NEUBERGER & BERMAN EQUITY FUNDS
Supplement dated April 1, 1997
to Statement of Additional Information dated December 6, 1996
INVESTMENT INFORMATION
The sections regarding the investment programs and managers of the Portfolios
(pages 11-23) are revised to read as follows:
NEUBERGER & BERMAN MANHATTAN PORTFOLIO
Neuberger & Berman MANHATTAN Portfolio's objective is capital
appreciation, without regard to income. The Portfolio differs from other
Portfolios in its willingness to invest in stocks with price/earnings ratios or
price-to-cash-flow ratios that are reasonable relative to a company's growth
prospects and those of the general market. The Portfolio is comprised of what
the manager believes are stocks of financially sound companies with a special
market capability, a competitive advantage or a product that makes them
particularly attractive over the long term, but that are selling at a reasonable
price relative to their growth rate. N&B Management calls this approach "GARP"
- -- growth at a reasonable price.
Neuberger & Berman MANHATTAN Portfolio's manager views value on
both a relative and an absolute basis, so the Portfolio may buy stocks with
somewhat above-market historical growth rates. The Portfolio tends to stay more
fully invested when the manager thinks the market is attractive for quality
growth companies. But the Portfolio will get out of stocks and into cash when
the manager thinks there are no reasonable values available. The Portfolio
steers clear of popular growth stocks selling at extremely high prices.
NEUBERGER & BERMAN GENESIS PORTFOLIO
The predecessor of Neuberger & Berman GENESIS Fund was
established in 1988. A fund dedicated primarily to small-capitalization stocks
(companies with total market value of outstanding common stock of up to $1.5
billion at the time the Portfolio invests), Neuberger & Berman GENESIS Portfolio
is devoted to the same value principles as the other equity funds managed by N&B
Management. The Portfolio is comprised of what the manager believes are
small-cap stocks with solid earnings today, not just promises for tomorrow.
Many people think that small-capitalization stock funds are
predominantly invested in high-risk companies. That is not necessarily the case.
Neuberger & Berman GENESIS Portfolio looks for the same fundamentals in
small-capitalization stocks as other Portfolios look for in stocks of larger
companies. The portfolio manager sticks to the areas she understands. The
portfolio manager looks for the most persistent earnings growth at the lowest
multiple, as well as for well-established companies with entrepreneurial
management and sound finances. Also considered are catalysts to exposing value,
such as management changes and new product lines. Often, these are firms that
have suffered temporary setbacks or undergone a restructuring.
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Neuberger & Berman GENESIS Portfolio's motto is "boring is
beautiful." Instead of investing in trendy, high-priced stocks that tend to hurt
shareholders on the downside, the Portfolio looks for little-known, solid,
growing companies whose stocks the manager believes are wonderful bargains.
AN INTERVIEW WITH THE PORTFOLIO MANAGER
Q: If I already own a large-cap stock fund, why should I consider
investing in a small-cap fund as well?
A: Look at how fast a sapling grows compared to, say, a mature
tree. Much of the same can be true about companies. It's possible for a smaller
company to grow 50% faster than an IBM or a Coca-Cola.
So, many small-cap stocks offer superior growth potential.
Consider the cereal you eat, the detergent you use, the coffee you drink -- and
imagine if you had invested in these products BEFORE they became household
names. If you had invested only in the blue-chip companies of the day, you would
have missed out on these opportunities.
Of course, we're not advocating investing in a portfolio
consisting only of small-cap stock funds. It pays to diversify. Let's look back
about 25 years. While past performance cannot indicate future performance,
small-cap stocks outperformed larger-cap stocks 16 out of the 25 years from 1971
to 1996, which means larger-cap stocks did better the rest of the time.1/
Q: Neuberger & Berman GENESIS Fund is classified as a "small-cap
value fund." To many people, "small-cap value" is an oxymoron. Can you clarify
the Portfolio's investment approach?
A: We understand the confusion. After all, a lot of people equate
"small-cap" with "growth." They also equate "value" with "cheap." At Neuberger &
Berman GENESIS Portfolio, we're 100% behind finding GROWING small-cap companies
- -- what we believe are highly profitable companies with solid records and
promising futures. So where do we part company with managers who follow a
"small-cap growth" style? It comes down to how much growth and at what price.
Small-cap growth investors seem willing to pay a premium for vastly superior
growth. This results in two problems: a) growth tends to be discounted by the
premium valuations, and b) the growth expectations are so high as to be
unsustainable. We believe superior yet more stable returns can be purchased at
significant discounts. They may be found in mundane, perhaps even boring,
industries. Remember, the same glamorous appeal that attracts so many growth
investors also attracts competitors.
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1/ Results are on a total return basis and include reinvestment of all dividends
and capital gain distributions. Small-cap stocks are represented by the fifth
capitalization quintile of stocks on the NYSE from 1971 to 1981 and performance
of the Dimensional Fund Advisors (DFA) Small Company Fund from 1982 to 1996.
Larger-cap stocks are represented by the S&P "500" Index, an unmanaged group of
stocks. Please note that indices do not take into account any fees or expenses
of investing in the individual securities that they track. Data about these
indices are prepared or obtained by N&B Management. The Portfolio may invest in
many securities not included in the above-described indices. Source: STOCKS,
BONDS, BILL AND INFLATION 1996 YEARBOOKTM, Ibbotson Associates, Chicago
(annually updates work by Roger G. Ibbotson and Rex A. Sinquefield). Used with
permission. All rights reserved.
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In that respect, we're "value" managers. Yet we'd like to make
this point clear: Low price-to-earnings multiples, in and of themselves, cannot
justify a "buy" decision. When we search for growing, high-quality small-cap
companies selling at what we feel are bargain prices, we ask ourselves: Is the
company cheap for a good reason? Or, does it have the financial muscle and the
management talent to make it into the big leagues?
Q: Let's turn to specifics. What criteria are used to decide
which small-cap companies make the cut -- and which ones don't?
A: Over the years, we've seen hundreds of small-cap companies
that flourished and just as many that failed to deliver on their early promises.
What made the difference? While every case is unique, here are a few important
traits of the winners.
First of all, a successful small-cap company normally produces
high returns. In practice, this means the business has a number of barriers to
entry. Perhaps the company has a technology that's hard to duplicate. Or maybe
it can make a product at a substantially lower cost than anyone else. Unlike
most businesses, it has an advantage that allows it to continue earning
above-market returns.
In addition to having a competitive edge, a successful small-cap
company should generate healthy cash flow. With excess cash, a company has the
ability to finance its own growth without diluting the ownership stake of
existing stockholders by issuing more shares.
No small-cap company can grow without having the right people on
board. That's why we spend so much time meeting the CEOs and CFOs of small-cap
companies. While we question the managers about future plans and strategies, we
spend as much time evaluating them as people. Do they seem honest and capable?
Or do they puff up their case? Making portfolio decisions is a lot about making
character judgments -- who has the stuff to manage a growing company, and who
doesn't.
THE RISKS INVOLVED IN SEEKING CAPITAL APPRECIATION FROM
INVESTMENTS PRIMARILY IN COMPANIES WITH SMALL MARKET CAPITALIZATION ARE SET
FORTH IN THE PROSPECTUS.
NEUBERGER & BERMAN FOCUS AND NEUBERGER & BERMAN GUARDIAN PORTFOLIOS
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Neuberger & Berman FOCUS Portfolio's investment objective is
long-term capital appreciation. Like the other Portfolios that use a
value-oriented investment approach, it seeks to buy undervalued securities that
offer opportunities for growth, but then it focuses its assets in those sectors
where undervalued stocks are clustered. The portfolio co-managers begin by
looking for stocks that are selling for less than the managers think they're
worth, a "bottom-up approach." More often than not, such stocks are in a few
economic sectors that are out of favor and are undervalued as a group. The
portfolio co-managers think 90% of cheap stocks deserve to be cheap and their
job is to find the 10% that don't.
The portfolio co-managers don't pick sectors for Neuberger &
Berman FOCUS Portfolio based on their perception of how the economy is going to
do. Nor do they engage in making economic or currency predictions. They look for
stocks with either low relative or low absolute valuations. Often, these stocks
will be found in a particular sector, but the managers didn't start out being
bullish on that sector. It's just where they happened to find the values. They
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find that if one company comes under a cloud, it tends to happen to its whole
industry. If an investment manager rotates the sectors in a portfolio by buying
sectors when they are undervalued and selling them when they become fully
valued, the manager would be able to achieve above-average performance.
Neuberger & Berman GUARDIAN Portfolio subscribes to the same
stock-picking philosophy followed since Roy R. Neuberger founded Neuberger &
Berman GUARDIAN Fund's predecessor in 1950.
It's no great trick for a mutual fund to make money when the
market is rising. The tide that lifts stock values will carry most funds along.
The true test of management is its ability to make money even when the market is
flat or declining. By that measure, Neuberger & Berman GUARDIAN Fund and its
predecessor have served shareholders well and have paid a dividend every quarter
and a capital gain distribution EVERY YEAR since 1950. Of course, there can be
no assurance that this trend will continue.
The portfolio co-managers place a high premium on being
knowledgeable about the companies whose stocks they buy. That knowledge is
important, because sometimes it takes courage to buy stocks that the rest of the
market has forsaken. The Portfolio is usually early in and early out. The
managers would rather buy an undervalued stock because they expect it to become
fairly valued than buy one fairly valued and hope it becomes overvalued. The
managers like a stock "under a rock" or with a cloud over it; they believe an
investor is not going to get great companies at great valuations when the market
perception is great.
Investors who switch around a lot are not going to benefit from
Neuberger & Berman GUARDIAN Portfolio's approach. They're following the market
- -- the Portfolio is looking at fundamentals.
NEUBERGER & BERMAN PARTNERS PORTFOLIO
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Neuberger & Berman PARTNERS Portfolio's objective is capital
growth. It seeks to make money in good markets and not give up those gains
during rough times.
Investors in the Portfolio typically seek consistent performance
and have a moderate risk tolerance. They do know, however, that stock
investments can provide the long-term upside potential essential to meeting
their long-term investment goals, particularly a comfortable retirement and
planning for a college education.
The portfolio co-managers look for stocks that are undervalued in
the marketplace either in relation to strong current fundamentals, such as a low
price-to-earnings ratio, consistent cash flow, and support from asset values, or
in relation to their projection of the growth of the company's future earnings.
If the market goes down, those stocks the Portfolio elects to hold,
historically, have gone down less.
The portfolio co-managers monitor stocks of medium- to
large-sized companies that often are not closely scrutinized by other investors.
The managers research these companies in order to determine if they are likely
to produce a new product, become an acquisition target, or undergo a financial
restructuring.
What else catches the portfolio co-managers' eyes? Companies
whose managements own their own stock. These companies usually seek to build
shareholder wealth by buying back shares or making acquisitions that have a
swift and positive impact on the bottom line.
To increase the upside potential, the managers zero in on
companies that dominate their industries or their specialized niches. The
managers' reasoning? Market leaders tend to earn higher levels of profits.
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Neuberger & Berman PARTNERS Portfolio invests in a wide array of
stocks, and no single stock makes up more than a small fraction of the
Portfolio's total assets. Of course, the Portfolio's holdings are subject to
change.
NEUBERGER & BERMAN SOCIALLY RESPONSIVE PORTFOLIO
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Securities for this Portfolio are selected through a two-phase
process. The first is financial. The portfolio manager analyzes a universe of
companies according to N&B Management's value-oriented philosophy and looks for
stocks which are undervalued for any number of reasons. The manager focuses on
financial fundamentals, including balance sheet ratios and cash flow analysis,
and meets with company management in an effort to understand how those
unrecognized values might be realized in the market.
The second part of the process is social screening. N&B
Management's social research is based on the same kind of philosophy that
governs its financial approach: N&B Management believes that first-hand
knowledge and experience are its most important tools. Utilizing a database, the
portfolio manager does careful, in-depth tracking and analyzes a large number of
companies on some eighty issues in six broad social categories. The manager uses
a wide variety of sources to determine company practices and policies in these
areas. Performance is analyzed in light of knowledge of the issues and of the
best practices in each industry.
The portfolio manager understands that, for many issues and in
many industries, absolute standards are elusive and often counterproductive.
Thus, in addition to quantitative measurements, the manager places value on such
indicators as management commitment, progress, direction, and industry
leadership.
AN INTERVIEW WITH THE PORTFOLIO MANAGER
Q: First things first. How do you begin your stock selection
process?
A: Our first question is always: On financial grounds alone, is a
company a smart investment? For a company's stock to meet our financial test, it
must pass a number of hurdles.
We look for bargains, just like the portfolio managers of the
other Portfolios. More specifically, we search for companies that we believe
have terrific products, excellent customer service, and solid balance sheets --
but because they may have missed quarterly earnings expectations by a few
pennies, because their sectors are currently out of favor, because Wall Street
overreacted to a temporary setback, or because the company's merits aren't
widely known, their stocks are selling at a discount.
While we look at the stock's fundamentals carefully, that's not
all we examine. We meet an awful lot of CEOs and CFOs. Top officers of over 400
companies visit Neuberger & Berman each year, and we're also frequently on the
road visiting dozens of corporations. From Neuberger & Berman SOCIALLY
RESPONSIVE Fund's inception, we've met with representatives of every company we
own.
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When we're face to face with a CEO, we're searching for answers
to two crucial questions: "Does the company have a vision of where it wants to
go?" and "Can the management team make it happen?" We've analyzed companies for
over three decades, and we always look for companies that have both clear
strategies and management talent.
Q: When you evaluate a company's balance sheet, what matters the
most to you?
A: Definitely a company's "free cash flow." Compare it to your
household's discretionary income -- the money you have left over each month
after you pay off your monthly debt and other expenses. With ample free cash
flow, a company can do any number of things. It can buy back its stock. Make
important acquisitions. Expand its research and development spending. Or
increase its dividend payments.
When a company generates lots of excess cash flow, it has growth
capital at its disposal. It can invest for higher profits down the line and
improve shareholder value. Determining exactly HOW a company intends to spend
its excess cash is an entirely different matter -- and that's where the
information learned in our company meetings comes in. Still, you've got to have
the extra cash in the first place. Which is why we pay so much attention to it.
Q: So you take a hard look at a company's balance sheet and its
management. After a company passes your financial test, what do you do next?
A: After we're convinced of a company's merits on financial
grounds alone, we review its record as a corporate citizen. In particular, we
look for evidence of leadership in three key areas: concern for the environment,
workplace diversity, and enlightened employment practices.
It should be clear that our social screening always takes place
after we search far and wide for what we believe are the best investment
opportunities available. This is a crucial point, and an analogy can be used to
explain it. Let's assume you're looking to fill a vital position in your
company. What you'd pay attention to first is the candidate's competence: Can he
or she do the job? So after interviewing a number of candidates, you'd narrow
your list to those that are highly qualified. To choose from this smaller group,
you might look at the candidate's personality: Can he or she get along with
everyone in your group?
Obviously, you wouldn't hire an unqualified person simply because
he or she is likable. What you'd probably do is give the job to a highly
qualified person who is ALSO compatible with your group.
Now, let's turn to the companies that do make our financial cuts.
How do we decide whether they meet our social criteria? Once again, our regular
meetings with CEOs are key. We look for top management's support of programs
that put more women and minorities in the pipeline to be future officers and
board members; that minimize emissions, reduce waste, conserve energy, and
protect natural resources; and that enable employees to balance work and family
life with benefits such as flextime and generous maternal AND paternal leave.
We realize that companies are not all good or all bad. Instead of
looking for ethical perfection, we analyze how a company responds to troublesome
problems. If a company is cited for breaking a pollution law, we evaluate its
reaction. We also ask: Is it the first time? Do its top executives have a plan
for making sure it doesn't happen again -- and how committed are they?
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If we're satisfied with the answers, a company makes it into our
portfolio. When all is said and done, we invest in companies that have diverse
work forces, strong CEOs, tough environmental standards, AND terrific balance
sheets. In our judgment, financially strong companies that are also good
corporate citizens are more likely to enjoy a competitive advantage. These days,
more and more people won't buy a product unless they know it's environmentally
friendly. In a similar vein, companies that treat their workers well may be more
productive and profitable.
Q: Why have investors been attracted to Neuberger & Berman
SOCIALLY RESPONSIVE Fund?
A: Our shareholders are looking to invest for the future in more
ways than one. While they care deeply about their own financial futures, they're
equally passionate about the world they leave to later generations. They want to
be able to meet their college bills and leave a world where the air is a little
cleaner and where the doors to the executive suite are a little more open.
NEUBERGER & BERMAN INTERNATIONAL PORTFOLIO
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Equity portfolios consisting solely of domestic investments
generally have not enjoyed the higher returns foreign opportunities can offer.
Over the past thirty years, for example, the average growth rates of many
foreign economies have outpaced that of the United States. While the United
States accounted for almost 66% of the world's total securities market
capitalization in 1970, it accounted for less than 30% of that total at the end
of 1996 -- or less than a third of the dollar value of the world's available
stocks and bonds.2/
Over time, a number of international equity markets have
outperformed their U.S. counterpart. Although there are no guarantees, foreign
markets could continue to provide attractive investment opportunities.
In addition, according to Morgan Stanley Capital International,
the leading companies in any given sector are not always U.S.-based. For
example, all ten of the largest construction companies, nine of the ten largest
banks and seven of the ten largest automobile companies are based outside of the
United States.
A principal advantage of investing overseas is diversification. A
diversified portfolio gives investors the opportunity to pursue increased
overall return while reducing risk. It is prudent to diversify by taking
advantage of investment opportunities in more than one country's stock or bond
market. By investing in several countries through a worldwide portfolio,
investors can lower their exposure and vulnerability to weakness in any one
market. Investors should be aware, however, that international investing is not
a guarantee against market risk and may be affected by the economic and other
factors described in the Prospectus. These include the prospects of individual
companies and other risks such as currency fluctuations or controls,
expropriation, nationalization and confiscatory taxation.
Furthermore, buying foreign stocks and bonds can be difficult for
the individual investor and involves many decisions. Accessing international
markets is complicated; few individuals have the time or resources to evaluate
thoroughly foreign companies and markets or the ability to incur the high
transaction costs of direct investment in such markets. A mutual fund investing
in foreign securities offers an investor broad diversification at a relatively
low cost.
_____________________
2/ Source: Morgan Stanley Capital International.
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The Portfolio invests primarily in equity securities of companies
located in developed foreign economies, as well as in "emerging markets." In all
cases, N&B Management's investment process includes a combination of "top-down
country allocation" and "bottom-up security selection."
The portfolio manager searches the world for investment
opportunities wherever and whenever they arise -- in both developed and emerging
markets. First, he selects countries with strong potential for growth. N&B
Management believes that the majority of the total return in a global equity
portfolio can be attributed to country allocation. The Portfolio's stock
selection process leads to diversification across more than 20 countries that
the manager believes offer the best value.
Then, he turns his attention to individual companies. The
portfolio manager looks at the fundamentals. Does the company lead its market
niche? How strong is its management? If the company is small, has it shown
sustained growth? In general, the Portfolio's selection process leads to
investments in mid-sized companies in developed countries and larger, more
established firms in emerging markets such as Hungary and Singapore.
TOP-DOWN APPROACH TO REGIONAL AND COUNTRY DIVERSIFICATION
N&B Management uses extensive economic research to identify
countries that offer attractive investment opportunities, by analyzing factors
such as growth rates of gross domestic product, interest rate trends, and
currency exchange rates. Market valuations, combined with correlation and
volatility comparisons, provide N&B Management with a target allocation across
twenty or more countries.
BOTTOM-UP APPROACH TO SECURITY SELECTION
N&B Management's value-oriented approach seeks out attractively
priced issues, by concentrating on criteria such as a low price-to-earnings
ratio relative to earnings growth rate, balance sheet strength, low price to
cash flow, and management quality. Typically, the Portfolio's investment
portfolio is comprised of over 100 different securities issues, primarily of
medium- to large-capitalization companies (determined in relation to the
principal market in which a company's securities are traded).
CURRENCY RISK MANAGEMENT
Exchange rate movements and volatility are important factors in
international investing. The portfolio manager believes in actively managing the
Portfolio's currency exposure, in an effort to capitalize on foreign currency
trends and to reduce overall portfolio volatility. Currency risk management is
performed separately from equity analysis. The portfolio manager uses a
combination of economic analysis to guide the Portfolio's longer-term posture
and quantitative trend analysis to assist in timing decisions with respect to
whether (or when) to invest in instruments denominated in a particular foreign
currency, or whether (or when) to hedge particular foreign currencies in which
liquid foreign exchange markets exist.
Over the past two decades, international stocks, on average, have
outperformed U.S. stocks. If you had invested $10,000 in the international
stocks that comprise the EAFE[REGISTERED TRADEMARK] Index and the U.S. stocks
that make up the S&P "500" Index twenty years ago, here's what your investments
would have been worth as of December 31, 1996:
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Avg. annual
Value of investment total return3/
International stocks
(EAFE[REGISTERED TRADEMARK]) $171,996 15.29%
Domestic stocks (S&P "500") $150,282 14.51%
Of course, these historical results may not continue in the
future. Investors should keep in mind the greater risks inherent in foreign
markets, such as currency exchange fluctuations, interest rates, and potentially
adverse economic and political conditions.
AN INTERVIEW WITH THE PORTFOLIO MANAGER
Q: Why should investors allocate a portion of their assets to
international markets?
A: First, an investor who does not invest internationally misses
out on about two-thirds of the world's potential investment opportunities. The
U.S. stock market today represents less than one-third of the world's stock
market capitalization, and the U.S. portion continues to shrink as other
countries around the world introduce or expand the size of their equity markets.
Privatizations of government-owned corporations, initial public offerings, and
the occasional creation of official stock exchanges in emerging economies
continuously present new opportunities for capital in an expanding global
market.
Second, many foreign economies are in earlier stages of
development than ours and are growing fast. Economic growth can often mean
potential for investment growth.
Finally, international investing helps an investor increase
diversification, which can reduce risk. Domestic and foreign markets generally
do not all move in the same direction, so gains in one market may offset losses
in another.
Q: Does international investing involve special risks?
A: Currency risk is one important risk presented by international
investing. Fluctuations in exchange rates can either add to or reduce an
investor's returns. Anyone who invests in foreign markets should keep that fact
in mind.
_____________________
3/ Total return assumes reinvestment of all dividends and other
distributions. The EAFE[REGISTERED TRADEMARK] Index, also known as the Morgan
Stanley Capital International Europe, Australia, Far East Index, is an unmanaged
index of over 1,000 foreign stock prices and is translated into U.S. dollars.
The S&P "500" Index is an unmanaged index generally considered to be
representative of U.S. stock market activity. Indices do not take into account
brokerage commissions or other fees and expenses of investing in the individual
securities that they track. Data about the performance of these indices are
prepared or obtained by N&B Management.
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Other risks include, but are not limited to, greater market
volatility, less government supervision and availability of public information,
and the possibility of adverse economic or political developments. Additional
special risks of foreign investing are discussed in the Prospectus.
Q: What are some of the advantages of investing in an
international fund?
A: An international mutual fund can be a convenient way to invest
internationally and diversify assets among several markets to reduce risk.
Additionally, the considerable burden of obtaining timely, accurate, and
comprehensive information about foreign economies and securities is left to
seasoned professional managers.
Q: What is your investment approach?
A: We seek to capitalize on investments in countries where we
believe that positive economic and political factors are likely to produce
above-average returns. Studies have shown that the allocation of assets among
countries is typically the most important factor contributing to portfolio
performance. We believe that, in the long term, a nation's economic growth and
the performance of its equity market are highly correlated. Therefore, we
continuously evaluate the global economic outlook as well as individual country
data to guide country allocation. Our process also leads to diversification
across many countries, typically twenty or more, in an effort to limit total
portfolio risk.
We strive to invest in companies within the selected countries
that are in the best position to capitalize on such positive developments or
companies that are most attractively valued. We usually include in the
Portfolio's investments the securities of large-capitalization companies,
determined in relation to the appropriate national market, as well as securities
of faster-growing, medium-sized companies that offer potentially higher returns
but are often associated with higher risk.
The criteria for security selection focus on companies with
leadership in specific markets or with niches in specific industries, which
appear to exhibit positive fundamentals and seem undervalued relative to their
earnings potential or the worth of their assets. Typically, in emerging markets,
we invest in relatively large, established companies that we believe possess the
managerial, financial, and marketing strength to exploit successfully the growth
of a dynamic economy. In more developed markets, such as Europe and Japan, the
Portfolio may invest to a higher degree in medium-sized companies. Medium-sized
companies can often provide above-average growth and are less followed by market
analysts, which sometimes leads to inefficient valuation.
Finally, we strive to limit total portfolio volatility and
protect the value of portfolio securities by selectively hedging the Portfolio's
foreign currency exposure in times when we expect the U.S. dollar to strengthen.
Q: How do you perceive the current outlook?
A: There is still an abundance of exciting investment
opportunities around the world. Many equity markets still have not reached the
maturity stage of the U.S. market and have much more room to grow. There are new
markets opening up to foreign investment and many changes are occurring in
markets where equity investments have traditionally commanded less attention
than fixed income securities.
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In addition, it appears to us that both Europe and Japan recently
passed the bottom of their economic cycles. In many economies, the current
recession has been the most severe of all recessions in the last five decades.
With global inflation still in check, many economies should continue to have
lower interest rates, which, coupled with a forecast of recovery in profits,
could positively impact stock market returns.
Q: Compared to the stock market in the United States, are there
more anomalies in security pricing abroad?
A: Well, the rest of the world is not as well followed as the
United States. So you'll find more anomalies. At the same time, though, the
level of analysis of companies around the world is improving every day, and the
gap in coverage is narrowing.
What never changes is the psychology of the investor -- you
regularly see either despair or euphoria in different sectors of every
international market. That, in our opinion, creates opportunities to find
undiscovered gems at extraordinarily cheap prices.
These opportunities can come from, say, uncertainty over an
election going one way or another. Investors may see the outcome as totally
disastrous for a country -- or as totally euphoric. Then, reality sets in, and
things are never as bleak or as wonderful as they had been painted.
Q: Do you integrate ideas from Neuberger & Berman's research and
the domestic portfolio managers?
A: Oh, sure. As everyone knows, the world is becoming smaller,
and certain industries are becoming global (or have become global). Whether one
thinks about technology, pharmaceuticals, medical devices, or the automobile
industry, it's really become one world market. So it's crucial to have good
knowledge about BOTH the United States and the areas outside the United States
where these companies dominate.
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