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By Sarah Bush | 02-27-2015 01:00 PM

Stanek: Striving for Consistency in an Uncertain Bond Market

Trying to time interest rates and move duration around is a fool's game, says Baird's Mary Ellen Stanek.

Sarah Bush: Hello, this is Sarah Bush with Morningstar. Today, I'm joined by Mary Ellen Stanek from Baird Funds. Thanks very much, Mary Ellen, for joining us today.

Mary Ellen Stanek: Thanks, Sarah. Great to be here.

Bush: So, we're talking about fixed income today, and I thought we would start with what's been going on in the markets. There's been a lot of speculation about when the Fed is going to raise interest rates. I thought maybe [you could start by talking] a little bit about your outlook right now.

Stanek: In terms of the outlook, we continue to be in a highly unusual environment, coming off of the financial crisis. Now, it's year seven, and there is a lot of uncertainty still. When you look around the world, we are still challenged in the world for economic growth--top-line growth. The U.S. is actually producing some of the strongest growth in the world right now, and inflation remains under control.

So, when we pull it all together, we think the Fed does want to come off their extreme measures--their zero-interest-rate policy--and probably will start moving if they can, if they feel like they've got an opening [to slightly move off the zero-interest-rate policy] that they launched in late '08 and have had in place since. That said, we don't expect a significant rise in interest rates, again, because economic growth is quite muted and inflation remains under control.

Bush: That brings me to an interesting point: You have a view on interest rates, but your funds are run duration-neutral, which is a little bit unusual in this world of unconstrained portfolios. Could you talk a little bit about that philosophy and how you think about duration management?

Stanek: Sure. Duration is just a very quick, precise measure of a portfolio's interest-rate sensitivity as interest rates change. Our approach is that we call ourselves structured fixed-income managers--and what do we mean by that? There are elements that are similar to an index or a passive strategy where we stay right at home, duration-neutral to the fund's benchmark in terms of interest-rate sensitivity.

The active part of what we do is that we're very opinionated about yield-curve positioning, sector allocation, and individual security selection of the portfolio relative to the benchmark while staying duration-neutral. And that's how we try to hit a lot of singles--once in a while, a double. We'll take a walk if we get it or a bunt if we get it. But we want to strive for a lot of consistency. Investors own bonds to lower overall volatility. They want to smoother ride. So, we look to have strategies that perform in a very consistent way. Trying to time interest rates and move duration around as a lot of active managers do, we think, is a fool's game. It's very tough to get those decisions correct in a consistent manner.

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