A Compelling Core Bond Fund

The following is our latest Fund Analyst Report for Baird Aggregate Bond BAGIX

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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 on its cheaper share class, while its pricier iteration earns a Silver.

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 have 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 process 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. The team avoids derivatives, foreign currency, and leverage while keeping the fund'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 credit and securitized debt relative to U.S. Treasuries. 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 downgraded high-yield holdings where valuations are still attractive, but this stake was just 0.4% of the portfolio as of December 2019.

Historically, this strategy noticeably overweights corporate credit relative to its benchmark (on average around 15 percentage points higher than the Bloomberg Barclays U.S. Aggregate Index over the trailing decade). As of December 2019, the strategy's 40% stake was higher than its bogy but only by 11 percentage points (its narrowest difference since 2008), a position underpinned by the team's observation of ever-tightening spreads in the corporate sector. Instead, this cohort found greater value in U.S. Treasuries (24%), an allocation that reached its peak since 2008, while the securitized stake (34%) remained largely unchanged over the same period, with the majority (22%) consisting of agency residential mortgage-backed securities and the remainder in nonagency MBS (3%), commercial mortgage-backed securities (8%), and asset-backed securities (2%).

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. The team maintained its longtime overweighting in financials (21%), with a focus on banks and life insurance companies with strong fundamentals.

People | Above Average While lacking the expansive analyst benches of some of the larger players in the fixed-income space, this nimble team 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, nine-person portfolio management team, which is composed of five members of the strategic leadership team and four midlevel leaders. Six of these nine have been listed on the strategy since its September 2000 inception date, with a further three added in 2019. Ten analysts, focusing on credit-, securitized-, and portfolio-risk research, and an additional strategic leader complete the effort.

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 both the team's roster and resources. While many of the senior leaders on this bench are far along in their careers, the team doesn't foresee immediate changes to its leadership ranks, and the naming of several midlevel leaders to the strategy suggests they are well-positioned to take the reins in the future.

Parent | Above Average Baird earns an Above Average Parent rating for strong stewardship within its fixed-income mutual fund lineup, circumspect capacity management, and high employee retention.

The Milwaukee-based financial-services firm has grown exponentially since it hired Mary Ellen Stanek and her cabinet of bond gurus to overhaul its bond-fund lineup in 2000. As Baird CIO and head of the fixed-income asset-management division, Stanek has championed investor-friendly practices across Baird's fund complex. The bond team's straightforward, risk-aware process has quickly and substantively attracted assets: From 2016 to 2018, assets grew from $37 billion to $67 billion. Although rapid growth can raise concern, Baird has responded by adding head count and technological resources, and it raised the minimum size of its separate accounts to $100 million to slow the pace of inflows. Tenured management and low turnover are also strengths, encouraged by Baird's employee-ownership structure.

Baird's smaller equity shelf is less impressive but also boasts reasonable fees and tenured management. It is also expanding. In 2018, the firm launched an open-end version of its Small/Mid Cap Growth strategy. Its network of financial advisors, however, has a blemished record. In 2019, it and 78 other advisory firms were fined for selling investors expensive share classes when cheaper alternatives were available.

Performance Over lead manager Mary Ellen Stanek's impressive tenure from October 2000 through January 2020, the strategy's 5.4% annualized return outpaced 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 the one hand, the strategy's volatility, as measured by standard deviation, was a note higher than the bogy over the period, owing in part to a greater proclivity for credit relative to U.S. Treasuries. Yet, on a risk-adjusted basis, as measured by the Sharpe ratio, the strategy dominated nearly 95% of its rivals.

The portfolio's bias to corporate credit has given it a long-term advantage against both index and typical peer, but it has also contributed to short-term volatility in swooning credit markets. Over the most painful span of the 2008 global financial crisis (September through November), for example, the strategy plummeted 4.4%, far more than the index's 0.5% loss and its typical peer's 1.6% dip over the same period. Despite that drubbing, in stress periods since--including both the commodity-related sell-off of June 2015 through February 2016 and the broad market sell-off over the fourth quarter of 2018--this strategy's returns remained resilient and landed in the middle of its category cohort.

Price 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 category's cheapest quintile. 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 be able to deliver positive alpha relative to the category benchmark index, explaining its Analyst Rating of Gold.