One of James Brown’s most enduring songs is his 1966 hit, “It’s A Man’s Man’s Man’s World.” Adapting that to the investment world and changing the title to “It’s A Growth, Growth, Growth Investor’s World” could perhaps summarize the U.S. equity investment landscape over the past decade.
Following the election of former President Trump, some investors presumed his promises to reinvigorate smokestack America might prompt markets to favor value stocks. That didn’t happen, and growth-oriented stocks began to pull ahead of value-oriented stocks in mid-2017—then zoomed way ahead after the Covid-fueled recession in 2020. During this period, value funds seemed as sexy as your grandfather’s Oldsmobile, and value managers weren’t getting the cover story treatment in the financial press.
But Eli Salzmann, senior portfolio manager at the Neuberger Berman Large Cap Value Fund, said the recent trends favoring growth never really bothered him. Salzmann, who took the helm at the fund at the start of 2012 along with portfolio manager David Levine, has seen that movie before.
“I’ve been in this for a long time and have managed value money for close to 30 years, and I know that things move in cycles,” he says. “Yes, there are periods where you’re very much in favor and there are periods where you’re very much out of favor. But I’ve learned you stick to your discipline.”
And that discipline has paid off for the fund, even before the rally in value-oriented stocks earlier this year when the so-called reopening trade kicked in and value stocks took the lead over growth stocks (as measured by the Russell 1000 Value and Growth indexes; the former is the Neuberger Berman fund’s bogey). Growth had regained the upper hand since Covid’s summer resurgence, but it hasn’t dimmed the Neuberger Berman fund’s long-term track record (even if the fund’s three-month performance vastly trailed that of its peers).
Indeed, the fund has landed in the top quartile in Morningstar’s large-value category in all of the measured time frames from year to date to the past 15 years. Some of that outperformance pre-dated Salzmann and Levine’s arrival, but they have continued the impressive run, including category percentile rankings of first and second in three- and five-year periods, respectively. The fund was up 51% in the one-year period ended September 10.
Salzmann sums up the U.S. equity market and his fund’s place in it this way: Growth stocks leading the equity rally—such as the mega-cap tech names—are way overvalued, while his fund’s portfolio is quite undervalued. And that, he believes, provides an outperformance opportunity for his fund. “We think there’s good value in all of our four overweighted sectors—financials, basic materials, energy and industrials,” he says.
Take financials, for example. “Right now the market as a whole is trading at a multiple of 20 times, and most of the banks that we own trade at 11 to 12.5 multiples. I can use the same thought process for energy and industrials. The stocks we own are all trading at a massive discount to the market,” Salzmann says.
Within financials, Salzmann’s favorite subsectors are banks, which include both regionals and money centers, as well as life insurance companies. His recent favorite regional banks were Truist Financial Corp. and Comerica Inc. He was big on Bank of America Corp. on the money center side, and in the life insurance space he liked MetLife Inc. and Equitable Holdings Inc.
Two Big Differentiators
Salzmann highlights two aspects he believes are differentiators for his fund. One relates to the interrelated concepts of capital and capacity, and it explains why he’s bullish on the energy sector.
“We look for sectors that are deprived of capital for long time periods, and in turn are deprived of capacity. And that’s what energy is,” Salzmann explains. “Starting in 2014, energy started to have massive capital outflows for a number of reasons, one of which is a lot of that money went into green energy. That kind of capital deprivation brought on a lot of capacity deprivation.
“Because oil was under so much pressure, you had all of this capital running out and all of this capacity being taken out,” he adds. “Now we’re on the other side of that mountain, probably for a couple of years to come, where so much capacity has come out that it will take quite a bit of time for the capacity to come back on, and that means that oil prices—as much as they’ve appreciated recently—will continue to appreciate.”