By Philip van Doorn
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.
Jonathan Good, manager of the Baird Small/Mid Cap Growth Fund /zigman2/quotes/205098149/realtime BSGIX -1.15% /zigman2/quotes/201485407/realtime BSGSX -1.10% , described in an interview why it’s important to stand firm in bear markets.
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:
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Profitability.
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Revenue growth.
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Industry dynamics.
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Management teams.
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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 /zigman2/quotes/210598135/delayed XX:R25IG -1.06% , as well as the S&P 500, since the fund’s inception on Oct. 31, 2018:
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.
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.”
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