Small/Mid Cap Value Strategy


Baird Equity Asset Management’s Small/Mid Cap Value portfolio invests in small- to medium-cap U.S. companies and seeks to provide superior risk-adjusted returns and consistently outperform the benchmark Russell 2500 Value Index over a full market cycle (typically 3–5 years). The portfolio comprises companies we expect to exceed street expectations and that trade at discounts to our proprietary calculations of fair value. To help control risks, the portfolio is generally diversified among companies in a broad range of industries and economic sectors.

Portfolio Construction

  • A concentrated portfolio of generally 40–50 stocks
  • A market cap range typically from $300 million to $10 billion at purchase 
  • Top holdings generally limited to 5% at cost, 8% at market
  • Sectors capped at 30% excluding financials 
  • Buy-and-hold approach

For more information, contact Rob Zwiebel or the Intermediary Specialist in your region.


Q4 2017 Small/Mid Value and Small Value Commentary

Fortunately, defining moments in portfolio management only seem to come around about once every market cycle. They test our grit and conviction in our investment process and philosophy. Just such a trial was presented in 2016 to small cap value managers with high quality bias like ourselves. We watched painstakingly as deep value stocks levitated post the election on pure speculation. We were puzzled as our companies with superior profitability, better growth and lower valuations underperformed. However, the price of discipline is always less than the price of regret. We resisted chasing consensus trades such as many infrastructure-related and bank stocks that commanded unjustified valuations. We held on to dividend paying stocks on the premise long-term rates would moderate. In short, we stayed disciplined.  

As predicted, last year's laggards we this year's winners and our research efforts were rewarded with strong security performance across most economic sectors. Importantly, most of the portfolios' return for 2017 came from earnings growth, with less than 5% of return attributed to multiple expansion. In a market with lofty current valuations, our portfolios continue to trade at compelling price/earnings ratios of under 16 times next twelve months earnings. In addition, the majority of our domestically-focused holdings pay an average effective tax rate greater than 30% and stand to benefit disproportionately from tax reform. Finally, we expect M&A activity to accelerate in 2018, also providing support for small cap valuations.  

What we know from the past is that the outperformance of high quality stocks is typically protracted, unlike the short sprints for deep value and, that over the full market cycle, high quality outperforms low quality. If history repeats itself, this trend should provide a nice tailwind in 2018 to complement the alpha we provide through security selection. 

Read Full Small or Small/Mid Value Commentary


Annualized Returns (%)

 3 MonthsYTD1-Year3-Year5-Year10-YearSince InceptionInception Date
Baird Small/Mid Cap Value (gross) 6.60 22.89 22.89 10.60 15.18 8.24 12.29 1/1/00
Baird Small/Mid Cap Value (net) 6.35 21.66 21.66 9.74 14.31 7.33 11.30 1/1/00
Russell 2500 Value Index 4.25 10.36 10.36 9.31 13.27 8.82 10.35

Annual Total Returns (%)

Baird Small/Mid Cap Value (gross) 22.89 9.90 0.17 9.47 36.88 17.30 6.15 10.29 29.40 -38.74 24.22
Russell 2500 Value Index 10.36 25.20 -5.49 7.11 33.32 19.21 -3.36 24.82 27.68 -31.99 -7.27

*Data as of 12/31/17