Baird Midcap Fund Crosses $100 Million in Assets

 

Five Star Manager Finds Opportunities in Energy and Industrials

 
MILWAUKEE, June 13, 2012
 
The Baird MidCap Growth Fund, which recently passed $100M in assets under management, has an overall five star rating by Morningstar and is ranked #1 out of 392 funds in the mid cap category over the one year period through May 31, 2012, according to Lipper.

Chuck Severson, senior portfolio manager of the fund, attributes the funds strong performance to its focus on finding medium-sized, high-quality companies. “Mid Caps in our view offer the best of small and large companies outpacing both small and large cap returns. They are more nimble than large caps and generally have less volatility than smaller companies. Our team has meaningful experience in the mid-market and has been able to consistently add value, while offering clients a smoother ride.”

The following Q&A touches on the opportunity in Mid Caps and provides an overview of Baird MidCap’s approach including a discussion of the industrial and energy sectors where the team is finding Mid Cap investments.

What kind of earnings growth do you expect from Mid Caps?
Our experience is that the average Mid Cap company is able to grow revenue faster than the average large cap and the average small cap company. The data also shows Mid Caps are able to grow operating income faster than large or small stocks.
         

Average Annual
Revenue Growth

Average Annual
Operating Income Growth

Average Annual
Returns

Mid Caps – Russell Mid Cap Index  

6.9%

7.4%

8.0%

Large Caps – Russell 1000 Index  

4.6%

5.5%

5.4%

Small Caps – Russell 2000 Index  

5.7%

5.6%

5.6%


Source: Bloomberg and Baird Investment Management – Growth is the largest determinant of long-term returns and Mid Caps have outpaced Large Caps and Small Caps over the past 15 years in both revenue growth and operating income growth. Data since January 1995, through September 30, 2011. These statistical measures are not a forecast of future performance.

How does that translate into investment performance?
According to data from Russell1, Mid Caps outperform large caps 85% of the time2. Since 1995, the average annual excess return for Mid Caps over large caps is 2.0%. We believe the higher revenue and profit growth mentioned above can play a role as Mid Caps are, in our opinion, better able to exploit and benefit from growth opportunities. They are more nimble, can hire workers and ramp-up production swiftly to meet changes in demand. In addition, they tend to benefit more from M&A activity. Because they are less-well covered by Wall Street, it creates information inefficiency. We think that investment managers that know the mid market well can seek to exploit this inefficiency to add value.

Relative to Small Caps, Mid Cap returns are higher 92% of the time3 over the past 15 years, outperforming small caps since 1995 on average 2.4% per year. Here once again, the higher revenue and profit growth contributes to the outperformance. But the extra maturity of the Mid Cap companies relative to small caps plays a role. They generally have more experienced management teams, better developed products, channels and geographic reach, and higher quality balance sheets. As a result, they often have better access to capital and capital markets, lower cost of capital, and ultimately higher return on capital.

What sectors offer opportunities among Mid Cap stocks?
We like the energy sector given the tight balance between supply and demand and we see opportunities playing out over the next several years. We like companies with a global reach that can take advantage of the heightened activity levels regardless of where they exist. We also have a bias towards service and equipment companies as they are beneficiaries of more activity and tend to have a more stable fundamental trajectory. Key holdings include Core Laboratories (CLB), Oceaneering (OII) and Dresser Rand (DRC).

One key theme for us is the trend towards deep water drilling driven by the major oil companies seeking large oil reserves. We are positioned to take advantage of this trend with the previously mentioned services companies as well as deep water driller Rowan (RDC).

Industrials have been a consistent presence in this fund. What opportunities are you finding in this sector?
Domestic industrial companies have done a terrific job of improving their operations and supply chains over the past two decades, which is driving record profits and cash flow. This improvement has enabled several acquisition stories to develop for quality operators and has driven strong growth for some of portfolio holdings Roper (ROP) and Actuant (ATU). Another theme we like is rail transportation. Densely populated areas are working to remove trucks from roadways given pollution, noise and traffic – consider very busy ports like Los Angeles/Long Beach or Houston. Rail has proven to be a great alternative and JB Hunt (JBHT) is a key provider of intermodal containers to the rail industry.

We also like the diversification opportunities that industrials offer, particularly in today’s uncertain economic climate. The portfolio holds companies exposed to opportunities in a wide variety of end markets including international mining company Joy Global (JOY), factory automation company Rockwell Automation (ROK), energy and industrial tools and supplies company Actuant(ATU), and GPS company Trimble (TRMB) that provides equipment for the construction and agriculture markets.

What sectors are you avoiding?
The portfolio is well diversified, but we have been underweight financials and healthcare. In financials, we have been selective and avoided credit exposure. In healthcare, our underweight has been driven by the uncertainty created by healthcare legislation, its subsequent review by the Supreme Count and the reduction of government budgets. However, we expect many of the underlying industry challenges are closer to seeing resolution, which should be a net positive. We have continued to stay focused on companies in healthcare that offer cost reduction or product innovation stories.

Historically speaking, we avoid more heavily regulated industries that offer limited growth opportunities including telecom and utilities.

About Baird’s Asset Management Team
Baird Advisors, Baird Investment Management and Baird Public Investment Advisors manage $18 billion for institutions, public entities, high net worth individuals and the Baird Funds. The Baird Funds Family includes Baird Aggregate Bond Fund, Baird Core Plus Fund, Baird Intermediate Bond Fund, Baird Intermediate Municipal Bond Fund, Baird Short-term Bond Fund, Baird MidCap Fund and Baird LargeCap Fund.

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 has more than $87 billion in client assets. 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 www.rwbaird.com.

 
1Data is from January 1995 through December 2011.
2Monthly rolling five year average returns from January of 2000 through September 30, 2011.
3Monthly rolling five year average returns from January of 2000 through September 30, 2011.

The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with a fund’s three-, five- and ten-year (if applicable) Morningstar Rating metrics. For each fund with at least a three year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars and the bottom 10% receive one star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

As of 5/31/2012, the Baird MidCap Fund Institutional Class received five stars for the three-year period among 679 Mid-Cap Growth Funds; five stars for the five-year period among 604 Mid-Cap Growth Funds; four stars for the 10-year period among 431 Mid-Cap Growth Funds and five stars overall among 679 Mid-Cap Growth Funds. The Baird MidCap Fund Investor Class received five stars for the three-year period among 679 Mid-Cap Growth Funds; five stars for the five-year period among 604 Mid-Cap Growth Funds; three stars for the 10-year period among 431 Mid-Cap Growth Funds and four stars overall among 679 Mid-Cap Growth Funds.

Lipper rankings are based on average annual total returns for the one-, five- and 10-year life periods for each respective Lipper category. Each fund is ranked based on average annual total returns assuming reinvestment of dividends and capital gains distributions, at net asset value and the deduction of all fund expenses. Since inception, Lipper rankings are calculated from the month end following the fund’s inception.

As of 5/31/2012, the Baird MidCap Fund Institutional Class ranked #1 for the one-year period among 392 Mid Cap Growth funds, #7 for the five-year period among 310 Mid Cap Growth funds, #60 for the ten-year period among 200 Mid Cap Growth funds, and #36 since its 12/29/2000 inception among 174 Mid Cap Growth funds.

The Fund invests a substantial portion of its assets in the stocks of mid-capitalization companies. Mid-capitalization companies often are more volatile and face greater risks than larger, more established companies. The Fund focuses on growth-style stocks and therefore the performance of the Fund will typically be more volatile than the performance of funds that focus on types of stocks that have a broader investment style. The Fund may invest up to 15% of its total assets in foreign securities and ADRs. Foreign investments involve risks such as currency rate fluctuations, different and sometimes less strict financial reporting standards and regulation, and the potential for political and economic instability.

The funds’ Morningstar and Lipper rankings reflect past performance, which is no guarantee of future results. Diversification does not ensure protection from the potential of principal loss.

Baird makes a market in the stocks of Actuant, Dresser Rand, JB Hunt, Joy Global, Oceaneering, Rowan, Rockwell Automation, Roper and Trimble.

The top 10 holdings for the Baird MidCap Fund as July 31, 2012:
Stericycle Inc. 2.4%
Dicks Sporting Goods Inc 2.4%
Church & Dwight Inc. 2.4%
Perrigo Co. 2.3%
Alliance Data Sys Corp. 2.2%
Teradata Corp Del 2.1%
Digital Realty TR Inc 2.1%
McCormick Co. Inc. 2.1%
Cabot Oil & Gas Co. 2.1%
Dollar General 2.0%

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. This and other information is found in the prospectus. For a prospectus or ratings current to the most recent month-end, please contact bairdfunds.com. Please read the prospectus carefully before investing.
 
For additional information contact:
 
 
Jody R. Lowe
The Lowe Group
414-322-9311

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