Investor Dialogue

Investor Dialogue: Bradley Tank

Neuberger Berman’s chief investment officer for fixed income discusses opportunities in US credit markets.

Neuberger Berman isn’t well known in Asia. Can you explain a bit about the firm?
Neuberger has been around since 1939; it’s got a rich heritage in the US. We have a primarily domestic focus, but during the past eight or nine years we have become more active outside the US, both in terms of clients and investments. Our AUM [assets under management] was around $200 billion before markets took a dive; it’s a bit less than that today.

We’re a very well-balanced organisation — fixed income represents about 40%-plus of our assets, with equities about half and then hedge funds and private equity making up the rest.


Corporate credit offers refuge in the current environment

Process is the key to consistency

Don’t swing for the fences; try to control volatility at the margin

What’s your background?
I’ve been in the investment business for coming up to 30 years, starting in fixed income at Salomon Brothers.

I joined Neuberger in 2002 to help develop the fixed income business here, then we re-invented the firm a couple of years ago when we spun ourselves off from Lehman, and we’re now majority owned by the people who work here.

How would you describe your investment style?
We try to put as much process around what we do as possible because that’s the key to repeatability. On the one hand, we’ve got a pretty comprehensive top-down process to assemble a portfolio asset class by asset class and sector by sector, using a probability-driven forecasting process and an optimisation methodology.

We go back, we fine-tune it, we put a lot of thought into the relationships between sectors. Then, on the other end of the spectrum, when we’re talking about picking individual credits, our analysts all work off the same templates, so it doesn’t matter if we’re looking at an industrial company in Europe or a technology company in the US — there’s a check-list of things we look at that each of our analysts go through, so there’s a consistency in approach.

Presumably you’re not buying much European sovereign credit these days?
We do have a global bond business where we have exposure to sovereign credits in Europe, but as a bit of a newcomer to those markets we don’t have a huge embedded set of portfolios and as a consequence we’ve been pretty nimble, staying away from a lot of the peripheral economies. If there is a theme that runs through all of our activities, both domestic and nondomestic, it’s that we rely very heavily on our significant corporate credit research staff. We’ve found lots of opportunity and value (and, more recently, refuge) in solid corporate credits.

What has made corporate credit so attractive these days?
If you look at the past few cycles — particularly the 1991 recession and credit market correction, then the correction in 2001-2002 — they were mostly about excessive leverage in the corporate sector. That theme is largely played out now. On a global basis, corporate cash balances have never been higher, corporate balance sheets have never been more liquid and we’ve never seen global companies healthier. Companies have delivered.

When they do major strategy shifts and major acquisitions or mergers, it’s typically done with a lot of cash and/or stock, and very little debt.

That must be quite a change from your time at Salomon in the 1980s.
In those days, leverage was generally encouraged, but you go through a couple of nasty cycles, 2001-2002 in particular, and equity markets take a different view of leverage. That was only reinforced in the aftermath of 2008-2009 when you had major companies — single-A or double-A credits — that couldn’t tap the short-term markets for months. That created a further movement on the part of large businesses dependent on global financial markets to maintain pristine balance sheets and high levels of cash.

They didn’t want to be held hostage to money markets that could shut down. But it took a generation to get there.

Today, there are some super-successful companies with mammoth amounts of cash. Apple’s a great example; it’s an exceptional growth story and a stock that’s been an absolute monster — and the market has absolutely not punished them for carrying all that cash.

How does the weak growth outlook affect your view on corporate credit?
The correction we’ve seen in the risk markets makes it much easier to buy corporate credit with confidence right now, because when you’re talking about creditworthiness we don’t need a lot of top-line growth for solid companies to continue to pay and not have issues with respect to solvency. We just need an absence of a meaningful economic downturn. As long as we don’t get a whopper of a recession, the bulk of the corporate credit market — high-yield, high-grade — is going to deliver solid returns on par with the income levels available, which are pretty good. The high-yield market is back north of 80% in terms of yield and high-grade corporate bonds are paying 4.5% to 5%, depending on what part of market you’re in.

So this is a buying opportunity?
Yes, we’re viewing this as a bit of a buying opportunity, lightening up our exposure to interest rates and going a bit heavier in our exposure to credit, and we’re pretty confident that ought to work pretty well out to one or two quarters.

How often do you make adjustments to your typical portfolio?
We move things around a bit and when we do that we try to deliver the whole firm to our clients — a variety of equity strategies and a variety of bond strategies — so we work as a team. We’ve got an asset allocation committee, which I am a part of. Generally, when we do it we’re trying to look out anywhere from two to six quarters, and when we move we tend to move around commonly agreed upon benchmarks and acceptable levels of risk, and we move in modest ways. We tend not to swing for the fences or go for broke, but at the margin we’ll engage in an active asset allocation process that tries to take advantage of valuation discrepancies and dampen volatility or dampen risk in times of turbulence, so currently the last move we made in many portfolios generally was to increase our equity exposure from underweight stocks to neutral stocks.


This story first appeared in the October 2011 issue of FinanceAsia magazine.


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