Asset Manager Research Overview of Baird s Due Diligence Capabilities 1
Overview Our philosophy is built on the same principles that have made Baird a nationally-recognized name in equity research. We believe that due diligence is both an art and a science. As such, we spend considerable time identifying investment opportunities that meet high standards; however, we spend even more time trying to identify the story behind the numbers. Professional oversight (as of 12/31/16)* Manage $6+ billion in discretionary portfolios Oversee $15+ billion Research coverage 80+ mutual funds 60+ separate account managers 25+ model portfolios Activity (average, on an annual basis) Due Diligence defined Due diligence is the process of investigation into the details of a potential investment. At Baird, it refers to the process set in place to research and monitor investment managers before, during and after that manager is recommended to a client. 325 conference calls 100 in-person visits 50 on-site visits Credentials 5 CFA (Chartered Financial Analyst) charter holders 4 post-undergraduate degrees Average 10+ years experience *Discretionary assets include those invested in Baird s ALIGN Strategic or UMA Select portfolios. Oversight assets include those invested in Baird s Recommended Managers and Mutual Fund programs, for which due diligence oversight is conducted. 2
Asset Manager Research Team Portfolio Management/Oversight Research Laura Thurow, CFA Director of PWM Research, Products and Services BA, Trinity College MBA, University of Chicago Year joined Baird/industry: 1999/1999 Previous Experience: equity research Kathy Blake Carey, CFA Director of Asset Manager Research BA, Yale University MBA, University of Colorado Year joined Baird/industry: 2013/1994 Previous Experience: equity research, portfolio management Geofrey Banda, CIMA Portfolio Consultant Portfolio Consultation BBS, University of Dayton MBA, University of Cincinnati Year joined Baird/industry: 2003/2001 Previous Experience: investment consulting Support Scott Osborne, CFA Senior Portfolio Analyst BBA, Fort Hays State University Year joined Baird/industry: 1998/1998 Previous Experience: bank examiner Aaron Benson, CFA Senior Portfolio Analyst BBA, University of Wisconsin - Milwaukee MS, University of Wisconsin - Milwaukee Year joined Baird/industry: 2007/2005 Previous Experience: performance measurement Joe Lorbert, CFP Portfolio Analyst BBA, Marquette University Year joined Baird/industry: 2016/2011 Previous Experience: Private Wealth, due diligence Maggie Savage, CFA Portfolio Analyst BBA, Marquette University Year joined Baird/industry: 2009/2009 Previous Experience: Equity Analyst David Manke Portfolio Associate BBA, UW-Madison Year joined Baird/industry: 2011/2011 Previous Experience: Private Wealth, Operations Debbie Binder Asset Manager Research Coordinator Carolyn Hagie Analytics Specialist 3
Kathy Blake Carey, CFA Kathy is the Director of Asset Manager Research for the Private Wealth Management division. She is a co-portfolio manager for the ALIGN Strategic portfolios where she is involved in the investment, asset allocation and rebalancing decisions as well as due diligence of the portfolios. Kathy is also a voting member of Baird s Equity Recommended Portfolio and sits on the firm s Investment Policy Committee. Background Prior to joining PWM Research, Kathy spent 9 years as an equity analyst and sector portfolio manager at Northwestern Mutual s public investment subsidiary Mason Street Advisors. Before that she was a senior associate in Baird s Equity Research Department covering Utilities and Financial Technology for 4 years. Education / Licensing Kathy received a BA from Yale University and a MBA from the University of Colorado- Colorado Springs. She has earned the CFA charter and is a member of the CFA Society of Milwaukee. She also holds a Series 7 and 24 license. 4
Due Diligence Process 1. Proprietary Screening Model Model includes several quantitative metrics that resonate with the expectations of our client base. These include risk-adjusted performance, consistency of performance, and down market risk. 2. Preliminary/Detailed Portfolio Analysis Conduct conference calls with portfolio managers to understand what competitive advantages the firms/team has. 3. On-Site Due Diligence Mandatory on-site meeting with key decision-makers where the objective is to assess how the team operates with one another. 4. Written Investment Thesis A formal compilation of all relevant information discovered during the due diligence process that answers the question why should we hire this manager? 5. Committee Approval This process of checks and balances ensures that multiple perspectives are taken into account. 6. On-Going Due Diligence Conduct regular conference calls and periodic on-site reviews to assess performance relative to our standards. Remove and replace options as necessary. 5
RANK ALERT (Algorithmic Evaluation Research Tool) Measures Breadth of Results Metric What It Measures Performance-Related Measures Alpha Excess return after incorporating market sensitivity Information Ratio Excess return relative to active risks taken Risk-Related Measures Sortino Ratio Excess return relative to downside volatility Standard Deviation Overall portfolio volatility Consistency-Related Measures Capture Ratio How well an investment does in an up market relative to a down market We first categorize over 20,000 investment options into specific asset classes before evaluating on a variety of metrics. Past performance, in and of itself, is a poor indicator of future results. As such, we do not screen purely based on performance. These metrics are designed to capture the characteristics that our clients expect from their investments. Batting Average The percentage of wins vs. losses against a market benchmark Seeks Consistency of Results Investment appears superior Investment performance is cyclical and we are not looking to recommend options that look great from a historical perspective only to underperform going forward. Investment appears inferior ALERT captures the long-term average We prefer to look at a larger body of evidence, evaluating each metric over 29 different 3-year periods. Consistency, in our view, is the key to longterm success. TIME 6
Portfolio Evaluation Organization History and ownership structure Reputation, culture and compliance Growth objectives and trajectory People Who are the key decision-makers? Experience and depth of team Incentive structure and alignment with clients Cohesiveness and stability Philosophy & Process Competitive edge Decision-making process Repeatability of process Portfolio Management Portfolio construction and suitability for clients Behavioral biases Effectiveness of sell discipline Performance Where is value being derived from? Historical record of holdings and transactions Best/worst environments Comparisons versus peers 7
On-Site Examination We require an on-site meeting before making any recommendation. These personal interactions are a key component of our process and allows to gain insights that are not possible over the phone. Can we verify that procedures are in place for compliance and risk management? How dominant or collaborative is the decision-making process? What type of environment does the team operate in? Is it conducive to their culture? How much time is spent on various functions? What trends are the team paying attention to? Which influence performance? How will the firm s growth objectives impact the portfolio management team? How (and by whom) are ideas generated? How well does the team really know their investments? How integrated are the firm s resources? How does this benefit the team? 8
Investment Thesis The investment thesis is the culmination of an analyst s work and addresses the simple question: why is this a good investment for clients? A typical thesis is six pages in length and includes qualitative and quantitative assessments of the investment manager. It is also disseminated to the Investment Committee before deciding whether or not to recommend it. 9
On-Going Due Diligence Baird s research process is designed to be continuous with as much effort being put into manager selection as on-going manager evaluation. Material Concerns On Watch A material breakdown in at least one factor of our investment thesis; advisors and clients are formally notified On-Going Due Diligence Termination Regular conference calls Periodic on-site visits Attribution analysis Compliance questionnaires Performance review triggers Concerns are Resolved Concern Persists or Worsens No longer a high conviction option or permanent impairment of our investment thesis Under Review Immaterial Concerns Conditions are evaluated; analysis intensifies 10
Diversification does not ensure against loss. The investment strategies of the program and of the underlying funds may not prove to be successful and an investor may lose money. Unless indicated otherwise, the underlying mutual funds discussed in this material are the institutional class shares. While the ALIGN Strategic Portfolios are designed to provide an investor with diversification and asset allocation, which should effectively reduce volatility, all investments are subject to risk. Some of the more pronounced risks of the underlying investments of the portfolios may include the use of derivatives, exposure to foreign markets, high-yield bonds and small and mid cap companies. Derivatives allow investors the potential to earn large returns from small movements in the underlying asset s price. However, investors could lose large amounts if the price of the underlying asset moves against them significantly. The term derivative indicates that the investment has no independent value its value is entirely derived from the value of the underlying asset. Investments in foreign and emerging markets securities involve additional risks such as currency rate fluctuations, the potential for political and economic instability, and different and sometimes less strict financial reporting standards and regulation. As the name implies, high yield bonds typically offer yields higher than investment grade securities, but they also include greater risks including increased credit risk and the increased risk of default or bankruptcy. An investment in small- and mid-capitalization companies often includes greater volatility and these companies face greater risks than those of larger, more established companies. ALIGN is a fee-based mutual fund advisory program. Because of this, an investor in the ALIGN program is subject to both a program fee and to the management fees of the respective mutual funds within the program. Please consider the investment objectives, risks, charges and expenses of the portfolio and any of the underlying funds carefully before investing. This and other information is found in Baird s Master Consulting Client Agreement, Form ADV and funds prospectuses or summary prospectuses. To obtain a Client Agreement, Form ADV and prospectus or summary prospectus, contact your Baird Financial Advisor. Please read these materials carefully before investing. 2015 Incorporated. Member SIPC. rwbaird.com. 800-RW-BAIRD. 11 11