A Compelling Core Bond Fund
Baird Aggregate Bond's risk-aware approach has kept it from major missteps over its long life.
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The dynamic team behind Baird Aggregate Bond adheres to a disciplined process and benefits from attractive fees. The strategy earns a Morningstar Analyst Rating of Gold for its cheaper share class and Silver for its more expensive one.
Lead manager Mary Ellen Stanek heads a well-tenured, nine-person portfolio management team composed of five strategic leaders and four midlevel directors, many of whom have worked in concert since the strategy's September 2000 inception. An additional strategic leader and 10 dedicated analysts lend further support. While this configuration is not as complex as some of the firm's largest competitors, the group is deeply collaborative and sticks to investments it can research thoroughly and confidently.
Stanek curates a portfolio of mainly investment-grade corporate credit, securitized debt, and U.S. government bonds--the primary sectors of its Bloomberg Barclays U.S. Aggregate Bond Index benchmark. The team matches the fund's duration to the index's and avoids derivatives, leverage, and esoteric fare. For most of the strategy's life, it has maintained persistent overweightings in corporate and securitized bonds and downplayed U.S. Treasuries, which has given it a slight yield advantage over the benchmark. To balance that additional credit risk, the team emphasizes diversification and position sizing as risk controls (no high-conviction name exceeds 75 basis points of its size in the bogy, while sector exposures are maintained within a handful of percentage points) and only buys credits that are investment-grade at time of purchase.
The strategy's risk-aware approach has kept it from major missteps over its long life (save for a poor showing during 2008), while low fees have discouraged outsize risk-taking. From its 2000 inception through January 2020, its institutional share class returned 5.4% and outpaced its bogy and nearly 90% of its distinct intermediate core bond Morningstar Category rivals (its home following the split of its prior intermediate-term bond category in May 2019).
Process | High
Mary Ellen Stanek and her crew have maintained the same structured and thoughtful investment process for just shy of two decades. While the team's resources may not match the scope of larger rivals, it stays well within its guardrails and has proactively added tools and head count to maintain its edge. This straightforward, comprehensive, and investor-friendly approach earns a High Process Pillar rating.
Rather than chase yield by digging into riskier parts of the fixed-income market, the team instead seeks value through sector rotation and security selection among investment-grade corporate bonds, securitized debt, and U.S. Treasuries. It avoids derivatives, foreign currency, and leverage while keeping the portfolio's duration strictly neutral to that of its Bloomberg Barclays U.S. Aggregate Bond Index benchmark. In most markets, the team has outrun its benchmark through a focus on corporate and high-quality securitized credit relative to U.S. Treasuries and agency mortgages. To mitigate the resulting higher potential for credit risk, all securities in the fund must be investment-grade at the time of purchase and are subject to strict diversification and position-sizing guidelines. The team will hold on to positions that lose their investment-grade ratings where valuations are still attractive, but this stake was just 1% of the portfolio as of December 2020.
Historically, this strategy tends to noticeably overweight corporate credit relative to its benchmark, with the overweighting averaging around 15 percentage points higher than the Aggregate Index over the decade ended December 2020. The team brought this stake to 44% as of December 2020 from 41% a year earlier. The managers added exposure to high-quality names like Pepsi (PEP), Exxon Mobil (XOM), and Procter & Gamble (PG) where pandemic-related spread-widening made valuations look attractive. The strategy's securitized stake shrank to 30% from 34% over the same period, chiefly because of a reduction to agency residential mortgages (18% from 22%). Although a supporting part of the portfolio, the team pointed to the agency commercial mortgage-backed securities sector (4%) as particularly interesting given its support from the Federal Reserve's post-March 2020 bond-buying program.
While the strategy's predilection for corporate bonds imbues it with more credit risk than the benchmark, the team rarely makes bold bets on industries and sectors, let alone individual names. High-conviction corporate names are typically expressed as a 0.50- to 0.75-percentage-point overweighting relative to the index's sizing, and industry overweightings are kept within a few percentage points. In line with the index's, the strategy's 6.2-year duration as of December 2020 was its longest in over a decade.
People | Above Average
While lacking the goliath analyst benches of some of the larger players in the fixed-income space, the nimble team leading this strategy benefits from seasoned leadership and a tight-knit, collaborative investment culture. It earns an Above Average People Pillar rating.
Baird Advisors CIO Mary Ellen Stanek heads a well-tenured, eight-person portfolio management team made up of four members of the strategic leadership team and four midlevel leaders. Five of these eight have been listed on the strategy since its September 2000 inception date, with a further three added in 2019. Her supporting roster of analysts, including five structured, seven credit, and four risk analysts, has continued to grow, with three joining the firm over the course of 2020.
The team's strengths lie in its experienced leadership bench, cohesive culture, and mindfulness about its limitations. This team does not pursue highly credit-sensitive or esoteric investments that would require resources beyond those that currently exist to support the strategies. Stanek has also been proactive in expanding the team's roster and resources. While many of the senior leaders on this bench are far along in their careers, the naming of several midlevel leaders to the strategy suggests they are well-positioned to take the reins in the future should any top-level changes occur.
Parent | Above Average
Baird's strength in its large fixed-income business and investor-friendly stewardship merit an Above Average Parent rating.
Under the leadership of longtime CIO Mary Ellen Stanek, the firm's taxable-bond funds continue to impress. Boasting low fees, a well-resourced team, and risk-aware investment processes, they constitute over 90% of the firm's assets under management, expanding from $37 billion in 2016 to nearly $88 billion at the end of 2019. This growth bears monitoring, but the team has shown prudence in adding personnel and operational resources to manage this burgeoning load. In recent years, the group has also focused on building out its municipal-bond effort, adding several key members to the team and launching two new municipal strategies in mid-2019. Although the firm's equity enterprise is smaller, it too benefits from tenured managers and attractive fees.
The firm's private wealth management arm has also grown precipitously in recent years, most recently through the acquisition of Louisville, Kentucky-based Hilliard Lyons in 2019. When framing the growth of this organization, Baird emphasized that Hilliard Lyons' advisors fit the cultural profile of its organization. This cultural fit is important: Turnover among the firm's analyst staff has historically been low, and around two thirds of employees owned stock in the firm at the end of 2019.
Over lead manager Mary Ellen Stanek's impressive tenure from October 2000 through January 2021, the strategy's 5.5% annualized return outstripped its Bloomberg Barclays U.S. Aggregate Bond Index benchmark by 48 basis points and nearly 90% of its distinct intermediate core bond category peers. On a risk-adjusted basis, as measured by Sharpe ratio, the strategy dominated over 90% of its rivals over this same period.
The strategy's bias toward corporate credit and securitized fare relative to U.S. Treasuries has given it a long-term advantage against both its index and typical peer, but it has also contributed to short-term volatility in swooning credit markets. The strategy's worst period was during the 2008 financial crisis, where its institutional shares' 4.4% drop from September through November 2008 far exceeded the index's 0.5% loss and typical peer's 1.6% dip. Results in credit stress periods since then have been middling--it landed near the middle of its cohort in both the commodity-related sell-off of June 2015 through February 2016 and the broad credit market sell-off over the fourth quarter of 2018 and lagged close to 60% of its cohort during the coronavirus-related sell-off in 2020 from Feb. 20 through March 23. Relative to more aggressive strategies in the intermediate core-plus bond category, however, such setbacks appear muted.
It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar Category's middle quintile. That's not great, but based on our assessment of the fund's People, Process, and Parent Pillars in the context of these fees, we think this share class will still be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.
Gabriel Denis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.