Baird reaping big gains from fallout at PIMCO

Firm doubles assets in 2 years after funds abandon bond giant

Mary Ellen Stanek
Mary Ellen Stanek is confident Baird could take in more assets without hurting returns.

Baird Asset Management is on a growth spurt, doubling its assets under management to almost $40 billion in just two years, thanks in part to William H. Gross' departure from PIMCO.

“The internal turmoil at PIMCO created a lot of opportunity for us,” said Warren Pierson, senior portfolio manager for Baird Advisors, the firm's fixed-income division.

Baird Advisors started 2014 with $20 billion in AUM. The firm had $4 billion in net fixed-income inflows though Sept. 30 of that year. After Mr. Gross' Sept. 2014 announcement that he was leaving Pacific Investment Management Co., Baird received another $5 billion in combined net inflows in the fourth quarter, Mr. Pierson said.

In 2015, Mr. Pierson said, Milwaukee-based Baird received another $7 billion in net inflows, roughly half coming from former PIMCO clients.

Baird Advisors had $36.5 billion in assets under management as of Nov. 30. Baird Investment Management, the equity arm, adds another $3 billion to Baird Asset Management's total.

Institutional investors that have hired Baird to replace PIMCO in the past 15 months include the $2.8 billion San Francisco Deferred Compensation Plan, the $3.3 billion Publix Super Markets Inc. 401(k) SMART Plan, the $526 million AutoNation 401(k) plan and the $150 million Ascension Health 401(k) Retirement Savings Plan.

David Erickson, chief investment officer of Ascension Investment Management, said Baird's strong investment results as well as the stability and cohesiveness of its top investment and management team prompted the switch.

“They are some of the smartest and most trustworthy people I know,'' he said. “I don't have to worry about them doing the right thing.”

Three of Baird's top officials, Mary Ellen Stanek, a managing director and chief investment officer; Gary Efle, a managing director who serves as research director/senior portfolio manager; and Charles Groeschell, a managing director and senior portfolio manager, have worked together for 30 years. Mr. Pierson has worked with the three for 23 years.

Baird Asset Management's parent company, Robert W. Baird & Co., which also includes wealth management, investment banking and private equity divisions, will bring in revenue in excess of $1 billion in 2015, Ms. Stanek said.

Asset management contributes to a significant amount of the revenue at the employee-owned company, she said, declining to disclose figures.

Robert W. Baird & Co. does not report net income.

Baird Advisors' fixed-income investment philosophy couldn't be more different from PIMCO's, consultants said, and that has been the attraction for investors. Baird's core plus bond strategy has achieved top-decile performance over the 10-year period ended Sept. 30, with less volatility than PIMCO's Total Return Fund, according to Morningstar statistics. Both funds are considered intermediate-duration bond funds.

No duration bets

PIMCO focuses on macro bets on whether interest rates will rise or fall, consultants said. Baird, on the other hand, does not make duration bets, Mr. Pierson said. Instead, the firm's portfolio managers set the duration of each portfolio equal to its benchmark. Then they attempt to add incremental value through security selection, sector allocation and yield curve positioning.

“It's difficult to get the macro picture right with any consistency,” said consultant Michael Rosen, co-founder, principal and chief investment officer of Angeles Investment Advisors LLC, Santa Monica, Calif. “There is a lot of volatility around the interest rate bets.”

The board of the $2.8 billion San Francisco Deferred Compensation Plan approved replacing the PIMCO Total Return Fund with the Baird Core Plus Bond Fund in October 2014 based on Angeles' recommendation.

Angeles said there were too many uncertainties after the resignation of Mr. Gross, a PIMCO co-founder who managed the Total Return Fund.

Since Mr. Gross' departure, assets under management in the Total Return fund have dropped to less than $100 billion, less than half the amount that was in the fund when Mr. Gross was managing it.

Mr. Rosen said the Baird approach had produced strong investment results, despite avoiding macro bets.

“Using a baseball term, do you swing for the fences or do you hit bunt singles?” Mr. Rosen said. “If you can do enough of those bunt singles, it adds up.”

Statistics from Morningstar Inc. show that Baird's $9.4 billion Core Plus Bond Fund produced an annualized 5.77% for the 10 years through Sept. 30 compared with PIMCO's $92 billion Total Return Fund's return of 5.76%. Although the returns were almost identical, Baird's strategy had less volatility, Morningstar figures show.

The standard deviation on Baird's strategy over the period was 3.518%, compared with PIMCO's Total Return Fund's 3.999%.

Baird's core plus and core bond strategies make up more than 60% of Baird Advisors' assets. Staples such as short-term, intermediate- and long-duration strategies round out the lineup. There is no foreign currency exposure, no leverage and no stand-alone high-yield approach. (Baird's core-plus strategy can hold up to 20% in high yield.)

Despite its long-term strong track record, Baird Core Plus Bond Fund struggled last year. Its performance in 2015 through Dec. 31 was 0.14%, underperforming its benchmark, the Barclays Universal Bond index's 0.43% return for the same period, shows Morningstar data.

Mr. Pierson said increases in interest rates in 2015 and a widening spread between Treasuries and corporate securities did not help the fund.

That didn't stop inflows, however.

Staying focused

Baird's rapid increase in AUM has asset owners and consultants to institutional investors starting to ask whether the firm can still produce top-tier investment results as a much bigger fixed-income player.

The board of the $20 billion City and County of San Francisco Employees' Retirement System hired Baird this month to run a $700 million core-plus separate account after reviewing proposals from 40 other firms.

In a report to the board, Eunice L. McHugh, the retirement system's senior portfolio manager, fixed income, said Baird's “relatively small size compared to other large asset managers” had advantages, such as allowing the firm to buy smaller blocks of securities. But she raised the question of what happens if the firm's assets continue their rapid growth. “With 18 portfolio manager/analysts and no dedicated traders, Baird does not possess particularly deep resources as compared to many larger companies,” she said in the report.

“If assets under management continue to increase materially, it will be essential to monitor the addition of firm resources.” Ms. McHugh, however, noted Baird has added staffers to the investment team in recent years.

Mr. Pierson said Baird has added 11 team members in recent years, including six investment professionals. He said the firm expects to add two more investment staffers this year.

Ms. Stanek said in an interview the company won't be afraid to close its active fixed-income strategies to new investors if necessary.

“We are not going to put our investment track record in jeopardy,” she said.

But she believes the firm can handle more fixed-income assets — upward of $100 billion — without sacrificing investment returns. She emphasized, however, that $100 billion is not a goal.

This article originally appeared in the January 11, 2016 print issue as, "Baird reaping big gains from fallout at PIMCO".