Asset Management - Fixed Income Investment Philosophy and Process

A Disciplined Investment Approach

Supported by strong fundamental research, Baird Advisors combines the science of understanding, measuring and controlling portfolio risks with the art of adding incremental, relative value to portfolio returns. The team uses a structured, risk-controlled approach for both taxable and tax-exempt fixed income management.

Since interest rates are extremely difficult to consistently forecast over time, the duration of each portfolio is set equal to that of an appropriate benchmark. Baird Advisors believes this duration-neutral approach offers the most effective way to control portfolio risk and helps ensure a high degree of predictability in tracking benchmark returns.

Baird Advisors seeks to add incremental value over and above benchmark returns through yield-curve positioning, sector allocation, security selection and competitive trade execution.

Risk Control: Foundation of Our Investment Discipline:
Approach to Taxable Bond Portfolios Approach to Tax-Exempt Municipal Bond Portfolios
Duration Neutral to Benchmark Avoid Bonds Subject to Alternative Minimum Tax.

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U.S. Treasuries and Government Agencies Securities
  • Emphasized for long-duration exposures
  • Used to match duration
Focus on High-Quality Holdings

  • Emphasize prerefunded issues (collateralized with U.S. Treasuries)
  • Prefer general obligation bonds (GOs) and essential service revenue bonds (water, sewer, electricity, etc.)
  • Avoid more aggressive sectors such as healthcare, industrial development or special use bonds

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Credit Securities
  • Limited credit exposure in more volatile sectors with continuous review of credit allocation
  • Focus on financial industry, with higher priority given to credit rating
  • Diversification increases as quality decreases
Focus on Intermediate Maturities
  • Emphasize 5- to 15-year maturity range
  • Municipal yield curve relatively steep through 15 years
  • Unattractive risk/reward trade-off on long end of yield curve
  • Yields on very short maturities unattractive on a relative and absolute basis

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Mortgage-Backed and Asset-Backed Securities
  • Focus on fixed-rate collateral vs. ARMs
  • Seasoned, more stable mortgage-backed securities
  • Use Bloomberg, Intex, Real Point and Yield Book for residential and commercial loans
Minimize Exposure to Callable Issues
  • Call options generally undervalued in municipal market
  • Emphasize non-call structures with known cash flows (e.g., sinking funds)
  • Higher total return prospects without giving up significant yield
                 
Video: Mary Ellen Stanek discusses our taxable bond philosophy:
Video: Warren Pierson discusses our tax-exempt bond philosophy:

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