Stanek: Control What You Can

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Mary Ellen Stanek from Baird Funds.

Mary Ellen, thanks so much for joining me.

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

Glaser: Let's start with what's probably been the biggest story not only in fixed-income markets, but in markets in general, which was the Fed choosing not to raise rates in September. You've talked in the past about some of the challenges that the Fed faces in making this decision. What are some of these and why do you think that they decided to wait?

Stanek: Well, in a nutshell, it's really unfortunate that the Fed has become one of the lead stories because it's adding a level of uncertainty and volatility to the markets that's not constructive or helpful. So, this third leg of the stool of trying to interpret global-financial-market stability is an issue that is causing them to pause or not pause. We try to step back for a minute and look at it this way: At the end of 2008, they enacted the zero-interest-rate policy at a time when we had an emergency-market set of conditions. Today, despite all the challenges, we are not in the same set of conditions. So, we are in the camp that believes they should move. They should move up a bit and stay there and pause and allow the market to start readjusting.

Glaser: So, you think that they should. Do you think that they will, though? Do you see a December rise still on the table?

Stanek: We think there is still the possibility, although much of the deliberation was before the latest jobs report, which clearly was OK but less than expected. So, when you, again, step back and look at it, the world is challenged for top-line growth--there's not much top-line growth. The U.S. is putting up some of the best growth in the world. We are not seeing a lot of move in inflation rates--in fact, we are seeing commodity prices fall. We're watching wages closely, although we are not seeing much in the way of wage inflation other than in the lowest tier of the labor category. So, all in all, we think from that vantage point, the Fed does have time.

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Glaser: More broadly, then, what does this mean for your outlook for your portfolio--for your positioning? How do you think about credit-quality selection?

Stanek: There is some irony in all of this because when you look at the U.S. in isolation--you can't from a global-macro vantage point--the U.S. consumer is in pretty good shape, fundamentally, and U.S. businesses are in pretty good shape, looking at balance sheets and all the credit scoring that we do. Leverage has ticked up a bit, but a lot of the highly rated companies are the ones that have been taking on more debt recently. So, overall, we look at it and we say that the credit fundamentals are actually quite positive--they remain quite strong. But yes, credit spreads have widened here. There has been a robust new-issuance market, and you're getting a little bit more yield, or what's called a "concession," from these new issues. So, if you look at it all on a risk-adjusted basis, there are some pretty compelling opportunities in here.

Glaser: So, this volatility that has maybe been created by the Fed has created some opportunities.

Stanek: Yes. Volatility, for us, is usually our friend. It's tough for investors, so keep the seat belts on because the volatility is going to continue to be out there. There is a lot of uncertainty about global economic growth--or lack thereof. If you consider what the Fed is likely to do, if you consider all the uncertainty around the political scene and what that could mean for policy and investors--both here in the U.S. and globally--and then the uncertainty around global central banks, it will most likely be an uncertain, volatile environment.

So, what are investors to do? Step back and, as we always say to ourselves, control what you can control--your investment costs. What kinds of expenses are you paying? How are you organizing your assets across taxable buckets or tax-exempt buckets? Use the volatility as an opportunity. Some great values are being created. In our case, we believe in investment-grade credit.

Glaser: You've seen some significant inflows in the last year. Is that making it easier or harder to take advantage of this volatility?

Stanek: Yes, we have seen a continued interest in our work. Some of it, we think, is a number of things. The team has been together a long time, and we've worked through lots of different market cycles and lots of volatility. Our style is very bottom-up in terms of how we source it. Right now, we're at the tail-end of the baseball season, and I know here in Chicago you have the Cubs [playing very well]--go Cubs! [At Baird,] we try to hit a lot of singles. We'll take an occasional double; we don't try to hit home runs. We'll take a walk if we need to, but what we want to do is have very high batting averages. That, we believe, is a sustainable advantage--even at our size now at about $35 billion under management. Across the Baird Funds lineup, we have lots of choices along the risk spectrum, but the funds have the same style of bottom-up, yield-curve positioning, sector allocation, individual-security selection, and then carefully managing liquidity. And as someone who provides liquidity when others are trying to sell, if there are positions that we want to buy, we're very disciplined about where we see value. That's one of the reasons we like some of the credit sectors right now.

Glaser: Mary Ellen, thank you for your take on the market today.

Stanek: Thanks a lot, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.