While last year’s technology selloff was a game-changer for many growth-centric investors, it proved a vindication to a pair of portfolio managers at Neuberger Berman. The firm’s $1.7 billion Large Cap Growth Fund , with some of the biggest technology names among its top holdings, lost 24.3% in 2022. By comparison, the Russell 1000 Growth Index, its benchmark, slid 29.8%. That shows the value of careful, bottom-up stock selection in a part of the market that for years leading up to 2022 was considered a sure bet to grow, said Charles Kantor, senior portfolio manager. The market has moved back to valuing business fundamentals, he said, after a period when a stock’s “story” meant more than its balance sheet. And 2022’s performance told Kantor and Marc Regenbaum, the fund’s other portfolio manager, that they cut through the tech noise and picked the right stocks. “The proof’s in the pudding,” said Kantor, a Harvard MBA who joined Neuberger in 2000. “We hate losing money but we, on balance, must have owned less of the hyperbolic growth.” NGUAX .RUI 5Y mountain The fund and its benchmark The fund, with an annual expense ratio of 0.83% and rated five stars by Morningstar, lands in the fifth percentile among all large growth funds over the past three years, and the 12th percentile over five years. ‘Rigor and process’ Kantor and Regenbaum have spent years managing the fund by taking a magnifying glass to the inner plumbing of some of the biggest growth stocks. The fund uses an economic value-added (EVA) framework, which Regenbaum said accounts for balance sheets, cost of capital and management incentives when deciding, in his words, if a great company can become a great stock. This strategy builds in part on Kantor’s prior work as a consultant trying to best align a company’s performance measurement with maximum shareholder value over the long term. “You should go to the end of the earth and back to do the fundamental research necessary to buy not just good companies, but to buy them at future growth values,” Kantor said, adding that the goal is to bring “rigor and process” to stocks that are too often marketed and hyped. Risk management is a key part of their evaluation, as is a review of the authenticity of companies’ environmental, social and governance work, Regenbaum said. Neuberger is also known for its “active engagement” with the companies it holds. What the fund is left with, is a group of stocks it calls “Beyond Privileged and Resilient Companies.” “Given we do not know the Fed’s terminal rate and when the U.S will hit a recession, we continue to ‘double down’ on our Beyond Privileged and Resilient companies while intensifying our due diligence around each investment’s ‘pricing power,’ competitive moat, business quality and cash flows as we progress through 2023,” Kantor and Regenbaum wrote in their first quarter letter to shareholders. Indeed, Morningstar says the fund’s portfolio has a lower price-to-book-value than other large cap growth funds or Morningstar’s benchmark index for the group, and faster book value growth. Almost 67% of the fund’s portfolio is made of stocks that Morningstar regards as having a wide moat, higher than the average large cap growth fund’s 63% or the Morningstar index’s 61%. Microsoft was the fund’s biggest holding at 9.9% at the end of the first quarter, followed by Apple (7.4%) and privately-held, pre-IPO Fanatics (5.7%). Salesforce (3.9%) and Alphabet (3.8%) rounded out the top five. Software, tech hardware, interactive media, internet, semiconductor and semi equipment stocks took up 49.6% of the entire portfolio at the end of the first quarter. For all that, Morningstar’s latest report said the fund’s “strategy skews toward smaller, more value-oriented companies compared with its average peer in the Large Growth Morningstar Category.” Kantor and Regenbaum, an NYU MBA who joined Neuberger in 2007, say they’re methodical, seeing strong futures for their stocks only after sifting through financial statements and the quality of management, who they see as executors of cash flows. They also look closely at the value of future growth and return on invested capital. For all that, seven of the fund’s top 10 holdings at the end of March were in tech, the exceptions being Fanatics, Prospect Capital and UnitedHealth . “You pay something for today, and then you should try and quantify how much you pay for the future that is yet to be delivered,” Kantor said. Outperformance over one and three years To be sure, the managers admit that their focus on quality has cost them gains in the past. There were “crazy growth companies that went to the moon,” Kantor said, “and then unfortunately at some point had to return to Earth.” In 2020, the fund lagged the Russell 1000 Growth Index by almost four percentage points. Still, the pair note that their ability to limit losses in 2022 proves the fund holds the right stocks. It’s easier to make money when you have a smaller loss to bounce back from, Kantor said. The fund has outperformed its bogey over the last one and three years, through March 2023. Kantor took over the nearly three-quarter-century old fund in 2015 and Regenbaum joined him about two years later. They “reluctantly” changed the name from the Neuberger Berman Guardian Fund last September to better reflect the investment strategy, though they very much still see themselves as “guardians” of capital. Investors are at an important moment given the Federal Reserve’s campaign to rein in inflation by hiking interest rates, and the interest-rate sensitive nature of growth stocks. The central bank is set to meet on May 2-3, with a majority on Wall Street thinking the benchmark fed funds rate will rise yet another quarter point. But Kantor said the work he and Regenbaum have done to pick the best stocks leaves him optimistic at times of higher market uncertainty. For his part, Regenbaum said that while the macroeconomic outlook for growth investing may have shifted, that’s only bolstered the value of the fund’s “bottom-up” strategy. “It does feel like we’re in a different investment regime where the details matter, where fundamentals matter,” Regenbaum said. “When you have this kind of change, right, it’s not going to be just a stock market, it’s suddenly a market of stocks. And as active stock pickers, you’ve got to find the right one.” Although the Investor, Trust and Advisor Classes of the fund are closed to new investors, Classes A, C, Institutional, R3 and R6 are open, although sometimes with assorted, higher expense ratios, fees or front-end loads.
