Fund Named Best In U.S. Over 3- and 5-Year Periods

Reflecting the investment team’s hard work, dedication to clients and commitment to delivering competitive returns in a persistently challenging market, the Short-Term Municipal Bond Fund (BTMIX) has been recognized for the second consecutive year with a Refinitiv Lipper Award. The Fund was named best short municipal debt fund for the three- and five-year periods out of 40 and 46 funds, respectively.  

  Annualized
  Q4 2020 1 Year  3 Years 5 Years  10 Years Since
Inception
Baird Short-Term Municipal Bond Fund Institutional 0.63% 3.24% 2.99% 2.46% n/a 2.50%
Bloomberg Barclays 1-5 Yr Short Term Municipal Bond Index 0.33% 2.84% 2.75% 1.94% n/a 1.92%

 

Municipal Market Q&A

Recently, Duane McAllister, CFA and Lyle Fitterer, CFA, Joe Czechowicz, CFA, and Erik Schleicher, CFA – Senior Portfolio Managers – sat down to talk about interest rates, ESG and municipal market opportunities.

  • ECONOMIC GROWTH IS STRONG, MORE FISCAL STIMULUS IS ON THE WAY AND INFLATION AND INTEREST RATES ARE ON THE RISE. TREASURY AND MUNICIPAL YIELDS ARE HIGHER SINCE YEAR END – HOW MUCH HIGHER MIGHT RATES GO?

    Duane: While it’s clear that some investors are concerned about the rise in rates, there are just as many that welcome the chance to invest at higher yield levels. The continuing inflows to fixed income funds is the proof. Our view is that rather than fear higher rates, investors should see it as a healthy sign for the economy and ultimately very good for all types of investors. Bonds are purchased for both income and safety. The more income, the more protection they provide against market volatility and turmoil.

    Lyle: It’s clear that the market wants to try to push yields higher, but the Fed has been very clear about its intention to hold short-term rates near zero until we reach full employment and inflation has risen to or above their 2% target level. Whether the bond vigilantes will force the Fed to move to a less-easy policy sooner than it wants remains to be seen. If growth is sustained at a higher level but employment falls rapidly, it will be an interesting battle of wills between investors and the Fed.

    Erik: We wrote a paper, nearly three years ago now, highlighting the benefits that rising rates offer to various types of investors. It may be even more relevant today in providing a nice counterbalance to investor concerns over rising rates. The good news is that whatever an investor’s outlook for rates, they can choose how much interest rate exposure they are willing to accept. The desire for safety helped drive significant flows into all the Baird bond funds last year, but among municipal funds, the Baird Short-Term Municipal Fund captured more flows than any other.

    Joe: Those who know our approach know that we don’t spend a lot of time trying to predict whether rates will rise or fall, and by how much. However, we wouldn’t be surprised to see market rates trend higher over the balance of 2021. Even so, we would remind people that there are still very strong disinflationary trends in place in the U.S., and globally, that should limit the overall rise.

  • IT APPEARS THAT MUNICIPAL YIELDS HAVE BEEN LESS VOLATILE THAN TREASURY YIELDS SO FAR THIS YEAR, WHY IS THAT?

    Duane: In a word, technicals! A very favorable supply/demand backdrop has been in place for several months, particularly since the November election. After a record level of issuance in October, supply levels fell through year end and have remained modest so far in 2021. The other part of the supply story, of course, is the growing issuance of taxable municipal debt relative to tax-exempt. Over 35% of 2020 supply was taxable and that portion could grow in 2021, which simply means less tax-exempt supply available for traditional municipal investors.

    Erik: The other side of the favorable technical picture is strong demand. Once the municipal market stabilized after the extreme volatility in March 2020, investor demand has been consistently positive. Last year was the fourth highest level of fund inflows on record, an impressive feat considering the heavy selling that occurred last spring. Investors like the safety and security that municipals offer, even with lower nominal yields than in the past. Industry fund flows in January and February of this year were well ahead of last year’s pace even with rates being lower.

  • ARE THERE ANY SEGMENTS OF THE CURVE THAT YOU FIND PARTICULARLY ATTRACTIVE NOW? AND IF SO, WHY? ALSO, WHICH SECTORS OF THE MARKET LOOK THE MOST INTERESTING TO YOU?

    Lyle: We are always looking across the entire curve for opportunities, but the intermediate segment of the curve, from roughly 7 – 12 years, currently offers the most advantageous roll-down benefit. Curve positioning is always important, but it creates an even larger contribution to total return when starting yields are low and the curve is upward sloping, as it is today. In rough numbers, a nine-year AAA bond will provide a yield of close to 1.0%, but the roll-down benefit will be almost as much, assuming the curve slope remains the same over the next year. That has been a focus for curve positioning in our intermediate funds and we even have a modest overweight in the 5-year range in the Short Muni Fund for the same reason – to maximize the roll-down benefit.

    Joe: From a sector perspective, we have been spending a lot of time looking at hospitals and higher education. I cover the hospital sector for the team and despite the significant Covid-19 challenges of the past year, most of the hospitals we own did an impressive job managing through the crisis. Revenues rebounded nicely once they could safely offer elective surgery again and most did a very good job of controlling expenses. Of course, the assistance they received from the CARES Act was critical as were the advanced Medicare payments, which provided much needed liquidity. I was amazed at how quickly the medical field pivoted to virtual visits, which is a trend that is here to stay and makes the entire process more efficient.

    Duane: Covid-19 has presented many challenges to colleges, both public and private. Most had to move to either all virtual or a hybrid model of virtual and in-class learning – which, quite frankly, very few schools were adequately prepared for. In addition to falling enrollment and having fewer students on campus, less auxiliary revenue was generated. Like the hospital sector, Federal stimulus has been delivered and many have adapted quite well. Our higher education analysts, Gabe Diederich, CFA and Lauren Vollrath, CFA, have done a great job helping us separate the winners from the losers. This sector that offers some of the best value opportunities for investors, if you do your homework – pardon the pun!

  • IT APPEARS THAT STATE AND LOCAL GOVERNMENTS MAY GET AS MUCH AS $350B IN THE NEXT FISCAL STIMULUS PACKAGE. WON’T THAT GO A LONG WAY TO SUPPORTING MUNICIPAL CREDITS?

    Erik: It will, and of course it comes on top of the significant support provided in the CARES Act last spring and the $900B Covid relief bill at year end. In the fiscal package being negotiated now, there is also money for K-12 schools, transit agencies, airports, hospitals and more. So, there will be very broad support for municipal entities. Whether they need all this additional money is debatable, since we have seen a sharp rebound in tax revenues in most states, with many running ahead of where they were pre-pandemic. That said, while the fundamental backdrop for municipal credit is solid, not all credits are recovering equally, and bottom-up credit work is still very important.

    Joe: A good example is some of the weaker state credits such as Illinois and New Jersey. While credit spreads have rallied sharply across the entire municipal market, as they have in the corporate sector, the challenges that these two states have faced for years have not gone away. In fact, their pension challenges have gotten worse as rates have come down and they face lingering structural challenges that will eventually need to be addressed.

  • ONE TOPIC THAT WE’RE HEARING MORE ABOUT, PARTICULARLY WITH THE POLITICAL SHIFT IN WASHINGTON, IS CLIMATE CHANGE, SUSTAINABILITY – REALLY THE ENTIRE CONCEPT OF ESG INVESTING. MUCH LESS IS WRITTEN ABOUT ESG AS IT RELATES TO THE MUNICIPAL MARKET. ANY THOUGHTS ON THIS? IS THE MUNICIPAL MARKET A GOOD PLACE TO LOOK IF YOU ARE AN ESG FOCUSED INVESTOR?

    Duane: This is obviously a very big topic today, much more than we can fully cover in this brief discussion. But the municipal market is an important yet underappreciated part of the ESG dialogue. Officially designated “green” municipal borrowings rose to $20B last year, up from $13B in 2019. When you add in issues designated as “social” or “sustainable,” you get an additional $10B in 2020. But one could argue the majority of municipal issuance provides societal benefits. Whether the money is used to enhance water quality, reduce neighborhood blight, provide more affordable housing, enhance the energy efficiency of schools and office buildings, invest in diversified renewable energy sources or countless other projects, we have seen the positive impact the municipal market has provided for society over our careers.

    Lyle: There are many examples we could point to, but we recently looked at a City of Detroit borrowing where the money was going for the demolition of 8,000 vacant and dilapidated homes and for the renovation of another 6,000 that could be restored, all with the intent of enhancing the quality of neighborhoods and making them safer and desirable for investment. We applaud that effort.

    Erik: Another example is The St. Paul Minnesota Port Authority which recently borrowed money for improvements on a heating and cooling system for many of the buildings in downtown St. Paul. A portion of their energy comes from urban wood renewables as well as a large solar thermal installation. While this wasn’t designated as “green,” it’s a classic example of a beneficial borrowing. This system eliminates the need for every office building to install their own heating and cooling system, which would be much less energy efficient. Municipalities will have to follow the trend of corporations in providing better disclosure regarding the original use of proceeds and what the ongoing benefits may be for the market to receive more “green” designations.

  • THOUGH YOUR FOCUS IS ON THE MUNICIPAL SECTOR, HOW MUCH CROSS-MARKET DISCUSSION DO YOU HAVE WITH THE TEAM MEMBERS FOCUSED ON THE TAXABLE MARKET?
    Duane: The integration across market sectors, taxable and tax-exempt, is truly seamless at Baird Advisors. We are all one team, working to produce the best, most consistent results we can for each client. All day, every day, we are sharing our thoughts on market valuations in both the tax-exempt and taxable municipal market with those who focus on Treasuries, corporates and structured products, such as mortgage-backed and asset-backed securities. At the same time, we benefit from seeing trends that develop in the taxable market that eventually find their way into the municipal market. Over the last year, we added a significant amount of both taxable and tax-exempt municipals to our taxable portfolios and funds when muni valuations were quite attractive. Municipals is a great sector to diversify into in a traditional taxable portfolio, without sacrificing yield you can add a different revenue stream of bond repayment.

    Lyle: The growth in the taxable municipal market will be an ongoing source of supply for our taxable funds for the reasons Duane cites, but we are also hopeful that we may see an infrastructure bill pass this year. With the Democrats controlling both sides of Congress and the White House, and the bipartisan agreement that there is both a need and benefit from investing in the nation’s infrastructure, it may pass. It would likely need to be tied to a tax plan to provide the funds to offset the cost at least partially. If this passes, we may see a boost in municipal supply late in the year or in 2022 – both taxable and tax-exempt. There is strong demand for both. Borrowing costs are low, so now would be a good time to see this happen.

Performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value of an investment in the fund will fluctuate so that an investor's shares when redeemed may be worth more or less than their original cost. The funds' current performance may be lower or higher than the performance data quoted. For performance current to the most recent month-end, please visit www.bairdfunds.com.

Investors should consider the investment objectives, risks, charges and expenses of each fund carefully before investing. This and other information is found in the prospectus and summary prospectus. For a prospectus or summary prospectus, contact Baird directly at 866-442-2473. Please read the prospectus or summary prospectus carefully before investing.

The Baird Short-Term Municipal Bond Fund since inception net return is based on performance from August 31, 2015, through November 30, 2020. Expense Ratio for the Institutional Share Classes is 0.30%; for the Investor Share Classes is 0.55%. The Baird Municipal Short-Term Bond Fund was awarded best fund in the short municipal debt category over the past 3 years out of 40 funds and over the past 5 years out of 46 funds.

Returns shown include the reinvestment of all dividends and capital gains.

The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers. The reporting period for the awards is the period ending November 30, 2020. Most recent returns for the Baird Short-Term Municipal Bond Fund can be found here.

The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award. For more information, see lipperfundawards.com. Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper.

Lipper Fund Awards from Refinitiv, ©2021 Refinitiv. All rights reserved. Used under license.

This is not a complete analysis of every material fact regarding any company, industry or security. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Baird does not provide tax or legal advice. Please consult your legal or tax professional for specific information.

Fixed income is generally considered to be a more conservative investment than stocks, but bonds and other fixed income investments still carry a variety of risk such as interest rate risk, regulatory risk, reinvestment risk, credit risk, inflation risk, call risk, default risk, political risk, tax policy risk and liquidity risk. In a rising interest rate environment, the value of fixed income securities generally decline and conversely, in a falling interest rate environment, the value of fixed income securities generally increase. Municipal securities investments are not appropriate for all investors, especially those taxed at lower rates.