Large Cap Strategy

OVERVIEW

The decision-making process of the Baird Large Cap portfolio (subadvised by L2 Asset Management LLC) is primarily quantitative and driven by proprietary models that rank securities based on fundamental measures of value, past performance and indicators of recent positive changes.

In addition to a quantitative assessment, the portfolio manager evaluates the outputs from the models based on regular fundamental analyses and uses such evaluation to identify process-oriented items to improve the model. More specifically, characteristics or items identified as potential risks or opportunities on a fundamental level are tested to see if they are actionable and can be part of a repeatable investment process.

In selecting investments, the process focuses on securities that are out of favor in the marketplace but have experienced favorable risk-adjusted returns. While the portfolio manager considers both growth and value factors in its investment processes, the selection process may have a tendency to be more value-oriented.

TEAM

For more information, contact Skip McGregor or the Intermediary Specialist in your region.

Matthew Malgari and Sanjeev Bhojraj co-manage the Baird Large Cap Strategy together. 

COMMENTARY

Q4 2016 Large Cap Equity Commentary

The Baird Large Cap strategy returned roughly 7% in the fourth quarter nearly doubling the return of the S&P 500. Based on the Large Cap Core category[1], the strong close to the year put our 2016 results 3% ahead of the peer group average and placed the portfolio firmly in the top quintile of peers. This performance was a welcome extension of the strong results we saw in the third quarter when the portfolio rose 7.0% while our typical peer1 lagged the index and returned 3.8%. While we cannot pinpoint causality, we believe that the near 60% re-pricing of US debt, where we saw 10-year yields soar from 1.6% at the start of the quarter to a peak of nearly 2.6% in December, may have provided a reminder to investors around the world that money typically is not free. The knock-on effect when it comes to equities is that eventually undervalued profits take primacy over stocks whose value is based on promises of future earnings priced beyond perfection.

During the fourth quarter, real estate, health care and consumer staples—all sectors we were underweight—were the worst performers falling between 2% and 4% in a market up 3.8%. Since we fervently believe in the disciplined process we bring to stock selection there have been and will be many times when Mr. Market is rushing about, but our opinions and portfolio composition will remain largely if not wholly unchanged. In that vein we feel forced to simply repeat, near verbatim, our comments from the prior quarter regarding the performance of the worst-performing sectors. In our opinion many of the stocks in real estate, health care and consumer staples have been priced as if they were bonds with the market coveting their yields at the apparent exclusion of any fundamental consideration. Generically speaking we have found that when a market embraces a group of stocks due to a univariate feature at the exclusion of a more comprehensive assessment of intrinsic value, it proves to be a suboptimal time for investment. Should Mr. Market also mix in a case of overvaluation, as we believe has occurred in many of these stocks, it makes for fertile ground for sharp capital impairments. Conversely, financials, energy and industrials rose between 7% and 21%. In all three sectors our disciplined approach to stock selection and risk management allowed us to generate excess returns.

Read Full Large Cap Equity Commentary