New Municipal Bond Fund added to Portfolios

When we take a position in a fund, in most cases we intend to hold the fund indefinitely. However, sometimes there are reasons why we replace managers. As described in your Investment Policy Statement (“IPS”), rarely is that reason performance, as this can be cyclical, but more often it has to do with a change in the fund’s characteristics, strategy or management.

Such is the case with one of the funds we purchased a couple years ago, the Wells Fargo Municipal Bond Fund (WMBIX) run by Lyle Fitterer. Lyle’s track record at Wells was excellent, and we were comfortable with the type of risks he takes in the strategy. The strategy continued to perform in line with expectations, however it was announced last year that he would be leaving and joining Baird Investment Management. This is not always a reason to sell a fund, as much of the team usually stays intact. There are examples in the past of star managers leaving a firm, but that firm continuing to perform well as the managers who take over continue to execute the strategy. So, we decided to be patient and stick with Wells for the time being.

At Baird, Lyle would be reuniting with one of his old colleagues from Wells, Duane McAllister. Before joining Baird in 2015, McAllister spent the previous 7 years as the portfolio manager for BMO Asset Management’s municipal strategy. These two have maintained a great rapport and were able to come together to co-manage a suite of muni strategies.

Since reuniting last year, they have started two new funds, the Baird Municipal Bond Fund, and the Baird Strategic Municipal Bond Fund. These funds are very similar to the funds they ran at Wells Fargo but are now starting with a low asset base. Due to the success at Wells, the fund had grown to about $5.5 billion, massive for a muni bond strategy. Their current funds combine for under $100 million. Having a large size can be a disadvantage, because it limits what you can buy and sell. For example, to make a 1% adjustment in the Wells fund, they would have to trade about $55 million which at certain times can be challenging. We have had good experiences following talented managers to smaller, more nimble funds.

Earlier this year, we wanted to shorten our duration as interest rates came down. This gave us a good opportunity to start a relationship with Baird, so we sold a portion of the Wells Fargo fund for the Baird Short-Term Municipal Bond strategy (BTMIX).

Then a little over a month ago, we got some news that would expedite our transition to Baird. Wells Fargo announced that several more of their investment team were leaving. Turns out, many were following their old boss to Baird and at this point we knew we needed to completely exit our Wells position.

After reviewing several different options, we decided to consolidate both the Wells Fargo fund, and Baird Short-Term Muni fund into a single position, called the Baird Strategic Municipal Bond Fund (BSNIX). This fund has an average bond maturity that sits right between the two previous funds, and more flexibility on how much credit and duration risk they can take going forward. Although the fund is new at Baird, the strategy has been run at Wells Fargo by Lyle (as well as Duane in the early years) for decades with great success.

As was the case with Wells Fargo before, we intend to hold this fund as a core position for the foreseeable future. Please contact us if you have any questions about the fund or your portfolio.