Baird Municipal Bond Managers Advise Caution

MILWAUKEE, Aug. 2, 2012
Given talk of higher taxes driven by the expiration of the Bush Tax cuts as well as the Presidential election, money flows into municipal bonds have been increasing. Warren Pierson and M. Sharon deGuzman, co-managers of the Baird Intermediate Municipal Bond Fund advise caution.

“Recent announced and planned municipal bankruptcies, including Stockton and San Bernardino in California, should remind investors that many municipalities remain under stress, despite the economic recovery,” said Pierson. “We believe it is important to stick with higher quality municipal bonds.”

Pierson and deGuzman look closely at every municipal bond they purchase, examining the underlying health of the municipal issuer. They avoid areas where population is falling or where unemployment remains stubbornly high. Said deGuzman, “We just looked at a bond issued by a community in Illinois and decided to take a pass given declining property values driven by high unemployment.”

Pierson and deGuzman also try to avoid areas that experienced more of a boom and bust cycle in the recent economic downturn. Said Pierson, “Consider what happened to the communities that saw the strongest growth in the real estate bubble. They later had a more prolonged and deep real estate recession.” Pierson sites areas like Phoenix, Las Vegas and a number of communities in Florida whose downturn was harder and longer than the rest of the country.

While Pierson and deGuzman do not expect a lot more bankruptcies, they do think that if other municipalities overcome the prevailing stigma on Chapter 9 filings and follow in the paths of Stockton or San Bernardino, we could see a flight to quality. “If a local economy isn’t growing and revenue isn’t growing, a municipality can languish under increasing stress,” said Pierson.

These municipal credit challenges are exacerbated by high demand as more investors seek to purchase municipal bonds in a rising tax environment. “Investors may be tempted by the higher-yielding, lower quality municipal bonds,” said Pierson. “But the first objective for municipal bond investors remains wealth preservation. Don’t turn a blind eye on quality considerations.”

In Pierson’s more than 23 years managing municipal portfolios, he has seen the markets react abruptly, even emotionally, to disruptions. “These markets can and do have dramatic reactions to negative news. Investors should carefully consider their comfort level with risk as sentiments in these markets can change quickly. Greed and fear drive most markets, this one included. While greed is encouraging some to purchase lower quality, higher yielding credits, sentiment can quickly turn to fear in the municipal markets leading to a less-than-orderly ‘rush for the exits.’”

Biography – Warren Pierson
Warren has over 23 years of investment experience managing various types of fixed income portfolios. Prior to joining Baird Advisors, Warren was a Senior Vice President and Senior Portfolio Manager with Firstar Investment Research and Management Company (FIRMCO) where he managed municipal bond portfolios and intermediate taxable bond portfolios. A major portion of his time is allocated to yield curve analysis and credit research. He plays a lead role in coordinating and implementing all fixed income strategy at the firm. Warren received his undergraduate degree from Lawrence University and was awarded the Chartered Financial Analyst designation in 1990. Warren is currently a member of The CFA Institute and is past President of the CFA Society of Milwaukee.

Biography – M. Sharon de Guzman
Sharon has over 17 years of investment experience managing various types of fixed income portfolios. Prior to joining Baird Advisors, Sharon was an Assistant Vice President and Portfolio Manager with Firstar Investment Research and Management Company (FIRMCO) where she did quantitative fixed income analysis and portfolio management. She received her undergraduate degree from Eastern Illinois University. Sharon is currently a member of The CFA Institute and is a member of the CFA Society of Milwaukee.

About Baird
Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has more than 2,700 associates serving the needs of individual, corporate, institutional and municipal clients. Baird oversees and manages client assets of more than $94 billion. Committed to being a great place to work, Baird ranked No. 21 on FORTUNE’s 100 Best Companies to Work For in 2012 – its ninth consecutive year on the list. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird’s private equity operations. For more information, please visit Baird’s Web site at

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For additional information contact:
Jody R. Lowe
The Lowe Group