NEUBERGER & BERMAN EQUITY TRUST
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 6 - 11) are revised to read as follows:
NEUBERGER & BERMAN MANHATTAN PORTFOLIO
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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
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The predecessor of Neuberger & Berman GENESIS Fund (which, like
Neuberger & Berman GENESIS Trust, invests all of its net investable assets in
Neuberger & Berman GENESIS Portfolio) 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 Trust 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?
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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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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.
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.
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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
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 1950, when Roy R. Neuberger founded the
predecessor of Neuberger & Berman GUARDIAN Fund, which, like Neuberger & Berman
GUARDIAN Trust, invests all of its net investable assets in Neuberger & Berman
GUARDIAN Portfolio.
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, the Fund, 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, this
past record does not necessarily predict the Fund's future practices.
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.
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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.
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.
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