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By Sarah Bush | 03-31-2014 11:00 AM

Hitting Singles off the Yield Curve

Instead of outguessing short-term interest rate moves, fund shop Baird looks to add value on yield curve positioning, individual security selection, and sector allocation, and is currently finding opportunities in corporates.

Sarah Bush: Hello my name is Sarah Bush, and I'm a fund analyst with Morningstar. I'm joined today by Mary Ellen Stanek, who is CIO at Baird Investments. Thank you very much for joining us today.

Mary Ellen Stanek: Thank you.

Bush: [We've just completed the] first quarter, and I think there have been some surprises in the first quarter for bond investors. Could you talk a little bit about what we have seen so far in the markets.

Stanek: Once again everybody thought interest rates had to rise and the equity market was going to do well, but it looks like the bond market actually was a pretty good place to invest, with total returns of 1%-2% depending on the duration [a measure of interest-rate sensitivity] of your portfolio. And the equity market looks kind of flat with a fair amount of volatility, reminding us once again that trying to get the market timing down is so tough. There are so many other ways to add value versus trying to move duration around and outguess the short-term direction of interest rates.

Bush: Well that brings up an interesting point. As we were coming into this year everyone was saying, rates were obviously going to rise and there were lot of [fixed-income] portfolios that were [short-term]. Could you talk a little more about the approach that you take with the Baird bond funds, such as duration-neutral and what you are doing?

Stanek: We’ve always believed in the efficiency of the market itself, that for a given duration, or average maturity on your portfolio, you will be paid appropriate inflation adjusted returns over time. And when trying to outguess the short-term direction of rates most investors get that wrong, and consistently get that wrong. And then they compound that inconsistency, and it’s the loser's game. They're behind the eight ball and behind benchmarks. So we take duration-neutral approach. We believe in the efficiency of the market so we stayed market-neutral on the duration side along the spectrum of product offerings, including some of the short-bond products, and all the way out to our core and our core-plus offerings.

And then we spend our time and attention on the things that we do believe we add value on--yield-curve positioning, sector allocation, and individual security selection--and try to hit a lot of singles and compound--it’s baseball season--very high batting averages. By doing that we find over time we have very competitive results.

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