Sustainability in a Fat Tailed Long Duration World

The Post Crisis Backdrop Uncertainty Promoting Heightened Volatility and Investor Concern High levels of financial leverage in the developed world present Fat Tail risks Near term deflationary risks associated with fiscal austerity Longer term risks from policy induced inflation No analogs in living memory See Additional Disclosures at the end of this piece which are an important part of this presentation. 1

THE DEBT PROBLEM, UNCERTAINTY, AND ITS IMPLICATIONS

Today s Fundamental Uncertainty Begins with the Debt Problem Gross Government Debt as a Percent of GDP How will this be resolved? As of May 2013. Please see the Additional Disclosures page which is an important part of this presentation. Source IMF. 2

Uncertainty Has Likely Changed the Distribution of Market Returns Lower Average Returns and Higher Volatility May Be the Norm Lower Average Returns Over Time from a slower growth Economy Managing risk means recognizing structural change and evaluating businesses against an evolving backdrop Return Probability Fat Tail Risk Inflation/Deflation Active choices need to reflect changing probabilities Expected Equity Market Return Fat Tail opportunity requires non-normal analytical framework Please see the Additional Disclosures page which is an important part of this presentation. 3

Uncertainty Contributing to a Weak Cyclical Rebound Real GDP 22 Quarters from Previous Cyclical Peak 120 118 116 114 112 Average of Severe Recessions: +19.0% 110 108 Average of Mild Recessions: +15.3% 106 104 102 100 Current: +4.6% 98 96 94 Prior Peak 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Quarters As of Q2 2013. See Additional Disclosures at the end of this piece which are an important part of this presentation. Source: BEA, CSFB. 4

Capital Market Implications Capital Exposed to Risk Longer First, In a sub-normal growth world, expected returns would be commensurately lower Pay back periods returns sufficient to cover initial capital are significantly longer...... Resulting in Term extension for both Projects and Investment horizons...... Thus, affecting both the Treasurer s and Investor s analytical perspectives See Additional Disclosures at the end of this piece which are an important part of this presentation. 5

Capital Market Implications Term Extension also Entails an Expansion in the Factor Set Second: As Pay back periods extend, a larger number of issues affect the outcome than before More factors become relevant to the potential outcomes as the term extends outward... Resulting in a more complex analytical framework... With, potentially, a wider range of expected outcomes. See Additional Disclosures at the end of this piece which are an important part of this presentation. 6

Capital Market Implications The Slow Growth Backdrop Also Has Fat Tails Third: Extreme outcomes are more probable in the current debt-challenged framework Fat Tails around each of the now greater number of factors...... Alter the probabilities of the expected outcomes...... Resulting in greater uncertainty of expected returns See Additional Disclosures at the end of this piece which are an important part of this presentation. 7

Capital Market Implications No Analogs in Living Memory Fourth: The current conditions have no analogs in living memory Current conditions are unique in the history of the current US Institutional structure...... And may be distinctive relative to the global economic structure and linkages...... Resulting in modeling challenges...... Dealing with Unknowables See Additional Disclosures at the end of this piece which are an important part of this presentation. 8

A Sampling of Issues Profit Motive Fundamental Motivation of Participants in a Free Market System Free Market Economics bases expectations on participants behaving rationally with a profit motive The introduction of a deus ex machina......with unlimited power...... Who guarantees to buy at whatever the market price is... At a defined periodic schedule... A large amount of market securities...... Into the indefinite future...... And who is NOT motivated by profit...... Is?? See Additional Disclosures at the end of this piece which are an important part of this presentation. 9

The Fed Has Moved Aggressively and Pre-emptively Federal Reserve Balance Sheet $4,000 $3,500 Projected Effect of QE3 $3,000 $2,500 $ Billion $2,000 $1,500 $1,000 $500 $- Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 US Treasuries Overnight SLF TSLF CP Liquidity Facility Maiden Lane (Bear) Repos TAF Primary Credit PDCF Agencies AIG CP Funding Facility Liquidity Swaps MBS TALF Other Please see the Additional Disclosures page which is an important part of this presentation. Source: Federal Reserve, Strategas Research Partners. 10

Central Banks Across the Developed World Have Also Intervened Central Bank Balance Sheets as a Percentage of GDP 90 80 70 60 % of GDP 50 40 30 20 10 0 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Q311 Q112 Q312 Q113 EQ313 EQ114 EQ314 E ECB Fed BoJ SNB BoE Please see the Additional Disclosures page which is an important part of this presentation. Source: Federal Reserve, UBS. 11

A Sampling of Issues Lack of Conviction on Potential Outcomes Participants Facing Challenging Conditions, Unable to Formulate Opinions With Adequate Conviction to Act Lacking conviction, a move en masse to passive choices...... Leads to singular behavior... Undermining systemic stability See Additional Disclosures at the end of this piece which are an important part of this presentation. 12

Macro Supersedes Fundamentals and Value in Times of Stress Cross Correlation of S&P 500 Components and ETF Volume 0.80 1,650 65 Day Corr: Moving Ave 0.70 0.60 0.50 Dominance of Passive strategies 0.40 and Macro Hedging in times of stress and uncertainty 0.30 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Corr S&P 500 1,450 1,250 1,050 850 650 S&P 500 5 Day Average Total ETF $ Volume Traded ($B) $200 $150 $100 $50 $0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 As of September 6th, 2013. Please refer to the attached performance information. Source: ISI, JPM ; Bloomberg; Neuberger Berman. Note: Total Market is defined as: NYSE, NASDAQ and Amex. 13

A Sampling of Issues Distortions in Market Signals Distortions In Market Signals Faced with distorted market signals...... Investor s choices are increasingly based on a single factor... Contributing to behavior not characteristic of the market segment See Additional Disclosures at the end of this piece which are an important part of this presentation. 14

2H11 Investors Sought Dividends Over Quality S&P 500 Performance by Free Cash Flow to Enterprise Value Quintiles 10 Top Quintile Dividend Payers 5 Highest Free Cash Flow Average Total Return by Quintile % 0-5 -10-15 -20 Excluding Top Dividend Payers Lowest Free Cash Flow 1 2 3 4 5 Quintiles Avg FCF/EV = +12.7% +6.2% +2.8% -2.7% +4.7% FCF/EV Quintiles Excl Top Quintile Dividend Payers Top Quintile Dividend Payers Source: Factset; Neuberger Berman. Free Cash Flow = Trailing 12 month Net Income before extraordinary items + Depreciation and Amortization Capital Expenditures Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. See Additional Disclosures at the end of this piece which are an important part of this presentation. Past performance is no guarantee of future results. 15

The Case for Sustainability Elongated Risk Horizons, Fat Tails, Distortions, Tenuous Analogs The Past is true and can be used to establish a margin of error into the Future investment is grounded on the past whereas speculation looks primarily to the future. both investment and speculation must meet the test of the future; they are subject to its vicissitudes and are judged by its verdict. the future is something to be guarded against rather than to be profited from. Security Analysis, Benjamin Graham and David Dodd, 1962 The Past informs the Future when adequately analyzed and applied for relevance into the Future select situations that will increase in intrinsic value in the future so that... so long as you do not... pay too much for them at the time of purchase, you will... in time make money, and lots of it. Developing an Investment Philosophy, Philip Fisher, 1980 See Additional Disclosures at the end of this piece which are an important part of this presentation. 16

Our Strategy for Navigating this Period of Uncertainty Minimize Fat Tail Risks Preserve/Grow Long Term Purchasing Power Own businesses that share characteristics well suited to navigate today s uncertainty: Secular share gainers not wholly dependent on the economy for growth High consumable/recurring revenue streams Free Cash Flow and Balance Sheet Strength Ability to increase price or pass through price inflation when necessary Emerging Market exposure from US multinationals selling to the rising middle class Examples include: Selected Consumer Staples Personal Lines Insurance Logistics, Transportation, & Distribution Media Payment Networks Avoiding businesses most exposed to Fat Tail risk and fundamental uncertainty: Credit Sensitive Financials Commodity Materials and Deep Cyclicals Business models with high financial leverage and negative free cash flow Looking for opportunities: Health Care - find companies with strong cost/benefit value proposition Businesses positioned to benefit from an energy driven US industrial renaissance Not Counting on a Strong Economy Constructive on Equities while mindful of Fat Tail Risks This material is intended as a broad overview of the Portfolio Managers style, philosophy and process and is subject to change without notice. Portfolio Managers views may differ from those of other Portfolio Managers as well as the views of Neuberger Berman LLC. See Additional Disclosures at the end of this piece which are an important part of this presentation. 17

ADDITIONAL DISCLOSURES

Additional Disclosures This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic or market estimates discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates. Certain products and services may not be available in all jurisdictions or to all client types. Unless otherwise indicated, returns shown reflect reinvestment of dividends and distributions. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Investing in the stocks of even the largest companies involves all the risks of stock market investing, including the risk that they may lose value due to overall market or economic conditions. For use with professional investors only. This material has been prepared by Neuberger Berman Management LLC for professional investors only. It has not been filed with FINRA, and may not be reproduced, shown or quoted to, or used with, members of the public. Neither Neuberger Berman nor its employees provide tax or legal advice. All investors are strongly urged to consult their own tax or legal advisors with respect to the impact on their personal situation of any potential strategy or investment. Neuberger Berman LLC, is a registered Investment Advisor and Broker-Dealer. Member FINRA/SIPC. The Neuberger Berman name and logo are registered service marks of Neuberger Berman Group LLC. 2013 Neuberger Berman LLC. All rights reserved. 18