PORTFOLIO SPOTLIGHT
muni bond team examine the financials of new bonds on Bloomberg and the Electronic Municipal Market Access website . They also subscribe to rating agency information and parse research from third-party firms . They ’ ll also pick up the phone to dig deeper into investment opportunities .
“ If there ’ s a credit that ’ s new to the market or we need to get up to speed on we ’ ll schedule a conference call with city authorities and municipal representatives and with the investment banker ,” McAllister says . “ One of the fun aspects of this business is lifting the hood to see
what makes a particular credit unique .”
The fund holds roughly 1,200 issues , but one issuer might account for several bonds . “ So in reality we own credits from less than 400 issuers ,” Fitterer says . “ Because there are so many issuers out there and there aren ’ t enough people to look at them , that ’ s what makes the market so inefficient .”
Credit Risk
Fitterer says Baird ’ s scoring system puts bonds into three categories : strong credits , core credits and watch credits .
“ If there ’ s a credit that ’ s new to the market , we ’ ll schedule a conference call with city authorities and municipal representatives and with the investment banker . One of the fun aspects of this business is lifting the hood to see what makes a particular credit unique .”
— Duane McAllister
Manager Duane McAllister Age 65
Professional Background As co-lead municipal sector / senior portfolio manager , he plays a lead role in setting investment strategy , with a big focus on municipal portfolio management and credit research . Before joining Baird Advisors , he was a managing director and senior portfolio manager at BMO Global Asset Management , where he was the lead portfolio manager for tax-free fixed-income strategies .
Outside Interests Outdoor activities ( hiking and cycling ), reading , being involved with his local church and other nonprofit organizations , and following the Green Bay Packers . He was instrumental in helping to create Grace Landing , a community of group homes for adults with intellectual and developmental disabilities .
Manager Lyle Fitterer Age 57
Professional Background As co-lead municipal sector / senior portfolio manager , he plays a lead role in setting investment strategy , with a big focus on municipal portfolio management and credit research . Before joining Baird Advisors , he served as the co-head of global fixed income and the head of the municipal fixed-income team at Wells Fargo Asset Management .
Outside Interests Reading , cooking ( especially baked treats for the office ), country music , and following local sports teams .
Credits placed in the “ watch ” category tend be bonds rated “ BBB ” or below . ( The lowest investment-grade rating is “ BBB- ” at Standard & Poor ’ s and Fitch Ratings .)
These lower-rated bonds “ have more risk , but they also have more income or total return potential ,” he says . “ The risk / reward for doing that has been very good when you look at default rates historically . A BBB-rated muni bond historically has had a default rate lower than a AAArated corporate bond . So it ’ s a great place to take credit risk .”
But taking credit risk doesn ’ t necessarily translate into a riskier fund . Morningstar rates the Baird fund as below average risk for its category . Bond investing can be a tricky thing , which is why many investors prefer to rely on professional managers for their fixed-income allocation , perhaps through mutual funds or separately managed accounts . Indexbased bond exchange-traded funds have been a popular option for many investors , but some people argue they aren ’ t nimble enough to quickly maneuver when market conditions or interest rates change .
The Baird fund ’ s managers say it offers a combination of better liquidity and greater diversification than what individual investors , or even separately managed accounts , can achieve . They also claim they can generate a higher yield by creating portfolios that include lower-quality bonds within a higher-quality portfolio ( the fund ’ s average credit quality is generally “ AA- ” to “ A +”).
McAllister says munis as an asset class can complement an overall fixed-income allocation . “ They perform differently at different points in the cycle , so it helps create a nice balance ,” he says .
“ If you pay no income tax , then obviously you shouldn ’ t be in munis ,” he continues . “ But if you ’ re a tax-paying investor of any sort , I think it makes sense to look at the muni fund and to think of it as a diversifier because munis tend to lag in the economic cycle — corporate spreads will widen out and corporate credits will get hurt first in a slowdown , whereas munis will lag , and that ’ ll help you in those situations .”
44 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2024 ADVISOR PHOTOGRAPHS COURTESY OF BAIRD ASSET MANAGEMENT | WWW . FA-MAG . COM