We want to help grow Neuberger Berman's name around equity investing, Senior portfolio manager Hendrik-Jan Boer, who joined the group with his team in November 2020, wants to realise this ambition. In an interview, he explained the strategy and approach of the US asset manager and especially the focus on the long term and on quality came to the fore.
 Hendrik Boer |
Hendrik-Jan Boer: We are originally an American asset manager and are 100% staff-owned. We employ around 2,300 people worldwide and around 600 of them are shareholders. And the interests of the owners coincide with those of the clients, which ensures that both the company and the managers can develop a long-term vision. Ultimately, the main objective is to achieve the best return for our customers. If we succeed in doing so, we will also do well, we reason. ESG is also of great importance: today 13 people are working exclusively on ESG and in 2020 we will be one of the PRI ESG Leaders' group, one of 20 asset managers out of a total of about 2100 asset managers.
Why did you and your entire team make the switch to NB in November 2020?
Hendrik-Jan Boer: At the end of 2019 we entered into talks with NB and after a study period of almost a year we came to an understanding. Neuberger Berman, while growing mainly organically, does take on a management team from time to time, which fits well with the group's philosophy. NB was looking to expand its equity capabilities, especially in global and European equities, and was looking for managers with a strong fundamental and ESG track record and a long-term outlook. The institution took a good look at us and found that the qualities of our team were a good fit. The reason we made the switch is that NB has the same vision for itself as it does for its clients: a focus on the long term and quality, and effectively doing what you preach. That is quite different from being part of a large insurance company where you have to deal with a different kind of management.
What does your team look like and what is the division of roles?
Hendrik-Jan Boer: Our team, active in the field of global sustainable equity investments, consists of three portfolio managers and four analysts, and I am the head that has to oversee everything. We are all in the same place, which makes it very easy to communicate with each other, and also when we work at home the communication goes very smoothly. On the one hand, the analysts look at the risk/return of individual companies, they put all this into models and then come up with the best ideas. On the other hand, the role of the managers is more to manage the total portfolio within the criteria that we promised to the client, such as staying within the risk profile and allocating in a way that we stand for: bottom-up focused, uncorrelated and combining interesting business models. And ultimately turning it into a high-quality portfolio or product, such as our European Sustainable Equity Fund, that will outperform in difficult times, both politically and financially, and outperform in good times thanks to its strong underlying characteristics.
How does your team go about narrowing the very wide equity universe?
Hendrik-Jan Boer: First of all, it does a screening on the widest possible universe of about 12 000 companies. And the team investigates which companies have the highest return on assets. That is a very good indicator to measure over several years how successful and competitive a company actually is. Step two is then to exclude companies that do not meet a simple application of sustainability. After that, we have a universe of 1,000 to 1,500 names left. From there, we let our analysts go and see which of those companies are best positioned and have the most attractive profile within their specific industries. We also look at how accessible they are for engagement from our side and we also run our models on them. And as long as companies continue to meet our criteria, we go further into them.
How does your team go about narrowing down the very wide stock universe?
Hendrik-Jan Boer: First of all, it does a screening on the widest possible universe of about 12 000 companies. And the team investigates which companies have the highest return on assets. That is a very good indicator to measure over several years how successful and competitive a company actually is. Step two is then to exclude companies that do not meet a simple application of sustainability. After that, we have a universe of 1,000 to 1,500 names left. From there, we let our analysts go and see which of those companies are best positioned and have the most attractive profile within their specific industries. We also look at how accessible they are for engagement from our side and we also run our models on them. And as long as companies continue to meet our criteria, we go further into them.
And after that, does the added value of analysts really emerge?
Hendrik-Jan Boer: The most interesting part is indeed in the bottom-up analysis of a company. How is the business process structured and how does the management allocate its investments and capital with foresight, we ask ourselves, and look at this simultaneously with numerous sustainability aspects. We do not want companies that cause damage to society in the broadest sense - that is the minimum threshold. Ultimately, what is important is that all companies in our portfolio must be strong in what they do. Do they have a strong competitive advantage and do they realise economies of scale? These are aspects that make companies strong and also allow them to grow in bad times. These companies also generate much more internal cash flow, allowing them to continually plan their own future without having to rely on external money. There are, of course, other things that we scrutinise. We find out which companies have better cost control, are better able to adapt to changing consumer tastes and constantly evolving regulations, as well as whether they use innovation and new technology in a way that can help the business process. We find that there is a select group of companies that structurally do this in a good way.
Is sustainability important to NB?
Hendrik-Jan Boer: Many products are called sustainable or ESG but actually it is no more than applying an initial filter or just a score made by an external party. That is not our approach. Sustainable and financial analysis are simply one to us. It is labour-intensive because every company has different factors and influences on the business process. We believe that sustainability simply increases the quality of a company. It is not just staying away from activities and behaviour that are not considered sustainable, such as weapons, tobacco and the gambling industry. We also stay away from companies that structurally exhibit controversial behaviour. The past has shown that these companies underperform in the long term as a result.
Does your strategy ensure outperformance?
Hendrik-Jan Boer: Yes, but sometimes the market is short-sighted. Active management, which is scarce, and quality always comes out on top in the end but sometimes you have to be patient. The period 2016-2018 was difficult for us because after the election of Trump, old industries such as oil, steel companies and so on were eagerly picked up. Short of that, many of those industries were and are structurally on the losing side because new technologies are undermining them. If you stick to your own style, you will eventually be rewarded and build up a good track record. Outperformance, however, is never a straight line because you are dependent on market sentiment. In recent years, we have seen companies in our portfolio outperform the market by 18% in 2020 and the counter is already at 10% this year. This is all driven by the strength of the underlying companies.
How do you define active management?
Hendrik-Jan Boer: We are active and that is reflected in how much you deviate from the benchmark. You can measure this in different ways. For example, we have an active share of 85% and a tracking error, or volatility compared to that benchmark, of just over 4%. That is quite deviant and that is because our portfolio is very concentrated. For our global equity fund, we have 40 names while many other products do. We have 80 to 100 names in the portfolio.
How do you define active management?
Hendrik-Jan Boer: We are active and that is reflected in how much you deviate from the benchmark. You can measure this in different ways. For example, we have an active share of 85% and a tracking error, or volatility compared to that benchmark, of just over 4%. That is quite deviant and that is because our portfolio is very concentrated. For our global equity fund, we have 40 names while many other products do. We have 80 to 100 names in the portfolio.
How do you concretely find winners for the longer term?
Hendrik-Jan Boer: Our advantage is that we try to look really far into the future with our models, driven by long-term trends and competitive strengths and weaknesses of the companies. One can see that strong companies are able to sustain high returns on assets much longer than what the market estimates. Even for companies like Microsoft , Adobe or Atlas Copco, today's market is too negative in the long run. And how do we measure that? Well, we do DCF analysis, which is very suitable for looking far into the future, and use the HOLT method from Credit Suisse that looks at the cash flow return on investment. We think this is the fairest indicator that shows the real return that a company makes on its investments. It allows you to compare apples to apples. And what you see with these quality companies is that the market very quickly starts to take into account a weakening of the company's strengths. And if a company is still in an attractive long-term growth phase, then of course we do not agree. Then you see huge gaps between what the market expects and what we expect, and this is the biggest source of alpha and relative outperformance.
From time to time, the markets experience a dip, as they have in recent weeks. How do you deal with that?
Hendrik-Jan Boer: For clients who invest in our fund, it is often a very good time to enter. And in the long term, that is better for your return. On deep red days, we do not actually do any specific actions to respond to those falls, unless it is that we happened to be moving from one position to another on those days because we had found something better. We have to be careful not to manage a portfolio based on daily indicators and news. We think that in the long run, prices are only driven by the total added value that companies create and that is what we focus on. The annual turnaround in our funds is on the low side and is historically around 30%. So we hold stocks for 3 to 5 years on average, which is quite a long time. And in recent years we have made our portfolios even more concentrated ourselves and for 2021 we are rather close to a 15% turnaround. So we only trade sporadically. After all, we really believe in the individual names we have selected.
