Neuberger Berman: Watching Brief

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  • 05 mins 15 secs
Steve Eisman predicted the 2008 financial crisis and was played by Steve Carrell in a Hollywood movie, The Big Short. Now he's got a portfolio available to UK investors. Watching Brief looks at Steve Eisman's TM Neuberger Berman Absolute Alpha Fund. Also discussing his view on the global equity long/short product is Brewin Dolphin's Ben Gutteridge, Head of Fund Research.

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Neuberger Berman
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He predicted the 2008 financial crisis, got played by Steve Carrell in a Hollywood movie, and now he’s got a portfolio available to UK investors. Watching Brief looks at Steve Eisman’s Neuberger Berman Absolute Alpha Fund. Also taking part with his view on this global equity long/short product is Brewin Dolphin’s Head of Product Research, Ben Gutteridge.

STEVE EISTMAN: It is definitely not a market neutral fund. Over a cycle, meaning from good times to bad times, we will be as high as 65% net long, which is very bullish; currently we’re slightly below 40%. And we have the ability to be net short. And I have been net short for extended periods of my career, which is unusual.

BEN GUTTERIDGE: Steve Eisman’s willing to put a bit of capital to work. We talk about gross and net, certainly on the gross side the amount of money that’s being used to generate those returns is at the higher end. You worry about some fund managers being a bit cautious, sitting on their hands, not putting as much money to work, and as a result not really having the types of returns, the potential returns on offer.

STEVE EISMAN: When you cover banks for as long as I have, you become an expert in the financial system. And the financial system is the plumbing of the economy. And it’s my experience that things show up in the plumbing a lot earlier than they show up elsewhere. So I look at things like credit quality, credit spreads, to figure out if there is any underlying stress in the economy. So there are three main lessons that I have taken from the financial industry. Number one: paradigms last a lot longer than you think. So the paradigm of the financial services sector from, call it 1995 until the financial crisis was we’re really smart, we can lever our balance sheets more every single year, so we can make more and more money. And that worked until it all blew up. The second lesson of the financial crisis is that compensation matters a lot. And the last lesson of the financial crisis would be that regulation matters a lot more than you ever think, and changes in regulation matter even more.

I think the most interesting paradigm out there is actually in the technology sector, they all have one thing in common, and that’s that they’re all oligopolies. And because they’re oligopolies their growth rates are more durable than anybody else’s.

BEN GUTTERIDGE: Well, there are a number of long/short equity funds out there. I think what stands out in this strategy is that the fund manager has clear experience of deriving returns from the short side of the book. Not every manager has that experience or can demonstrate that sort of success.

STEVE EISMAN: I’m short Canadian financials because I think that there’s going to be a credit cycle in Canada for the first time in 30 years. And I’m short a couple of European financials, largely because I think most European financials are poorly run and they’re going to have to continue to de-lever.

BEN GUTTERIDGE: Well, we’re using long/short portfolios in the absolute return part of the book. We are seeing it as a diversifier to equities and bonds. There is some aspiration that they can make returns in all stages of the market cycle. You know, during periods of high volatility that thesis could be tested, certainly, but in a bear market we’re hopeful that long/short managers can really use that short book to drive returns.

STEVE EISMAN: So we charge a flat management fee for our services. There are no hidden expenses and we do not charge a performance fee. As far as the question I always get when I say I don’t charge a performance fee is how are we aligned, my answer to that very simply is that 100% of my net worth is in a separately managed account that is managed pari passu with the fund. So we all eat the same meal.

BEN GUTTERIDGE: Neuberger Berman may not be quite the household name in the UK but to us on the professional side of research we are very familiar with Neuberger Berman and they can quite rightly talk about their achievements in fixed income and less liquid parts of the market. I’m sure they’ll be very proud of their achievements in traditional asset classes as well. But that they’ve managed to secure the talents of Steve Eisman, one of the most internationally recognised investors, showcases by itself that they are set up to allow fund managers of that kind to operate in the way that they need to, to deliver the best outcome for clients. So we have every confidence in this strategy.