Oct. 22, 2003 — The leader of a retreat can spearhead an advance.
Take the Neuberger Berman Focus/Investor (NBSSX), for example. The fund suffered its second consecutive loss in 2002, falling 36.4%, while the average mid-cap value fund dropped 19.8%, and the S&P 500 slid 22.1%. This year, though, the Neuberger Berman fund jumped 46.6% through September. That topped its peer group, which was up 18.8%, and the index, which rose 14.7%.
Neuberger Berman Focus's 13.5% return in the third quarter was also the best among similar funds, which rose 7.4%. By comparison, the S&P 500 index gained 2.7% in the three-month period.
"What's doing it for us this year?" asked Kent Simons, who manages the portfolio. "The answer, basically, is, it's the same things that did it to us last year."
Previously, the $1.7-billion fund was weighed down by its financial and technology stocks, but many of those same holdings have been among his best performers in 2003, Simons said.
Start with Capital One Financial (COF), then and now the fund's No. 1 stock. Shares of the credit card and banking company fell the summer before last because of concerns about an informal memorandum of understanding between Capital One and federal regulators, Simons said. The stock never recovered, ending the year down 40%, but it's more than doubled this year, he noted.
Simons remains attracted to the company because it has generated returns on equity and earnings growth of more than 20% since it went public, yet its stock trades at only 13 times projected 2003 earnings.
Similarly, Citigroup Inc (C), which currently ranks second in the portfolio, and J.P. Morgan Chase & Co (JPM), another major holding, "had their earnings dented fairly substantially," in 2002, Simons said, in part because they had been the lead banks for Enron Corp (ENRNQ) and WorldCom, which were forced into bankruptcy following disclosures of corporate scandals.
Elsewhere in the finance sector, brokerage houses like Merrill Lynch (MER), which now holds fifth place in the portfolio, were hurt by New York Attorney General Eliot Spitzer's allegations that their investment advice was tainted by conflicts of interest, which led Wall Street firms to reach a settlement with Spitzer and federal regulators.
As of October 14, however, Citigroup's stock is up 39%, and shares of Merrill and J.P. Morgan have both risen 53%.
Simons argued that the problems that weakened his financial services stocks a year ago were highly unusual and are unlikely to crop up again. Moreover, the long-term outlook for these kinds of companies is promising because demographic factors are working in their favor, he said. He explained that Americans invest most heavily between the ages of 55 and 65, "and that part of the population is probably going to be the fastest growing over the next ten years."
Citigroup and J.P. Morgan look good in particular because they're global businesses whose earnings growth exceeds that of companies in the S&P 500 while their stocks trade at a discount to the index, Simons said. Both are also benefitting as the U.S. economic recovery picks up steam, he said.
