Q:  How would you define your investment philosophy? A : Philosophically, we believe that the bond market indices are efficient in discounting risk and return over time with respect to interest rate risk. Also, we believe in maintaining a portfolio that is duration neutral to the index and in seeking added return opportunities in our yield curve positioning, sector allocation and security selection. This is the hallmark of our approach. In our opinion, the best way to outperform the bond market is to control that key element of portfolio risk by being duration neutral and getting returns that are similar to the benchmark and then likely outperforming the markets through yield curve positioning, sector allocation and security selection. We do believe that there are inefficiencies with respect to risk and return as well as pricing inefficiencies within sectors and across securities. Therefore, we try to take advantage of what we view as some of the inefficiencies in the market and we aim at adding some incremental return on an annual basis. Our key objective is to consistently add incremental returns while looking over longer time periods of three, five or ten years. Q:  How do you respond to absolute return goals set by investors? A : First of all, portfolio returns in the range of 8% to 9% is a pretty ambitious undertaking in the current environment. We recognize that other asset classes may achieve those levels over the long run, and stocks, for example, might be closer to that, but year-over-year there is going to be a lot of volatility. We view the bond market as part of an overall portfolio allocation that will stabilize returns and provide consistency and income. For us, it is more of a relative return exercise, primarily relative to the market benchmarks that we manage against. Q:  What is your investment strategy? A : As a first step, we begin by looking at the yield curve positioning. The shape of the yield curve is a clear assessment of the risk and return for taking on additional maturity and duration risk along the curve. Overall, we are duration neutral in the portfolio. We may underweight or overweight certain segments of the curve as we try to come up with a yield advantage and maximize rolldown. As bonds roll down steeper parts of the curve, they get a price boost that gives them a better total return, so we underweight flatter parts of the yield curve or overweight steeper parts of the yield curve when we believe the yield curve will remain historically steep for an extended period of time. We tend to use the organic cash flow in the portfolio – coupon payments and principal payments – to migrate those positions over time. Then comes the sector allocation part of our process. Being aware that various bond sectors - Treasuries, government agencies, corporates, mortgage backed, asset backed, commercial mortgage backed, or municipals - offer different yields at different times, we also know that, more importantly, they have different and unique risk levels too. When evaluating all those risks, we first ask ourselves what may go wrong with a bond or a sector. Also, if it does go wrong, how bad can it get? Hence, a significant part of our analysis is based on understanding that risk and what we are getting paid to add that security to the portfolio. On a risk-adjusted basis, we also want to know how to position our portfolio relative to the benchmark in order to come out ahead of the benchmark on an annual basis. When it comes to selecting securities, we spend a lot of time understanding the structure of each individual name and all of its different attributes. And when we add a security, generally it has to have some competitive advantage to either a bond in the portfolio or to bonds that are in the benchmark. On a day-to-day basis, we spend 80% to 90% of our time on security selection and building portfolios from a bottom-up perspective. Finally, competitive execution is also key in our strategy. As senior portfolio managers, we execute all of our own trades rather than come up with a model portfolio that we send off to a different group to execute it. In our view, being involved in the market day-to-day plays a major role in recognizing relative value. What is more, we are aware that there is so much market information between portfolio construction and actual execution that a lot can get lost in translation. Q:  What analytical steps does your research process involve? A : To start with, it is a highly research intensive discipline. We do our own market and credit research with all senior portfolio managers and analysts contributing to the research function. Our flat organizational structure allows both the portfolio managers and analysts to work together in building the portfolios, which is critical in our opinion. One of the things that distinguishes us is a much more holistic approach to relative value assessment across sectors. We employ this tactic by working together on a day-to-day basis to build the portfolio. As far as idea generation is concerned, we have rich discussions around cross sector relative value. Not only does that lead to better communication in the team, but it also helps us make really good cross-sector relative value decisions. Furthermore, there is a wide array of tools that we benefit from. We have a portfolio analytics system that we supplement with market data and company research tools. In addition to that, we use different electronic trading platforms where we trade certain sectors of the market. We also use security-level analytics tools that help us analyze all the details on mortgage securities in terms of modeling and analyzing the security structure and underlying collateral. We submit all this input to a sophisticated analytical system to scrutinize risk both at a security, sector, and a portfolio level. Then, we use all that research to come up with securities that we are comfortable with. Q:  How do you build your portfolio? A : In the Baird Core Plus Bond Fund we have hundreds of securities that are very well diversified both by issuer name and sector. The crucial factor in constructing our portfolio is deciding how much the market will pay us for the risk and whether that is enough. Once we have reached a consensus, we will proceed with underweights or overweights by security and sector, and diversification is the focal point in that risk control process. With regard to credit exposure, the percentage of a particular issuer in the portfolio will typically be between 0.5% and 1%, or sometimes as low as 0.25% as we go down in quality. At present, we are not enamored with agency mortgages and we have only two thirds of index weight in the fund. One of the bond types that we like in general is the corporate sector. Although there are certain risks there, we think we are rewarded with handsome returns, so we tend to be overweight, particularly in the financial sector. In addition to that, corporate balance sheets and corporate earnings are about as strong as they have ever been and that is a good fundamental backdrop for overweight positions to corporates. Moreover, we think there are better opportunities in the sector on a risk-adjusted basis too. We are specifically looking at cohorts or groups or types of securities within mortgages that make up the mortgage sector. Once they have been identified, we compare them to specific types or groups of securities within the corporate sector. We are currently underweight and positioned with 12% in Treasuries and overweight in the corporate segment to come up with a portfolio that has an attractive yield advantage over the benchmark with a high degree of probability of outperforming that benchmark over time. In terms of our process, we are driven to more diversified holdings, still having overweights and underweights relative to the benchmark but more controlled. It is a blend of one big passive risk control aspect of the duration neutrality and a risk controlled active approach to the rest of the portfolio construction decision making. Our Core Plus Fund is benchmarked against the Barclays Capital U.S. Universal Index. That benchmark is very competitive and it keeps us in a broad multi-sector strategy for risk control. Again, we find a big part of the added value in underweighting and overweighting sectors relative to this benchmark. We are not a closet indexer. Right now, we feel we have been in a period where Treasuries have very little to no relative value compared to the other sectors of the bond market especially 10 year maturities and shorter. We think that is the most overvalued sector in the high-quality bond market because of the specific intervention of the Fed to implement their extraordinary monetary policy. We are adding yield in the portfolio not so much by adding a lot of risky assets but by underweighting a lot of the Treasury sectors as we think yields have been held artificially low by the Fed. One of the most distinguishing features of our portfolio construction is our approach to expense ratios. We have a modest expense ratio in our fund, which has a positive effect on the portfolio’s net returns to investors on a daily basis. Q:  Where do you currently see relative value in the market? A : Right now, we see more value in corporates than mortgages. But as we drill down a little bit more on the corporate side, we have concluded that we see more value in the finance sector. And as we look at some of these individual companies, again from a bondholder’s perspective, we think that on a risk-adjusted basis it makes sense to put more of our overweight to the corporate space in the financial sector. We are willing to do that not just because of the more attractive yield spreads but also because we think that there is intrinsically less risk in many cases. Unlike other sectors, we do not have the risk of a leveraged buyout to such a degree in the financial sector. For example, when we compare the bonds of General Electric Company versus those of Bank of America, the bank has a much wider spread and a little bit lower credit rating, but we think it offers much better value on a risk-adjusted basis.