It can be tempting to chase performance during any given year, but unfortunately it’s a tried-and-true way to lower your investment returns in the long run.
His stock-selection strategy has led to the fund being rated five stars (the highest) by Morningstar. It has a competitive record for its life of nearly four years.
Good said the fund’s long-term success has sprung from a focus on five factors, from bottom-up analysis of companies with market capitalizations averaging $10 billion:
- Revenue growth.
- Industry dynamics.
- Management teams.
- Expectations. This is what Good called “the hardest part,” an attempt to understand what is embedded in consensus estimates for financial performance, and whether those expectations are too low or too high.
Below are four examples of stocks held by the Baird Small/Mid Cap Growth Fund, along with Good’s comments and growth estimates for earnings and sales that tie into the five factors above.
Outperformance in a difficult year
Let’s look at the performance of the Baird Small/Mid Cap Growth Fund’s two share classes against its benchmark, the Russell 2500 Growth Index R25IG,
That’s an impressive record — beating the two broad indexes, especially for a fund that is not very concentrated. The Baird Small/Mid Cap Growth Fund tends to hold between 60 and 70 stocks of companies with market capitalizations ranging from $500 million to $12 billion.
“I t might seem strange to say when the fund is down 24% that I am OK with our risk-reward over the next 12 months. ”
— Jonathan Good, manager of the Baird Small/ Mid Growth Fund.
What may 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% (all with reinvested dividends).
How to view the risk-reward ratio
When discussing the bear market of 2022, Good said that looking back, he believed that the companies in the Baird Small/Mid Growth portfolio would fare well in a rising-interest-rate environment “because of strong balance sheets,” but “the headwind was the multiples [price-to-earning ratios] were high.”
“It might seem strange to say when the fund is down 24% that I am OK with our risk-reward over the next 12 months,” Good said.
He said this year’s decline for the fund reflected his strategy “not to take big sector bets.” (Some funds hit the jackpot this year, with outperformance based entirely on heavy allocation to energy stocks.)
Good called the fund’s excellent long-term record “a function of good bottom-up stock picking and having good, quality businesses that have outperformed.” Those include dynamic innovators as well as “long-term compounders with consistent and revenue growth, which fed multiple expansion.”
Four stocks held by the fund
Good — who specializes in covering health care industries and has a degree in applied and biomedical sciences from the University of Pennsylvania and an M.B.A. from the Kellogg School of Management at Northwestern University — said the Baird Small/Mid Growth Fund is overweight health care and industrials when compared with its benchmark, the Russell 2500 Growth Index.
But he also said the index itself is about 90% weighted to four sectors: health care, technology, industrials and consumer discretionary.
He said that the SMID space offers particular flexibility to him as a fund manager, as he can focus mainly on profitable companies with an average market capitalization of about $10 billion, but can also capture smaller companies that appear to have strong paths for sales growth, even if they have not yet achieved profitability.
Here are four companies he discussed:
Five Below Inc. FIVE,
ShockWave Medical Inc. SWAV,
Repligen Corp. RGEN,
Paycor HCM Inc. PYCR,
For context, consensus estimates point to sales CAGR of 4.5% through 2024 for the S&P 400 Mid Cap Index MID,