December 9, 2023

Chasing performance during any given year can be tempting, but unfortunately it is a tried-and-true way of reducing your investment returns in the long run.

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Jonathan Good, Manager, Baird Small/Mid Cap Growth Fund BSGIX,

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An interview described why it is important to stand firm in bear markets.

Their stock-selection strategy has earned the fund a five star (highest) rating by Morningstar. It has a competitive record for its life of about four years.

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Good said from a bottom-up analysis of companies with an average market capitalization of $10 billion, the fund’s long-term success stemmed from a focus on five factors:

Below are four examples of stocks held by the Baird Small/Mid Cap Growth Fund, along with Good’s comments and growth projections for earnings and sales that tied into the five factors above.

Better performance in tough years

Let us look at the performance of two stock classes against the Baird Small/Mid Cap Growth Fund’s benchmark, Russell 2500 Growth Index R25IG,
As well as the S&P 500, since the fund’s inception on October 31, 2018:

It’s an impressive record – outperforming two broad indices, especially for a fund that isn’t very focused. Baird Small/Mid Cap Growth Funds tend to hold 60 to 70 stocks of companies with market capitalizations ranging from $500 million to $12 billion.

,I can’t find it strange to say that when the fund is down 24% that I am fine with our risk-reward over the next 12 months. ,

–Jonathan Good, manager of Baird Small/Mid Growth Fund.

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What might surprise you even more about the fund’s performance is that both of its share classes are down 24% this year. The Russell 2500 Growth Index is down 25% and the S&P 500 is down 20% (with all reinvested dividends).

How to View the Risk-Reward Ratio

Discussing the bear market of 2022, Good said that looking back, he believed companies in the Baird Small/Mid Growth portfolio would do well in a rising interest rate environment “due to a strong balance sheet”. , but the “headwind” was the multiplier [price-to-earning ratios] were high.”

“It may seem strange to say that when the fund is down 24%, I’m okay with my risk-reward over the next 12 months,” Good said.

He said this year’s decline for the fund reflects his strategy “not to take big sector bets”. (Some funds hit the jackpot this year, with outperformance based solely on a hefty allocation of energy stocks.)

Good called the fund’s excellent long-term record “a function of good bottom-up stock picking and the outperformance of good, quality businesses.” These include consistent further revenue growth with dynamic innovators as well as “long-term compounders, which fueled multiple expansions.”

Four stocks held by the fund

Good — who specializes in covering the health care industries and has a degree in Applied and Biomedical Sciences from the University of Pennsylvania and an MBA from the Kellogg School of Management at Northwestern University — said the Baird Small/Mid Growth Fund will fund overweight health care and industry when compared with its benchmark, the Russell 2500 Growth Index.

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But he also noted that the index itself is roughly 90% weighted in four sectors: health care, technology, industry and consumer discretionary.

He said the SMID space offers him particular flexibility as a fund manager, as he can primarily focus on profitable companies with an average market capitalization of around $10 billion, but can also hold smaller companies. which are strong avenues for sales growth, even though they have not yet achieved profitability.

Here are four companies he discussed:

Five Down Inc.
As a consumer you may already be familiar. Good sees “a huge runway of unit growth” for the discount retailer, adding that “they are also offering a 10-down option with more flexibility.” He pointed to the company’s profit during periods of high inflation and its ability to roll with consumer whims. Analysts surveyed by FactSet expect the company’s sales to grow at a compound annual growth rate (CAGR) of 18.8% over the next two calendar years through 2024, with earnings per share growing at a CAGR of 24.6%.

Shockwave Medical Inc.
“An incredibly rapid growth story,” Good said. The company manufactures equipment and develops procedures to remove calcium from the circulatory system using sound-wave technology similar to those used to remove kidney stones. Good said the technology is easier for doctors to learn and there are “good reimbursements” from insurance companies. Analysts expect two-year sales CAGR of 27.2 percent through calendar 2023, with EPS CAGR of 34%.

Replication Corp.
Develops processing technologies and modular supplies products for use in the manufacture of biologic drugs. “They have driven development with the idea of ​​single-use and consumables, rather than the old version of stopping, cleaning, supplying, etc.” New, modular approaches could help many biotech companies reduce their risks and their costs. Good also said that Repligen is making an “incredibly smart acquisition. Now, a huge source of debate” over the stock is “what happens when Covid is gone,” he said. According to analysts surveyed by FactSet. Based on estimates, the consensus calls for Repligen to achieve a two-year sales CAGR of 15.9%, with an EPS CAGR of 17.6% through 2024.

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Paycor HCM Inc.
Provides a suite of human-resources software services for small and medium-sized companies. “It’s a case of a huge market opportunity for small business,” Good said, though he added that Paycor is also “growing upmarket.” Consensus estimates a two-year sales CAGR of 18.3% for Paycor, with an EPS CAGR of 31.5%.

For context, consensus estimates point to a sales CAGR of 4.5% through 2024 for the S&P 400 Mid Cap Index MID,
And the EPS CAGR for that index is 6.4%.

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