets , Neuberger reported net asset outflows of $7 billion in 1999, $4 billion in retail equity and $3 billion in institutional equity. In 2000 the drain slowed to $1.2 billion, most of it institutional fixed income, and in 2001 the firm pulled in net assets of $1.8 billion.

Neuberger breaks ranks with its rivals in both its bottom-up portfolio management model and in the composition of its sales force. At firms such as Sanford C. Bernstein & Co., Fiduciary Trust Co., Northern Trust and U.S. Trust, most investment products offered to private clients are uniform and centrally managed , essentially, one size fits all.

When a new customer signs with Neuberger Berman, a private asset management representative (called a client consultant) reviews his financial situation and interviews him to get a feel for his risk tolerance. That's standard operating procedure throughout the industry. But Neuberger then apportions the client's account among one or more of 30 portfolio teams, which employ a dozen different equity styles that range from deep value to growth. Of the roughly $26 billion in high-net-worth portfolios, about $20 billion is in equities and $6 billion is in fixed income. About 75 percent of the equity portfolios fall within the categories of value and growth-value blend; just 25 percent are pure growth.

In this respect Neuberger slices its product package very thin. At Bessemer Trust Co., for example, clients are assigned to one core U.S. equity strategy, which has a growth tilt.

Explains Neuberger's Seth Finkel, a 12-year veteran client consultant: "You try to assign the client to a team that matches his investment goals and, in some cases, his personality. Some portfolio managers enjoy interacting with clients, others don't. You try to match them up appropriately."

Most clients come to Neuberger for the firm's value orientation. That's a central reason that the composite private client equity portfolio fell just 2.6 percent last year, compared with the S&P 500's 11.9 percent loss. "The bottom line is performance," says one Neuberger client, an East Coast physician. "With Neuberger the numbers long term have been outstanding. Client service is important, but at the end of the day, they deliver good numbers."

Over the past five years, Neuberger's private client equity composite has returned an average annual 12.8 percent, versus 10.8 percent for the S&P 500. And for the ten years ended December 31, 2001, the composite produced average annual returns of 15 percent, compared with 13 percent for the S&P 500.

Neuberger portfolio managers enjoy considerable autonomy compared with their counterparts at other firms, which typically have rigid investment guidelines and approved and verboten stock lists. Naturally, that is an appeal. Says Cary Kop-lin, who joined Neuberger in April 2000 after 34 years at Schroder Wertheim & Co.: "I showed up at Neuberger and from the start there was no pressure on me to meld into one style. I was allowed to find my way."

Adds his partner, value portfolio manager Michelle Stein: "With Jeff Lane you have to fill out a form to order new office supplies, but there's no approved stock list. Here they really leave us alone."

Lane admits that critics see Neuberger as a "cooperative" of independent fiefdoms, but he sees that as more of a strength than a weakness. "If you asked me when I started here whether I prefer the Bernstein model , top-down, one size fits all, easy to communicate , I would have said that I did. Today I see our model as the better way to go. It's diversified: There's no approved list dictating what people can or cannot buy. Our portfolio managers feel unencumbered and more entrepreneurial."

Says John LaPann, president of Federal Street Advisors, a Boston-based consulting firm serving 30 wealthy individuals, with $2.5 billion assets under advisory, "No matter who our client is, Neuberger has someone who is bound to be a good fit."

Often the system has to be sold to potential clients. "Some people feel it's the luck of the draw," says client consultant Finkel. "Potential clients will invariably say to me, 'I hear that at Neuberger how well you do depends on who you get.' And they'll ask, 'How do I know I'm going to get somebody good?' What I tell them is that we have a wide spectrum."

The firm also departs from industry convention in the setup of its sales force. Most private client specialists, including Bessemer, Fiduciary and U.S. Trust, maintain separate operations for sales and client service, allowing salespeople to devote all their time to signing new accounts. But Neuberger's salespeople also serve as client service reps on the accounts they bring in. That can be a strong selling point to potential clients who value such continuity.

"The last thing a client wants is to be shuffled off to someone junior. At a lot of other firms, the guy who sells the account is not who services it," says Joel Isaacson, a New York,based accountant who often refers clients to Neuberger.

Finkel feels that the model gives him an edge. "Countless times people will ask, 'Who is going to be my point man on the account?' and you can see in their eyes that they don't want the answer to be someone else."

The firm's 40 client consultants, who work out of 13 offices across the country, are projected to bring in $2 billion of new assets this year. Five years ago 12 consultants in just three offices brought in $253 million.

Private client chief Schneider has built up the client consultant force steadily. "We were extremely picky and we were patient," she says. "We wanted people who know the business, are actually from the areas they cover and want to end their careers at Neuberger." Between 1996 and 2001 no senior salespeople left the firm.

Since taking over, Lane has made it clear that the high-net-worth business should take center stage at Neuberger. He wasn't CEO for long before naming Schneider to the executive management committee that runs the firm, promising her the necessary resources to fund her effort.

These days, the client roster includes the occasional ballplayer and Hollywood producer, as well as retiring baby boomers and fifth-generation heirs. Typical for the industry, Neuberger's average private client has a net worth of about $10 million, keeps a $3.6 million account at the firm and pays annual fees of 125 basis points.

Like many asset managers, Neuberger is now on the prowl for small entrenched asset managers that are ready to sell out. In the past year and a half, the firm has closed three acquisitions and completed four lift-outs of high-net-worth money managers. "We are selective," says Lane, "and we don't want anybody who doesn't want us."

Lane started small, beginning with the December 2000 acquisition of New York,based Delta Capital Management for an undisclosed sum. With assets of $550 million, the high-net-worth shop was founded by Francis Fraenkel, a relative value-style manager who once ran money at the former Lehman Asset Management Co. "Neuberger had never done an acquisition before," explains COO Matza. "We had to teach our company how to grow."

Neuberger also targeted firms that managed asset classes where it had no particular expertise , in March 2001 the firm acquired the $186 million Fasciano Fund, a small-cap retail mutual fund run out of Chicago by portfolio manager Michael Fasciano. That fund is up 10 percent so far this year, versus a 2 percent return for the Russell 2000 index. Neuberger also looked to bolster stock picking depth in its core portfolios, buying Oscar Capital, a money manager with a value-growth mix as well as investments in hedge funds, a first for the firm.

With an eye toward gaining referrals and adding the ancillary services that a high-net-worth money manager needs , tax planning, consulting, back-office support , Neuberger last year acquired Executive Monetary Management, a financial and estate planning consulting firm that advises $1.8 billion in ultra-high-net-worth assets. While the referrals have yet to roll in, Lane is confident that they soon will. "EMM was a terrific strategic fit," he says.

The no-nonsense CEO is ready to roll the dice. "We've been doing small deals for now," Lane notes, "but nothing says we can't do a bigger one going forward."

Might that include the sale of Neuberger itself? Not surprisingly, Lane declines to comment. But industry sources suggest that it's a real possibility, and that if someone offered $60 a share, it might just do the trick.