UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-09997
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BAIRD FUNDS, INC.
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(Exact name of registrant as specified in charter)
777 EAST WISCONSIN AVENUE, FLOOR 18
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MILWAUKEE, WI 53202
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(Address of principal executive offices) (Zip code)
CHARLES M. WEBER
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ROBERT W. BAIRD & CO. INCORPORATED
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777 EAST WISCONSIN AVENUE
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MILWAUKEE, WI 53202
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(Name and address of agent for service)
1-866-442-2473
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Registrant's telephone number, including area code
Date of fiscal year end: DECEMBER 31, 2005
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Date of reporting period: DECEMBER 31, 2005
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ITEM 1. REPORT TO STOCKHOLDERS.
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(BAIRD FUNDS LOGO)
ANNUAL REPORT
December 31, 2005
Baird Intermediate Bond Fund
Baird Aggregate Bond Fund
Baird Intermediate Municipal Bond Fund
Baird Core Plus Bond Fund
Baird Short-Term Bond Fund
TABLE OF CONTENTS
PAGE
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LETTER TO SHAREHOLDERS 1
2005 BOND MARKET OVERVIEW 2
BAIRD INTERMEDIATE BOND FUND 6
BAIRD AGGREGATE BOND FUND 20
BAIRD INTERMEDIATE MUNICIPAL BOND FUND 35
BAIRD CORE PLUS BOND FUND 42
BAIRD SHORT-TERM BOND FUND 51
ADDITIONAL INFORMATION ON FUND EXPENSES 61
STATEMENTS OF ASSETS AND LIABILITIES 63
STATEMENTS OF OPERATIONS 64
STATEMENTS OF CHANGES IN NET ASSETS 65
FINANCIAL HIGHLIGHTS 70
NOTES TO THE FINANCIAL STATEMENTS 79
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 89
DIRECTORS AND OFFICERS 90
DISCLOSURE REGARDING THE BOARD OF DIRECTORS' APPROVAL
OF THE INVESTMENT ADVISORY AGREEMENT FOR BAIRD BOND FUNDS 92
ADDITIONAL INFORMATION 96
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
CAUTIONARY NOTE ON ANALYSES, OPINIONS AND OUTLOOKS: In this report we offer
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analyses and opinions on the performance of individual securities, companies,
industries, sectors, markets, interest rates and governmental policies,
including predictions, forecasts and outlooks regarding possible future events.
These can generally be identified as such because the context of the statements
may include such words as "believe," "should," "will," "expects," "anticipates,"
"hopes" and words of similar effect. These statements reflect the portfolio
managers' good faith beliefs and judgments and involve risks and uncertainties,
including the risk that the portfolio managers' analyses, opinions and outlooks
are or will prove to be inaccurate. It is inherently difficult to correctly
assess and explain the performance of particular securities, sectors, markets,
interest rate movements, governmental actions or general economic trends and
conditions, and many unforeseen factors contribute to the performance of Baird
Funds. Investors are, therefore, cautioned not to place undue reliance on
subjective judgments contained in this report.
(BAIRD FUNDS LOGO)
1-866-442-2473
www.bairdfunds.com
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February 28, 2006
Dear Shareholders,
We would like to thank you for investing in the Baird Funds. We appreciate the
opportunity to help our investors navigate the transitions and challenges
presented by the financial markets in 2005. The Baird Funds continued to grow
during the year with total net assets exceeding $820 million as of December 31,
2005. In addition, three of our Bond Funds and two of our Equity Funds
celebrated their 5-year anniversaries during the year.
In this Annual Report we review the bond market in 2005 and the performance and
composition of each of the Baird Bond Funds. We hope you find this report both
informative and helpful in achieving your investment goals. Thank you again for
choosing Baird Funds.
Sincerely,
/s/Mary Ellen Stanek
Mary Ellen Stanek, CFA
President
Baird Funds, Inc.
2005 BOND MARKET OVERVIEW
2005 SUMMARY
Despite 200 basis points of Fed tightening and spiking oil prices, the bond
market defied the odds and delivered positive returns in 2005. The yield curve
went flat and Ford and GM lost their investment grade status. The U.S. dollar
rebounded and foreigners added to their holdings of U.S. Treasury debt.
Consumer spending, boosted by mortgage equity extraction, helped the economy
achieve another year of steady growth and core inflation, held in check by stiff
global competition, remained subdued. More in-depth analysis is provided below.
FLAT YIELD CURVE
The yield curve continued to flatten in 2005 as the Federal Open Market
Committee (FOMC) raised its target for the Fed funds rate to 4.25% from 2.25% in
eight 0.25% increments. Short-term market rates rose in response to the Fed's
action (as did the U.S. dollar), but as in 2004, long-term rates once again
declined and the yield curve ended very flat (see chart and table below). The
difference between 2-year and 30-year Treasury yields finished the year at just
14 basis points, down from 176 basis points on December 31, 2004. While the
table below shows only a 17 basis point increase in the 10-year T-note yield, it
is worth noting that over the course of the year it covered a 77 basis point
range from a low of 3.89% on June 1, 2005 to a high of 4.66% on November 4,
2005.
TREASURY YIELDS
Source: Bloomberg
Maturity 31-Dec-2004 31-Dec-2005
-------- ----------- -----------
1 2.77% 4.43%
2 3.07% 4.40%
3 3.22% 4.36%
5 3.61% 4.35%
7 3.93% 4.36%
10 4.22% 4.39%
15 4.65% 4.58%
20 4.85% 4.61%
25 4.90% 4.58%
30 4.83% 4.54%
MATURITY DEC. 31, 2004 DEC. 31, 2005 1 YR. CHANGE
-------- ------------- ------------- ------------
1 2.77% 4.43% 1.66%
2 3.07% 4.40% 1.33%
3 3.22% 4.36% 1.14%
5 3.61% 4.35% 0.74%
7 3.93% 4.36% 0.43%
10 4.22% 4.39% 0.17%
15 4.65% 4.58% -0.07%
20 4.85% 4.61% -0.24%
25 4.90% 4.58% -0.32%
30 4.83% 4.54% -0.29%
MODEST INFLATION + STRONG FOREIGN DEMAND = LOWER LONG-TERM RATES IN 2005
A significant increase in the price of oil (peaking at $70/barrel in August)
pushed the Consumer Price Index (CPI) higher in 2005, but core inflation (CPI
excluding food and energy) remained modest at just 2% on a year-over-year basis
through November (see chart on next page, top left). Additionally, global
competitive forces, led by the supply of cheap foreign labor (see table on next
page, top right) have limited domestic wage gains in the U.S. to levels well
below prior economic cycles. The lack of wage inflation, the market's
confidence in the Fed's resolve to contain inflation overall and a dearth of
long-bond issuance kept long-term interest rates low in 2005.
CONSUMER PRICE INDEX
Date CPI (all items) CPI (excl. Food & Energy)
---- --------------- -------------------------
12/31/84 3.90% 4.70%
3/29/85 3.70% 4.80%
6/28/85 3.80% 4.40%
9/30/85 3.10% 4.00%
12/31/85 3.80% 4.30%
3/31/86 2.30% 4.10%
6/30/86 1.80% 4.00%
9/30/86 1.80% 4.10%
12/31/86 1.10% 3.80%
3/31/87 3.00% 4.00%
6/30/87 3.70% 4.10%
9/30/87 4.40% 4.30%
12/31/87 4.40% 4.20%
3/31/88 3.90% 4.40%
6/30/88 4.00% 4.50%
9/30/88 4.20% 4.40%
12/30/88 4.40% 4.70%
3/31/89 5.00% 4.70%
6/30/89 5.20% 4.50%
9/29/89 4.30% 4.30%
12/29/89 4.60% 4.40%
3/30/90 5.20% 4.90%
6/29/90 4.70% 4.90%
9/28/90 6.20% 5.50%
12/31/90 6.10% 5.20%
3/29/91 4.90% 5.20%
6/28/91 4.70% 5.00%
9/30/91 3.40% 4.50%
12/31/91 3.10% 4.40%
3/31/92 3.20% 3.90%
6/30/92 3.10% 3.80%
9/30/92 3.00% 3.30%
12/31/92 2.90% 3.30%
3/31/93 3.10% 3.40%
6/30/93 3.00% 3.30%
9/30/93 2.70% 3.20%
12/31/93 2.70% 3.20%
3/31/94 2.50% 2.90%
6/30/94 2.50% 2.90%
9/30/94 3.00% 3.00%
12/30/94 2.70% 2.60%
3/31/95 2.90% 3.00%
6/30/95 3.00% 3.00%
9/29/95 2.50% 2.90%
12/29/95 2.50% 3.00%
3/29/96 2.80% 2.80%
6/28/96 2.80% 2.70%
9/30/96 3.00% 2.70%
12/31/96 3.30% 2.60%
3/31/97 2.80% 2.50%
6/30/97 2.30% 2.40%
9/30/97 2.20% 2.20%
12/31/97 1.70% 2.20%
3/31/98 1.40% 2.10%
6/30/98 1.70% 2.20%
9/30/98 1.50% 2.50%
12/31/98 1.60% 2.40%
3/31/99 1.70% 2.10%
6/30/99 2.00% 2.10%
9/30/99 2.60% 2.00%
12/31/99 2.70% 1.90%
3/31/2000 3.80% 2.40%
6/30/2000 3.70% 2.50%
9/29/2000 3.50% 2.60%
12/29/2000 3.40% 2.60%
3/30/2001 2.90% 2.70%
6/29/2001 3.20% 2.70%
9/28/2001 2.60% 2.60%
12/31/2001 1.60% 2.70%
3/29/2002 1.50% 2.40%
6/28/2002 1.10% 2.30%
9/30/2002 1.50% 2.20%
12/31/2002 2.40% 1.90%
3/31/2003 3.00% 1.70%
6/30/2003 2.10% 1.50%
9/30/2003 2.30% 1.20%
12/31/2003 1.90% 1.10%
3/31/2004 1.70% 1.60%
6/30/2004 3.30% 1.90%
9/30/2004 2.50% 2.00%
12/31/2004 3.30% 2.20%
3/31/2005 3.10% 2.30%
6/30/2005 2.50% 2.00%
9/30/2005 4.70% 2.00%
11/30/2005 3.40% 2.20%
Source: Bloomberg
MANUFACTURING HOURLY WAGES
(in US $)
2004
----
Germany $31.25
US $23.17
Japan $21.90
Spain $17.10
Taiwan $5.97
Czech Rep $5.43
Mexico $2.50
China*<F1> $0.91
*<F1> 2002
Source: Bureau of Labor Statistics and ISI
Strong foreign demand for U.S. Treasuries also helped keep bond prices up and
interest rates down. As the U.S. trade deficit widened, foreign holdings
increased to record highs again in 2005 (see chart below, left) despite concerns
that waning foreign demand could lead to higher interest rates. A look at
yields around the world (see chart below, right) suggests that lack of
attractive alternatives may be a key factor that keeps foreign buyers interested
in the U.S. Treasury market.
FOREIGN HOLDINGS OF PUBLIC U.S. TREASURY DEBT
Year $ Billions (left scale) % of Total Outstanding
---- ----------------------- ----------------------
1980 127 0.17
1981 136 0.17
1982 151 0.15
1983 164 0.14
1984 200 0.15
1985 226 0.14
1986 269 0.15
1987 296 0.15
1988 354 0.17
1989 424 0.19
1990 438 0.18
1991 476 0.17
1992 520 0.17
1993 595 0.18
1994 633 0.18
1995 820 0.23
1996 1,047 0.28
1997 1,166 0.31
1998 1,185 0.32
1999 1,080 0.3
2000 1,026 0.31
2001 1,040 0.31
2002 1,254 0.35
2003 1,539 0.38
2004 1,856 0.43
2005 2,037 0.45
Source: US Federal Reserve
GLOBAL YIELD CURVES
Maturity U.S. Germany Japan U.K. China
-------- ---- ------- ----- ---- -----
1 4.43% 2.72% 0.06% 4.19% 1.53%
2 4.40% 2.86% 0.29% 4.19% 1.72%
3 4.36% 2.92% 0.42% 4.19% 2.42%
5 4.35% 3.07% 0.86% 4.17% 2.47%
7 4.36% 3.18% 1.18% 4.14% 2.84%
10 4.39% 3.31% 1.48% 4.10% 2.97%
15 4.58% 3.43% 1.67% 4.11% 3.19%
20 4.61% 3.56% 1.98% 4.06% 3.41%
30 4.54% 3.57% 2.31% 3.98%
Source: Bloomberg
POSITIVE RETURNS, LONGER DURATION OUTPERFORMS
Despite the increase in short-term yields, all sectors of the bond market posted
positive returns in 2005 (see table on next page). As in 2004, however, shorter
benchmarks (e.g. Lehman Brothers 1-3 yr. Gov't/Credit, +1.77%) felt the full
effect of the Fed's tightening and lagged full market benchmarks (e.g. Lehman
Brothers Aggregate, +2.43% and Lehman Brothers Gov't/Credit, +2.37%) which
benefited from the "conundrous" decline in long-term yields. A more detailed
listing of various benchmark and sector returns appears in the following table.
TOTAL RETURNS OF SELECTED LEHMAN BROTHERS (LB) INDICES AND SECTORS
Index/Sector 2005
------------ ----
LB Aggregate Index 2.43%
LB Gov't/Credit Index 2.37%
LB Int. Gov't/Credit Index 1.58%
LB 1-3 yr. Gov't/Credit Index 1.77%
US Treasury Sector 2.79%
Government Agency Sector 2.34%
Corporate Sector 1.68%
AAA 2.54%
AA 1.92%
A 2.32%
BBB 0.81%
Mortgage Backed Securities Sector 2.61%
Asset-Backed Securities Sector 2.09%
High Yield Sector 2.74%
Municipal Sector 3.51%
FORD AND GM CAUSE CORPORATE SECTOR TO LAG
The downgrade of Ford and GM to below investment grade was the major theme in
the corporate market in 2005. Dramatic widening of yield spreads on Ford and GM
issues caused the performance of the corporate sector (+1.68%) to lag all other
sectors for the year. Performance of BBBs (+0.81%) vs. AAAs (+2.54%), AAs
(+1.92%) and As (+2.32%) shows that the impact was confined to lower rated
issues (and the auto sector in particular). In sympathy with Ford and GM, yield
spreads on investment grade corporate bonds in general widened in 2005, but only
by 5-10 basis points, as modest new supply of just $85 billion (see supply chart
below, left) helped keep corporate spreads relatively tight by historical
standards in 2005. At year end, yields on 5-year GMAC issues were approximately
8.5%; yields on 5-year GM Co. bonds were as high as 14.0%.
NET NEW SUPPLY
Year Treasury Agency Investment Grade Corporate
- ---- -------- ------ --------------------------
1992 282.5 41.2 72.77
1993 235.4 86.7 66.36
1994 136.6 168.2 30.36
1995 181.1 105.7 84.72
1996 152.5 81.2 96.92
1997 -2.9 96.8 104.67
1998 -101.4 273.9 219.25
1999 -74.5 320 232.2
2000 -314.1 235.1 214.39
2001 16.1 219.1 458.72
2002 237.3 215.5 265.55
2003 370.1 269 221.04
2004 369 90 131
2005 219.4 -125.6 85
2006 est. 296 165 110
Source: Lehman Brothers
DURATION OF LEHMAN FIXED RATE MBS INDEX
Date
----
Jan-85 5.74
Feb-85 5.52
Mar-85 5.54
Apr-85 5.5
May-85 5.59
Jun-85 5.42
Jul-85 5.24
Aug-85 5.15
Sep-85 4.95
Oct-85 4.83
Nov-85 4.79
Dec-85 4.99
Jan-86 5.06
Feb-86 5.23
Mar-86 5.13
Apr-86 4.77
May-86 3.87
Jun-86 3.59
Jul-86 3.41
Aug-86 3.52
Sep-86 3.51
Oct-86 3.68
Nov-86 4.17
Dec-86 4.2
Jan-87 4.45
Feb-87 4.59
Mar-87 4.63
Apr-87 4.47
May-87 4.21
Jun-87 4.26
Jul-87 4.24
Aug-87 4.65
Sep-87 4.8
Oct-87 5.12
Nov-87 5.35
Dec-87 5.51
Jan-88 5.77
Feb-88 5.84
Mar-88 5.79
Apr-88 5.27
May-88 4.93
Jun-88 4.81
Jul-88 4.88
Aug-88 4.79
Sep-88 4.94
Oct-88 5.04
Nov-88 5.03
Dec-88 5.11
Jan-89 4.52
Feb-89 4.65
Mar-89 4.81
Apr-89 4.72
May-89 4.6
Jun-89 4.38
Jul-89 4.19
Aug-89 4.35
Sep-89 4.28
Oct-89 4.07
Nov-89 4.03
Dec-89 4.11
Jan-90 4.32
Feb-90 4.44
Mar-90 4.54
Apr-90 4.72
May-90 4.54
Jun-90 4.37
Jul-90 4.23
Aug-90 4.5
Sep-90 4.5
Oct-90 4.43
Nov-90 4.12
Dec-90 4.04
Jan-91 3.96
Feb-91 4
Mar-91 4.05
Apr-91 4.07
May-91 4.12
Jun-91 4.26
Jul-91 4.36
Aug-91 4.11
Sep-91 3.78
Oct-91 3.75
Nov-91 3.78
Dec-91 2.41
Jan-92 3.58
Feb-92 3.47
Mar-92 3.98
Apr-92 4.05
May-92 3.53
Jun-92 3.4
Jul-92 3.05
Aug-92 2.77
Sep-92 2.78
Oct-92 3.57
Nov-92 3.68
Dec-92 3.44
Jan-93 3.01
Feb-93 2.56
Mar-93 2.56
Apr-93 2.66
May-93 2.76
Jun-93 2.32
Jul-93 2.47
Aug-93 2.16
Sep-93 2.33
Oct-93 2.8
Nov-93 3.43
Dec-93 3.47
Jan-94 3.35
Feb-94 3.47
Mar-94 4.35
Apr-94 4.74
May-94 4.83
Jun-94 4.74
Jul-94 4.6
Aug-94 4.1
Sep-94 4.35
Oct-94 4.43
Nov-94 4.45
Dec-94 4.4
Jan-95 4.24
Feb-95 4.5
Mar-95 4.46
Apr-95 4.28
May-95 3.5
Jun-95 3.47
Jul-95 3.6
Aug-95 3.48
Sep-95 3.32
Oct-95 3.2
Nov-95 2.91
Dec-95 2.57
Jan-96 2.63
Feb-96 3.48
Mar-96 3.86
Apr-96 4.19
May-96 4.36
Jun-96 4.2
Jul-96 4.07
Aug-96 4.21
Sep-96 4.02
Oct-96 3.62
Nov-96 3.18
Dec-96 3.66
Jan-97 3.66
Feb-97 3.72
Mar-97 3.99
Apr-97 3.84
May-97 3.78
Jun-97 3.6
Jul-97 2.94
Aug-97 3.35
Sep-97 3.02
Oct-97 2.64
Nov-97 2.62
Dec-97 2.4
Jan-98 2.09
Feb-98 2.32
Mar-98 2.46
Apr-98 2.48
May-98 2.35
Jun-98 2.27
Jul-98 2.43
Aug-98 2.06
Sep-98 1.37
Oct-98 2.23
Nov-98 2.21
Dec-98 1.95
Jan-99 1.86
Feb-99 2.82
Mar-99 2.94
Apr-99 3.04
May-99 3.6
Jun-99 3.81
Jul-99 4.15
Aug-99 4.31
Sep-99 4.15
Oct-99 4.04
Nov-99 4.17
Dec-99 4.27
Jan-00 4.36
Feb-00 4.17
Mar-00 4.03
Apr-00 4.25
May-00 4.37
Jun-00 4.11
Jul-00 4.11
Aug-00 3.94
Sep-00 3.84
Oct-00 3.75
Nov-00 3.45
Dec-00 3
Jan-2001 2.71
Feb-2001 2.68
Mar-2001 2.84
Apr-2001 3.3
May-2001 3.4
Jun-2001 3.56
Jul-2001 3.05
Aug-2001 2.9
Sep-2001 2.62
Oct-2001 1.46
Nov-2001 2.6
Dec-2001 3.1
Jan-2002 3.16
Feb-2002 2.9
Mar-2002 3.51
Apr-2002 3.03
May-2002 2.83
Jun-2002 2.6
Jul-2002 2.03
Aug-2002 1.4
Sep-2002 0.91
Oct-2002 1.08
Nov-2002 1.63
Dec-2002 0.94
Jan-2003 1.2
Feb-2003 0.81
Mar-2003 1.11
Apr-2003 1.03
May-2003 0.58
Jun-2003 1.02
Jul-2003 3.05
Aug-2003 3.14
Sep-2003 2.49
Oct-2003 3.12
Nov-2003 3.24
Dec-2003 2.98
Jan-2004 2.82
Feb-2004 2.53
Mar-2004 2.37
Apr-2004 3.59
May-2004 4.15
Jun-2004 4.13
Jul-2004 3.85
Aug-2004 3.11
Sep-2004 3.12
Oct-2004 2.73
Nov-2004 3.18
Dec-2004 2.86
Jan-2005 2.5
Feb-2005 3.09
Mar-2005 3.42
Apr-2005 2.89
May-2005 2.38
Jun-2005 2.23
Jul-2005 3.05
Aug-2005 2.57
Sep-2005 3.25
Oct-2005 3.8
Nov-2005 3.85
Dec-2005 3.64
Source: Lehman Brothers
MBS, ABS, GOVERNMENT AGENCIES AND MUNICIPALS DELIVER SOLID RETURNS
Showing a preference for the lower overall credit risk profile of mortgage-
backed (MBS) and asset-backed securities (ABS), investors willingly accepted the
intrinsic cash flow timing risks of these sectors as a trade-off. Despite
decreases in prepayment speeds and a corresponding extension in mortgage
durations from 2.86 to 3.64 years (see chart above, right), strong investor
demand helped MBS and ABS post solid returns of +2.61% and +2.09% respectively.
Government Agencies performed well on a relative basis (+2.34%), as a $126
billion decrease in net supply (see supply chart above, left) kept FNMA and
FHLMC yield spreads mostly stable amidst negative headlines. Municipal bonds,
benefiting from a steeper municipal yield curve and longer overall duration,
outperformed all other sectors with a +3.51% return. High yield bonds generated
Treasury-like returns of +2.74%.
2006 OUTLOOK
We believe the Bernanke Fed will cease raising rates in 2006 and we expect
moderate economic growth. Strong global competitive forces will prevent
inflation and interest rates from rising significantly. Heavy Treasury issuance
should be met with solid domestic and foreign demand while the return of the 30-
year Treasury bond will limit the magnitude and duration of any inversion of the
yield curve. Corporate yield spreads will remain relatively stable amidst
modest new supply, and security selection will be key to adding value in this
sector. We see good relative value in Government agency debt and also see
opportunities to add value in the mortgage and asset-backed sectors.
BAIRD ADVISORS
Mary Ellen Stanek, CFA
Gary A. Elfe, CFA
Charles B. Groeschell
Warren D. Pierson, CFA
Daniel A. Tranchita, CFA
M. Sharon deGuzman
BAIRD INTERMEDIATE BOND FUND
DECEMBER 31, 2005
The Baird Intermediate Bond Fund seeks an annual rate of total return, before
Fund expenses, greater than the annual rate of total return of the Lehman
Brothers Intermediate Government/Credit Bond Index. The Lehman Brothers
Intermediate Government/Credit Bond Index is an unmanaged, market value weighted
index of investment grade, fixed-rated debt including government and corporate
securities with maturities between one and ten years.
The Fund's performance in 2005 was comparable to that of the Index with the
performance of our Institutional Class shares outperforming the Index and our
Investor Class shares slightly underperforming the Index. Absolute returns were
modest. Helping the Fund's relative performance were the following factors:
o The Fund's overall portfolio structure (designed to underweight 2-year
and 7 to 10-year maturities and overweight 4 to 5-year and 10-year+
maturities) which benefited from flattening in the yield curve;
o The Fund's exposure to high-quality mortgage-backed and asset-backed
securities which performed well relative to other sectors and which are
not found in the Index; and
o Strong performance of individual corporate issues owned by the Fund.
The Fund's overweighting of BBB-rated corporate bonds relative to the Index and
exposure to individual issues in the auto and media sectors detracted from
relative performance in 2005. The Fund maintained its duration-neutral strategy
vis-a-vis the Index, holding a broadly diversified portfolio of over 230
securities at year end.
The Fund ended 2005 with a yield advantage versus the Index. This yield
advantage, combined with exposure to specific sectors which we believe have
superior total return potential (mortgage-backed securities, government agency
issues and issues in the auto and media sectors), should enhance the Fund's
prospects of continuing to add value over its benchmark in the coming year.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F2>
U.S. Treasury 12%
U.S. Gov't Agency 28%
AAA 18%
AA 4%
A 17%
BBB 18%
Below BBB 2%
Not Rated 1%
SECTOR WEIGHTINGS*<F2>
Asset-Backed 8%
Financials 18%
Industrials 15%
Utilities 6%
Mortgage-Backed 15%
International 2%
Municipal 1%
U.S. Gov't Agency 20%
U.S. Treasuries 12%
Cash 3%
NET ASSETS: $234,630,466
SEC 30-DAY YIELD:**<F3>
Institutional Class: 4.78%
Investor Class: 4.54%
AVERAGE DURATION: 3.63 years
AVERAGE MATURITY: 5.04 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
Investor Class: 0.55%***<F4>
PORTFOLIO TURNOVER RATIO:****<F5> 42.1%
TOTAL NUMBER OF HOLDINGS: 237
*<F2> Percentages shown are based on the Fund's total net assets.
**<F3> SEC yields are based on SEC guidelines and are calculated for the 30
days ended December 31, 2005.
***<F4> Includes 0.25% 12b-1 fee.
****<F5> Not annualized.
BAIRD INTERMEDIATE BOND FUND
BAIRD INTERMEDIATE BOND FUND - INSTITUTIONAL CLASS
VALUE OF A $250,000 INVESTMENT
Baird Intermediate Bond Fund - Lehman Brothers Intermediate
Date Institutional Class Shares Government/Credit Bond Index
---- ------------------------------ ----------------------------
9/29/2000 $250,000 $250,000
12/31/2000 $266,589 $259,242
6/30/2001 $277,111 $269,827
12/31/2001 $284,379 $282,476
6/30/2002 $293,461 $291,870
12/31/2002 $307,199 $310,260
6/30/2003 $323,016 $323,504
12/31/2003 $325,290 $323,633
6/30/2004 $325,782 $323,274
12/31/2004 $338,193 $333,477
6/30/2005 $344,066 $338,777
12/31/2005 $344,187 $338,741
GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION
DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD INTERMEDIATE BOND FUND - INVESTOR CLASS
VALUE OF A $10,000 INVESTMENT
Baird Intermediate Bond Fund - Lehman Brothers Intermediate
Date Investor Class Shares Government/Credit Bond Index
---- ------------------------------ ----------------------------
9/29/2000 $10,000 $10,000
12/31/2000 $10,668 $10,370
6/30/2001 $11,075 $10,793
12/31/2001 $11,353 $11,299
6/30/2002 $11,711 $11,675
12/31/2002 $12,231 $12,410
6/30/2003 $12,845 $12,940
12/31/2003 $12,917 $12,945
6/30/2004 $12,921 $12,931
12/31/2004 $13,394 $13,339
6/30/2005 $13,615 $13,551
12/31/2005 $13,603 $13,550
GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE
(9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD INTERMEDIATE BOND FUND
AVERAGE ANNUAL TOTAL RETURNS
SINCE
For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS INCEPTION(1)<F6>
- --------------------------------------- -------- ---------- ----------------
Baird Intermediate Bond Fund - Institutional Class Shares 1.77% 5.24% 6.27%
Baird Intermediate Bond Fund - Investor Class Shares 1.56% 4.98% 6.03%
Lehman Brothers Intermediate Government/Credit Bond Index(2)<F7> 1.58% 5.50% 5.95%
(1)<F6> For the period from September 29, 2000 (commencement of operations)
through December 31, 2005.
(2)<F7> The Lehman Brothers Intermediate Government/Credit Bond Index is an
unmanaged, market value weighted index of investment grade, fixed-rate
debt including government and corporate securities with maturities
between one and ten years. This index does not reflect any deduction
for fees, expenses or taxes. A direct investment in an index is not
possible.
THE RETURNS SHOWN IN THE LINE GRAPHS AND TABLE ABOVE REFLECT REINVESTMENT OF
DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
FOR INFORMATION ABOUT THE PERFOMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM.
BAIRD INTERMEDIATE BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
Principal
Amount Value
--------- -----
LONG-TERM INVESTMENTS - 96.9%
ASSET-BACKED SECURITIES - 7.6%
$ 156,099 Amresco Residential
Securities Mortgage
Loan Trust,
Series 1998-1, Class A6,
6.51%, 08/25/2027 $ 155,621
476,193 Banc One Home
Equity Trust,
Series 1999-2, Class A7,
7.18%, 06/25/2029 479,928
1,150,000 Bayview Financial
Acquisition Trust,
Series 2005-B, Class 1A2,
4.70%, 04/28/2039 1,136,832
1,333,945 Chase Funding
Mortgage Loan,
Series 2004-1, Class 1A3,
2.98%, 04/25/2026 1,320,398
865,500 Chemical Master Credit
Card Trust I,
Series 1996-3, Class A,
7.09%, 02/15/2009 874,345
CitiFinancial Mortgage
Securities, Inc.:
5,300 Series 2003-2, Class AF2,
2.13%, 05/25/2033 5,283
1,085,450 Series 2003-3, Class AF2,
3.08%, 08/25/2033 1,077,891
206,714 Contimortgage Home
Equity Trust,
Series 1999-1, Class A7,
6.47%, 12/25/2013 205,948
765,934 Countrywide Alternative
Loan Trust,
Series 2005-5R, Class A2,
4.75%, 12/25/2018 756,530
Countrywide Asset-Backed
Certificates:
529,898 Series 2004-10, Class AF2,
3.32%, 05/25/2022 528,120
107,513 Series 2004-9, Class AF2,
3.34%, 09/25/2023 107,182
2,200,000 Series 2005-12, Class 1A2,
4.85%, 02/25/2026 2,183,825
1,500,000 Credit Based Asset
Servicing and Securities,
Series 2005-CB1,
Class AF4,
4.62%, 01/25/2035 1,445,354
Delta Funding Home
Equity Loan Trust:
305,172 Series 1997-2, Class A6,
7.04%, 06/25/2027 304,241
168,939 Series 1999-1, Class A6F,
6.34%, 12/15/2028 168,640
190,250 Series 1999-2, Class A7F,
7.03%, 08/15/2030 189,838
81,864 Equivantage Home
Equity Loan Trust,
Series 1996-3, Class A3,
7.70%, 09/25/2027 81,615
Green Tree Financial
Corporation:
691,339 Series 1998-4, Class A5,
6.18%, 04/01/2030 680,988
487,344 Series 1999-3, Class A5,
6.16%, 02/01/2031 489,800
113,959 IMC Home Equity
Loan Trust,
Series 1998-1, Class A6,
6.52%, 06/20/2029 114,634
2,500,000 MBNA Credit Card
Master Note Trust,
Series 2003-A3, Class A3,
2.93%, 08/15/2010 2,506,102
1,111,839 New Century Home
Equity Loan Trust,
Series 2003-5, Class AI3,
3.56%, 11/25/2033 1,105,367
330,879 Oakwood Mortgage
Investors, Inc.,
Series 1999-B, Class A3,
6.45%, 11/15/2017 304,811
799,787 Renaissance Home
Equity Loan Trust,
Series 2004-3, Class AF2,
3.57%, 11/25/2034 793,475
190,828 Residential Asset Mortgage
Products, Inc.,
Series 2003-RS6, Class AI3,
3.08%, 12/25/2028 189,801
Residential Asset Mortgage
Products, Inc.,
306,834 Series 2003-RS9, Class AI3,
3.61%, 10/25/2028 305,657
214,135 Series 2003-KS7, Class AI3,
3.37%, 11/25/2028 213,440
10,848 Salomon Brothers
Mortgage Securities VII,
Series 1997-LB6, Class A6,
6.82%, 12/25/2027 10,841
------------
17,736,507
------------
FINANCIAL - 18.3%
Allfirst Financial, Inc.
Subordinated Notes:
1,300,000 7.20%, 07/01/2007 1,346,392
500,000 6.88%, 06/01/2009 524,054
550,000 American General Finance
Corporation Notes,
4.00%, 03/15/2011 520,302
589,000 American General Finance
Corporation Senior Notes,
8.45%, 10/15/2009 654,307
630,000 AmSouth Bancorporation
Subordinated Debentures,
6.75%, 11/01/2025 702,602
415,000 AmSouth Bank NA
Subordinated Notes,
6.45%, 02/01/2018 428,112
500,000 AMVESCAP PLC Notes,
5.38%, 02/27/2013 F<F11> 492,741
725,000 Banco Santander Chile SA,
7.00%, 07/18/2007 F<F11> 742,610
225,000 Bank of America Corporation
Subordinated Notes,
10.20%, 07/15/2015 306,720
350,000 Bank of Oklahoma
Subordinated Notes,
7.13%, 08/15/2007 362,187
Bank One Corporation
Subordinated Notes:
180,000 6.00%, 02/17/2009 184,366
750,000 10.00%, 08/15/2010 894,487
480,000 Bankers Trust Corporation
Subordinated Notes,
7.38%, 05/01/2008 505,437
300,000 CIT Group Company
of Canada,
5.20%, 06/01/2015
(Acquired 05/25/2005,
Cost $299,151)*<F10> F<F11> 296,524
800,000 CIT Group, Inc.
Senior Notes,
3.38%, 04/01/2009 761,185
1,336,000 Comerica Incorporated
Subordinated Notes,
7.25%, 08/01/2007 1,382,640
800,000 Compass Bank
Subordinated Notes,
8.10%, 08/15/2009 885,188
260,000 Corestates Capital Trust I,
8.00%, 12/15/2026
(Acquired 11/29/2005,
Cost $276,398)*<F10> 275,626
Countrywide Home
Loans, Inc.:
1,000,000 5.50%, 02/01/2007 1,004,857
650,000 4.00%, 03/22/2011 611,610
900,000 Credit Suisse First
Boston USA, Inc. Notes,
6.13%, 11/15/2011 944,768
475,000 Dime Capital Trust,
9.33%, 05/06/2027 519,915
480,562 First National Bank of
Chicago Pass Thru
Certificates,
8.08%, 01/05/2018 557,913
1,100,000 First National Bank of Omaha
Subordinated Notes,
7.32%, 12/01/2010 1,159,363
775,000 FMR Corporation Notes,
4.75%, 03/01/2013
(Acquired 02/26/2003,
Cost $776,809)*<F10> 763,331
500,000 General Electric Capital
Corporation Notes,
6.00%, 06/15/2012 526,595
1,000,000 Genworth Financial Inc.
Notes, 5.75%, 06/15/2014 1,043,715
950,000 Glencore Funding LLC,
6.00%, 04/15/2014
(Acquired 03/31/2004
& 02/02/2005;
Cost $794,280 &
$146,738 respectively)*<F10> 893,515
500,000 The Goldman Sachs
Group, Inc. Bonds,
5.15%, 01/15/2014 496,707
200,000 The Goldman Sachs
Group, Inc. Notes,
6.60%, 01/15/2012 214,838
1,200,000 Household Finance
Corporation Senior
Unsubordinated Notes,
6.40%, 06/17/2008 1,237,969
300,000 International Lease Finance
Corporation Notes,
5.70%, 07/03/2006 300,850
500,000 J.P. Morgan Chase &
Company Subordinated
Notes, 6.63%, 03/15/2012 538,803
1,550,000 KeyCorp Subordinated
Notes, 6.75%, 03/15/2006 1,555,673
Lehman Brothers
Holdings, Inc. Notes,
700,000 8.50%, 05/01/2007 731,195
596,000 8.50%, 08/01/2015 724,996
325,000 Lion Connecticut Holding,
7.13%, 08/15/2006 329,455
600,000 Marsh & McLennan
Companies, Inc.,
5.38%, 07/15/2014 590,534
600,000 MBNA Corporation Notes,
6.13%, 03/01/2013 636,251
175,000 Mellon Capital II, Series B,
8.00%, 01/15/2027 186,265
750,000 Merrill Lynch &
Co., Inc. Senior
Unsubordinated Notes,
5.00%, 02/03/2014 740,662
1,000,000 Morgan Stanley Dean
Witter Debentures,
10.00%, 06/15/2008 1,115,686
300,000 Morgan Stanley
Unsubordinated Notes,
6.75%, 04/15/2011 322,958
1,230,000 National Australia Bank
Ltd. Yankee Subordinated
Notes, Series A,
8.60%, 05/19/2010 F<F11> 1,400,052
396,000 National City Bank of
Kentucky Subordinated
Notes,
6.30%, 02/15/2011 419,233
500,000 Nationwide Life
Global Fund Notes,
5.35%, 02/15/2007
(Acquired 02/08/2002;
Cost $499,520)*<F10> 501,202
125,000 Met Life Global Funding
Senior Notes,
4.50%, 05/05/2010 122,564
800,000 Phoenix Companies,
6.68%, 02/16/2008 807,490
894,000 PNC Funding Corporation,
7.50%, 11/01/2009 971,852
1,200,000 Rabobank Nederland
Senior Notes,
2.70%, 03/15/2007
(Acquired 02/03/2004,
Cost $1,199,760)*<F10> F<F11> 1,165,792
700,000 Residential Capital
Corporation,
6.38%, 06/30/2010 711,281
805,000 SAFECO Corporation,
6.88%, 07/15/2007 823,885
546,000 SAFECO Corporation
Senior Notes,
7.25%, 09/01/2012 608,657
Santander Central
Hispano Issuances: F<F11>
325,000 7.00%, 04/01/2006 326,511
150,000 7.63%, 09/14/2010 166,126
500,000 6.38%, 02/15/2011 531,619
1,160,000 Transamerica Finance
Corporation Debentures,
0.00%, 03/01/2010 ^<F9> 919,243
875,000 UFJ Bank Ltd/New York,
Subordinated Notes,
7.40%, 06/15/2011 966,209
350,000 UFJ Finance Aruba AEC,
6.75%, 07/15/2013 F<F11> 382,153
Union Planters Corporation
Subordinated Notes:*<F10>
870,000 6.50%, 03/15/2018
(Acquired 05/08/02,
09/22/2005, 02/12/03,
and 05/08/03;
Cost $200,363, $234,877,
$73,378 and $400,227
respectively) 897,326
300,000 7.75%, 03/01/2011 337,735
500,000 Washington Mutual Bank
Subordinated Notes,
6.88%, 06/15/2011 540,141
500,000 Washington Mutual
Capital I,
8.38%, 06/01/2027 538,811
887,000 Westdeutsche Landesbank
Subordinated Notes,
4.80%, 07/15/2015 870,112
------------
43,021,898
------------
INDUSTRIAL - 15.5%
450,000 Alcan, Inc. Notes,
5.00%, 06/01/2015 436,515
30,365 America West Airlines
Pass Thru Certificate,
8.54%, 07/02/2007 30,034
810,000 Anthem, Inc.,
6.80%, 08/01/2012 883,717
225,000 Auburn Hills Trust
Debentures,
12.38%, 05/01/2020 334,560
300,000 BellSouth Corporation,
4.75%, 11/15/2012 292,342
575,000 British Telecom PLC Notes,
8.38%, 12/15/2010 F<F11> 654,558
Bunge Ltd. Finance
Corporation Notes:
800,000 5.35%, 04/15/2014 791,275
400,000 5.10%, 07/15/2015 387,009
375,000 Caesars Entertainment,
Senior Notes,
7.50%, 09/01/2009 399,368
1,000,000 Clear Channel
Communications, Inc. Notes,
5.50%, 09/15/2014 956,888
125,000 Comcast Cable
Communication Holdings,
8.38%, 03/15/2013 144,685
Continental Airlines, Inc.
Pass Thru Certificates:
4,749 7.42%, 10/01/2008 4,395
98,857 6.54%, 09/15/2009 93,899
1,155,000 Cooper Cameron
Corporation Senior Notes,
2.65%, 04/15/2007 1,116,728
700,000 Cooper Industries, Inc.
Notes, 5.25%, 07/01/2007 702,974
1,175,000 Cox Communications Inc.,
7.13%, 10/01/2012 1,258,984
324,000 Delta Air Lines, Inc.
Pass Thru Certificates,
9.50%, 11/18/2008
(Acquired 11/24/2004,
Cost $324,000)*<F10> @<F8> ^<F9> 285,120
1,000,000 Deutsche Telekom
International Finance BV,
8.50%, 06/15/2010 1,133,771
300,000 Dollar General Corporation,
8.63%, 06/15/2010 329,250
500,000 Fiserv, Inc. Notes,
4.00%, 04/15/2008 485,524
623,000 Ford Capital BV Debentures,
9.50%, 06/01/2010 521,763
300,000 Ford Motor Company
Debentures,
9.22%, 09/15/2021 222,000
500,000 General Electric
Company Notes,
5.00%, 02/01/2013 499,740
General Motors Acceptance
Corporation Notes:
1,025,000 7.75%, 01/19/2010 957,234
200,000 6.75%, 12/01/2014 179,924
550,000 General Motors Nova
Scotia Finance Company,
6.85%, 10/15/2008 F<F11> 412,500
Halliburton Company Notes:
475,000 5.63%, 12/01/2008 484,529
625,000 5.50%, 10/15/2010 638,350
650,000 Hanson Australia Funding,
5.25%, 03/15/2013 F<F11> 644,349
830,000 Health Care Service
Corporation Notes,
7.75%, 06/15/2011
(Acquired 06/20/2001
and 01/26/2005;
Cost $497,765 and
$373,250 respectively)*<F10> 928,978
400,000 Highmark, Inc. Notes,
6.80%, 08/15/2013
(Acquired 08/14/2003;
Cost $399,088)*<F10> 433,052
975,000 Hutchison Whampoa
International Ltd.,
6.25%, 01/24/2014
(Acquired 11/19/2003
and 02/08/2005;
Cost $749,228 and
$243,019 respectively)*<F10> F<F11> 1,020,346
1,000,000 Ingersoll-Rand
Company Debentures,
6.39%, 11/15/2027 F<F11> 1,131,555
105,000 International Paper
Company Notes,
7.63%, 01/15/2007 107,044
650,000 Laboratory Corporation
of America Holdings,
5.50%, 02/01/2013 652,131
500,000 Limited Brands, Inc.,
5.25%, 11/01/2014 471,939
500,000 Marathon Oil
Corporation Notes,
5.38%, 06/01/2007 502,666
350,000 Marathon Oil Corporation,
6.00%, 07/01/2012 369,682
900,000 The May Department
Stores Company Debentures,
8.85%, 03/01/2006 904,534
1,000,000 Nextel Communications
Senior Notes,
6.88%, 10/31/2013 1,043,214
Northwest Airlines, Inc.:
497,999 7.25%, 07/02/2014 64,740
230,071 6.26%, 11/20/2021 234,169
700,000 PCCW Capital II Ltd.,
6.00%, 07/15/2013
(Acquired 07/10/2003;
Cost $696,731)*<F10> F<F11> 715,012
600,000 Pearson Dollar Finance PLC,
5.70%, 06/01/2014
(Acquired 09/28/2005,
Cost $618,130)*<F10> F<F11> 606,989
Qwest Capital Funding, Inc.:
350,000 7.00%, 08/03/2009 353,500
100,000 7.25%, 02/15/2011 101,250
1,000,000 Reed Elsevier Capital Notes,
4.63%, 06/15/2012 969,133
500,000 SBC Communications,
Inc. Notes,
5.63%, 06/15/2016 503,081
650,000 Sealed Air Corporation
Senior Notes,
5.38%, 04/15/2008
(Acquired 04/09/2003;
Cost $646,490)*<F10> 652,439
239,199 Southwest Airlines
Company Pass-Thru
Certificates,
7.67%, 01/02/2014 249,290
TCI Communications,
Inc. Debentures:
325,000 7.88%, 08/01/2013 367,336
300,000 8.75%, 08/01/2015 363,508
1,360,000 Telecom Italia Capital,
4.95%, 09/30/2014 F<F11> 1,298,920
200,000 Tele-Communications,
Inc. Debentures,
9.80%, 02/01/2012 241,279
Telus Corporation Notes,
380,000 7.50%, 06/01/2007 F<F11> 392,401
838,000 Time Warner Companies
Inc. Debentures,
9.13%, 01/15/2013 991,837
275,000 Tribune Company,
5.25%, 08/15/2015 262,011
Tyco International
Group S.A.: F<F11>
700,000 6.38%, 02/15/2006 701,143
400,000 6.38%, 10/15/2011 415,438
650,000 6.00%, 11/15/2013 663,966
257,967 Union Pacific Corporation
Pass Thru Certificates,
8.66%, 07/02/2011 276,371
United AirLines, Inc.
Pass Thru Certificates:
245,275 7.76%, 10/01/2005 146,302
854,505 6.20%, 09/01/2008 837,716
300,000 10.02%, 03/22/2014 @<F8>,^<F9> 197,688
1,000,000 Viacom, Inc.,
7.70%, 07/30/2010 1,079,405
160,000 Weyerhaeuser
Company Notes,
5.95%, 11/01/2008 163,232
500,000 Willamette Industries,
Inc. Notes,
6.60%, 06/05/2012 523,669
325,000 Yosemite Securities Trust I,
8.25%, 11/15/2004
(Acquired 04/26/2001,
Cost $325,000)*<F10>,@<F8>,^<F9> 184,438
------------
36,403,389
------------
UTILITIES - 5.8%
300,000 Baltimore Gas & Electric
Company Notes,
5.25%, 12/15/2006 300,784
1,000,000 Dominion Resources Inc.,
Series C,
5.15%, 07/15/2015 968,822
800,000 Duke Capital LLC Notes,
5.67%, 08/15/2014 806,818
300,000 Edison Mission Energy
Senior Notes,
9.88%, 04/15/2011 349,875
600,000 Energy Transfer Partners,
5.65%, 08/01/2012
(Acquired 08/10/2005 and
07/26/2005, Cost $99,249
and $499,485)*<F10> 593,122
300,000 Exelon Corporation
Senior Notes,
6.75%, 05/01/2011 319,386
464,563 Kiowa Power Partners LLC,
4.81%, 12/30/2013
(Acquired 11/19/2004;
Cost $464,563)*<F10> 449,683
300,000 Korea Electric Power
Corporation,
6.75%, 08/01/2027 F<F11> 334,965
800,000 MidAmerican Energy
Holdings Company
Senior Notes,
4.63%, 10/01/2007 794,218
325,000 National Rural Utilities
Cooperative Finance
Collateral Trust,
3.88%, 02/15/2008 318,001
925,000 National Rural Utilities
Cooperative Finance
Corporation Notes,
5.75%, 08/28/2009 949,764
800,000 ONEOK, Inc. Senior Notes,
7.13%, 04/15/2011 864,952
800,000 Pacific Gas and Electric
Company 1st Mortgage,
4.80%, 03/01/2014 779,622
1,000,000 Pepco Holdings, Inc. Notes,
3.75%, 02/15/2006 998,751
300,000 PPL Energy Supply, LLC
Senior Notes,
6.40%, 11/01/2011 316,211
175,000 PSE&G Energy Holdings
LLC Senior Notes,
8.50%, 06/15/2011 187,250
PSE&G Power LLC:
275,000 7.75%, 04/15/2011 304,475
400,000 5.00%, 04/01/2014 385,934
841,866 RGS (I&M) Funding
Corporation Debentures,
9.82%, 12/07/2022 1,080,240
500,000 System Energy Resources
1st Mortgage,
4.88%, 10/01/2007 496,472
350,000 Tristate Gen & Trans Assn,
Series 2003, 6.04%,
01/31/2018
(Acquired 10/14/2003;
Cost $350,000)*<F10> 360,357
900,000 Vectren Utility Holdings,
6.63%, 12/01/2011 964,112
600,000 The Williams Companies,
Inc. Notes,
8.13%, 03/15/2012 654,000
------------
13,577,814
------------
MORTGAGE-BACKED SECURITIES - 14.7%
Bank of America
Alternative Loan Trust:
495,402 Series 2003-11, Class 4A1,
4.75%, 01/25/2019 482,243
1,905,816 Series 2004-11, Class 4A1,
5.50%, 12/25/2019 1,908,198
Citicorp Mortgage
Securities, Inc.:
1,704,844 5.50%, 10/25/2014 1,700,766
1,699,802 5.50%, 06/25/2034 1,670,592
2,146,464 Countrywide Alternative
Loan Trust Series
2005-50CB, Class 4A1,
5.00%, 11/25/2020 2,124,527
2,000,000 Countrywide Home
Loans, Inc.,
Series 2003-18, Class A3,
5.25%, 07/25/2033 1,993,788
231,715 Deutsche Mortgage
Securities, Inc.,
Series 2004-1, Class 3A3,
3.69%, 09/25/2033 230,922
76,990 Federal Gold Loan
Mortgage (FGLMC)
Pass Thru Certificate,
6.00%, 07/01/2028 78,011
Federal Home Loan
Mortgage Corporation
(FHLMC):
1,992,930 Series 3033, Class LU,
5.50%, 03/15/2013 2,022,660
1,350,000 Series 2592, Class PD,
5.00%, 07/15/2014 1,348,902
1,522,421 Series 2695, Class UA,
5.50%, 09/15/2014 1,534,123
871,150 Series R001, Class AE,
4.38%, 04/15/2015 851,885
2,323,167 Series R003, Class VA,
5.50%, 08/15/2016 2,344,463
32,737 Series 1094, Class K,
7.00%, 06/15/2021 32,726
19,103 Series 1101, Class M,
6.95%, 07/15/2021 19,104
181,226 Series 1136, Class H,
6.00%, 09/15/2021 180,912
74,285 Series 1280, Class B,
6.00%, 04/15/2022 74,156
79,024 Series 1395, Class G,
6.00%, 10/15/2022 79,057
350,185 Series 2531, Class N,
4.00%, 07/15/2027 346,328
Federal National Mortgage
Association (FNMA):
1,000,000 Series 2002-73, Class OC,
5.00%, 04/25/2014 998,760
1,500,000 Series 2003-24, Class PC,
5.00%, 11/25/2015 1,495,544
400,000 Series 2002-94, Class BG,
5.00%, 04/25/2016 399,062
312,220 Series 1991-137, Class H,
7.00%, 10/25/2021 324,593
196,164 Series 1992-136, Class PK,
6.00%, 08/25/2022 199,556
133,149 Series 1993-32, Class H,
6.00%, 03/25/2023 133,846
1,173,122 Series 2002-95, Class MD,
5.00%, 07/25/2026 1,169,962
1,134,180 Series 2002-77, Class QP,
5.00%, 09/25/2026 1,131,141
194,118 Series 2003-25, Class PC,
4.50%, 02/25/2027 192,997
47,188 Series 1998-66, Class C,
6.00%, 12/25/2028 47,482
GMAC Mortgage
Corporation Loan Trust:
1,900,000 4.39%, 12/25/2025 1,884,133
1,611,855 5.50%, 09/25/2034 1,603,557
Government National
Mortgage Association
(GNMA):
535,509 5.50%, 03/16/2013 539,866
1,267,906 4.00%, 02/16/2028 1,258,255
672,892 6.00%, 02/20/2029 675,952
920,276 IMPAC Secured Asset
Corporation,
Series 2004-2, Class A3,
5.00%, 08/25/2034 916,367
765,435 Master Alternative Loans
Trust, Series 2004-3,
Class 1A1,
5.00%, 03/25/2019 753,956
861,421 Salomon Brothers Mortgage
Securities VII,
Series 2003-UP2, Class A2,
4.00%, 06/25/2033 832,218
1,001,755 Washington Mutual,
Series 2004-CB4, Class 21A,
5.50%, 12/25/2019 1,003,933
------------
34,584,543
------------
INTERNATIONAL (U.S. $ DOMINATED) - 1.9%
Corp Andina De Fomento
275,000 Notes,
7.38%, 01/18/2011 F<F11> 301,756
Korea Development
Bank Notes: F<F11>
450,000 4.25%, 11/13/2007 443,987
350,000 4.63%, 09/16/2010 343,008
700,000 Landesbank Baden-
Wurttemgerg
Subordinated Notes,
6.35%, 04/01/2012 F<F11> 763,717
350,000 National Bank of Hungary
Yankee Debentures,
8.88%, 11/01/2013 F<F11> 442,691
PEMEX Project Funding
Master Trust: F<F11>
275,000 6.13%, 08/15/2008 280,500
1,625,000 9.13%, 10/13/2010 1,870,375
------------
4,446,034
------------
MUNICIPAL BONDS - 0.9%
Tobacco Settlement
Financing Corporation:
350,000 Series 2001-A, Class A,
5.92%, 06/01/2012 347,837
868,552 Series 2001-A, Class A,
6.36%, 05/15/2025 875,214
1,046,000 Toll Road Inv. Part II,
0.00%, 02/15/2011
(Acquired 09/28/2004;
Cost $782,046)*<F10>,^<F9> 807,976
------------
2,031,027
------------
U.S. GOVERNMENT AGENCY ISSUES - 20.3%
25,650,000 Federal Home Loan Mortgage
Corporation (FHLMC):
4.13%, 07/12/2010 25,012,649
20,875,000 Federal National Mortgage
Association (FNMA):
7.25%, 01/15/2010 22,745,003
------------
47,757,652
------------
U.S. TREASURY OBLIGATIONS - 11.9%
U.S. Treasury Bonds:
350,000 9.88%, 11/15/2015 500,035
15,575,000 9.25%, 02/15/2016 21,584,147
5,475,000 U.S. Treasury Note:
6.00%, 08/15/2009 5,770,135
------------
27,854,317
------------
Total Long-Term
Investments
(Cost $229,600,026) 227,413,181
------------
Shares
- ------
SHORT-TERM INVESTMENTS - 4.3%
MONEY MARKET FUNDS - 4.3%
9,373,571 Investment Company
Cash Reserve Portfolio -
AIM Fund 9,373,571
587,759 Short-Term Investment
Trust Prime Portfolio -
AIM Fund 587,759
------------
Total Short-Term
Investments
(Cost $9,961,330) 9,961,330
------------
Total Investments
(Cost $239,561,356) -
101.2% 237,374,511
------------
Liabilities in Excess of
Other Assets - (1.2)% (2,744,045)
------------
TOTAL NET
ASSETS - 100.0% $234,630,466
------------
------------
@<F8> Security Default
^<F9> Non-Income Producing Security
*<F10> Unregistered Security
F<F11> Foreign Security
See notes to the financial statements
BAIRD AGGREGATE BOND FUND
DECEMBER 31, 2005
The Baird Aggregate Bond Fund seeks an annual rate of total return, before Fund
expenses, greater than the annual rate of total return of the Lehman Brothers
Aggregate Bond Index. The Lehman Brothers Aggregate Bond Index is an unmanaged,
market value weighted index of investment grade, fixed-rate debt issues,
including government, corporate, asset-backed, and mortgage-backed securities,
with maturities of at least one year.
The Fund outperformed the Index in 2005, although absolute returns were modest.
Helping the Fund's relative performance were the following factors:
o The Fund's overall portfolio structure (designed to underweight 2-year,
7 to 10-year and 30-year maturities and overweight 4 to 5-year, 11-year
and 20-year maturities), which benefited from flattening in the yield
curve;
o The Fund's significant exposure to asset-backed securities compared to
the Index; and
o Strong performance of individual corporate issues owned by the Fund.
The Fund's overweighting of BBB-rated corporate bonds relative to the benchmark
and exposure to individual issues in the auto and media sectors detracted from
relative performance in 2005. An underweighting of mortgage pass-through
securities versus the Index also detracted from the Fund's relative performance.
The Fund maintained its duration-neutral strategy vis-a-vis the Index, holding a
broadly diversified portfolio of over 270 securities at year end.
The Fund ended 2005 with a yield advantage versus the Index. This yield
advantage, combined with exposure to specific sectors which we believe have
superior total return potential (asset-backed securities, government agency
issues and issues in the auto and media sectors), should enhance the Fund's
prospects of continuing to add value over its benchmark in the coming year.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F12>
U.S. Treasury 12%
U.S. Gov't Agency 34%
AAA 26%
AA 3%
A 9%
BBB 14%
Below BBB 2%
SECTOR WEIGHTINGS*<F12>
Asset-Backed 10%
Commercial Mortgage-Backed 2%
Financials 12%
Industrials 10%
Utilities 4%
Mortgage-Backed 31%
International 1%
U.S. Gov't Agency 13%
U.S. Treasuries 12%
Cash 5%
NET ASSETS: $228,422,325
SEC 30-DAY YIELD:**<F13>
Institutional Class: 4.89%
Investor Class: 4.67%
AVERAGE DURATION: 4.57 years
AVERAGE MATURITY: 7.54 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
Investor Class: 0.55%***<F14>
PORTFOLIO TURNOVER RATIO:****<F15> 46.0%
TOTAL NUMBER OF HOLDINGS: 275
*<F12> Percentages shown are based on the Fund's total net assets.
**<F13> SEC yields are based on SEC guidelines and are calculated for the
30 days ended December 31, 2005.
***<F14> Includes 0.25% 12b-1 fee.
****<F15> Not annualized.
BAIRD AGGREGATE BOND FUND
BAIRD AGGREGATE BOND FUND - INSTITUTIONAL CLASS
VALUE OF A $250,000 INVESTMENT
Baird Aggregate Bond Fund - Lehman Brothers Aggregate
Date Institutional Class Shares Bond Index
---- -------------------------- -------------------------
9/29/2000 $250,000 $250,000
12/31/2000 $264,448 $260,514
6/30/2001 $275,084 $269,936
12/31/2001 $286,461 $282,512
6/30/2002 $295,106 $293,222
12/31/2002 $310,239 $311,484
6/30/2003 $328,053 $323,719
12/31/2003 $332,520 $324,268
6/30/2004 $333,936 $324,755
12/31/2004 $350,368 $338,336
6/30/2005 $360,526 $346,843
12/31/2005 $360,351 $346,555
GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION
DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD AGGREGATE BOND FUND - INVESTOR CLASS
VALUE OF A $10,000 INVESTMENT
Baird Aggregate Bond Fund - Lehman Brothers Aggregate
Date Investor Class Shares Bond Index
---- --------------------------- -------------------------
9/29/2000 $10,000 $10,000
12/31/2000 $10,577 $10,421
6/30/2001 $10,985 $10,797
12/31/2001 $11,420 $11,300
6/30/2002 $11,748 $11,729
12/31/2002 $12,343 $12,459
6/30/2003 $13,031 $12,949
12/31/2003 $13,200 $12,971
6/30/2004 $13,269 $12,990
12/31/2004 $13,894 $13,533
6/30/2005 $14,284 $13,874
12/31/2005 $14,247 $13,862
GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE
(9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD AGGREGATE BOND FUND
AVERAGE ANNUAL TOTAL RETURNS
SINCE
For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS INCEPTION(1)<F16>
- --------------------------------------- -------- ---------- -----------------
Baird Aggregate Bond Fund - Institutional Class Shares 2.85% 6.38% 7.21%
Baird Aggregate Bond Fund - Investor Class Shares 2.54% 6.14% 6.97%
Lehman Brothers Aggregate Bond Index(2)<F17> 2.43% 5.87% 6.42%
(1)<F16> For the period from September 29, 2000 (commencement of operations)
through December 31, 2005.
(2)<F17> The Lehman Brothers Aggregate Bond Index is an unmanaged, market value
weighted index of investment grade, fixed-rate debt issues, including
government, corporate, asset-backed, and mortgage-backed securities,
with maturities of at least one year. This index does not reflect any
deduction for fees, expenses or taxes. A direct investment in an
index is not possible.
THE RETURNS ON THE LINE GRAPHS AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS
AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT
REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM.
BAIRD AGGREGATE BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
Principal
Amount Value
--------- -----
LONG-TERM INVESTMENTS 95.5%
ASSET-BACKED SECURITIES - 10.0%
$ 225,000 Advanta Business Card
Master Trust,
Series 2003-B, Class A,
2.95%, 12/20/2008 $ 225,343
118,987 Advanta Mortgage Loan
Trust, Series 1999-2,
6.82%, 04/25/2014 119,020
342,263 Banc One Home
Equity Trust,
Series 1999-2, Class A7,
7.18%, 06/25/2029 344,948
465,723 Bear Stearns Asset Backed
Securities Trust,
Series 2003-AC1, Class A1,
4.10%, 05/25/2033 453,974
CitiFinancial Mortgage
Securities, Inc.:
7,227 Series 2003-2, Class AF2,
2.13%, 05/25/2033 7,204
500,000 Series 2003-2, Class AF3,
3.04%, 05/25/2033 496,853
Contimortgage Home
Equity Trust:
243,193 Series 1999-1, Class A7,
6.47%, 12/25/2013 242,292
11,001 Series 1997-2, Class A9,
7.09%, 04/15/2028 10,982
134,807 Series 1999-3, Class A8,
4.9%, 05/25/2029 135,173
Countrywide Asset-Backed
Certificates:
2,000,000 Series 2005-17, Class 1AF2,
5.36%, 03/25/2030 2,001,156
2,000,000 Series 2004-12, Class AF3,
4.02%, 12/25/2030 1,956,638
1,500,000 Series 2004-15, Class AF6,
4.61%, 04/25/2035 1,439,488
1,300,000 Series 2005-1, Class AF6,
5.03%, 07/25/2035 1,283,398
1,500,000 Series 2005-10, Class AF2,
4.49%, 02/25/2036 1,481,206
Credit Based Asset
Servicing and Securities:
1,000,000 Series 2005-CB1, Class AF4,
4.62%, 01/25/2035 963,569
2,000,000 Series 2005-CB8, Class AF2,
5.30%, 12/25/2035 2,000,000
875,000 Daimler Chrysler Master
Owner Trust,
Series 2004-A, Class A,
2.84%, 01/15/2009 875,171
86,679 Equivantage Home
Equity Loan Trust,
Series 1996-3, Class A3,
7.70%, 09/25/2027 86,416
GE Capital Mortgage
Services, Inc.:
15,267 Series 1997-H3, Class A6,
6.72%, 10/25/2027 15,221
30,974 Series 1997-HE4, Class A7,
6.74%, 12/25/2027 30,879
245,649 Series 1999-HE1, Class A7,
6.27%, 04/25/2029 247,195
Green Tree Financial
Corporation:
319,565 Series 1993-3, Class A7,
6.40%, 10/15/2018 321,460
265,774 Series 1993-4, Class A5,
7.05%, 01/15/2019 272,035
13,484 Series 1995-4, Class A5,
6.95%, 06/15/2025 13,666
6,613 Series 1997-1, Class A5,
6.86%, 03/15/2028 6,802
276,318 Series 1997-6, Class A8,
7.07%, 01/15/2029 285,447
380,236 Series 1998-4, Class A5,
6.18%, 04/01/2030 374,543
420,000 Household Automobile
Trust, Series 2003-1,
2.22%, 11/17/2009 410,054
48,435 IMC Home Equity
Loan Trust,
Series 1997-5, Class A10,
6.88%, 11/20/2028 48,349
694,899 New Century Home
Equity Loan Trust,
Series 2003-5, Class AI3,
3.56%, 11/25/2033 690,855
165,440 Oakwood Mortgage
Investors, Inc.,
Series 1999-B, Class A3,
6.45%, 11/15/2017 152,405
750,000 RAAC Series,
Series 2004-SP1, Class AI2,
4.38%, 01/25/2022 741,751
Residential Asset Mortgage
Products, Inc.:
189,722 Series 2003-RS11, Class AI3,
3.56%, 08/25/2028 189,120
318,027 Series 2004-RS1, Class AI3,
3.41%, 06/25/2028 316,698
138,357 Series 2004-RS3,
Class AI2,
3.05%, 06/25/2029 137,489
1,035,000 Series 2003-RS7, Class AI6,
5.34%, 08/25/2033 1,032,029
1,000,000 Series 2005-RS1, Class AI6,
4.71%, 11/25/2034 974,068
Residential Asset Securities
Corporation:
1,000,000 Series 2004-KS7, Class AI2,
3.51%, 05/25/2024 989,881
1,250,000 Series 2004-KS2, Class AI3,
3.02%, 05/25/2029 1,233,242
250,000 Series 2003-KS5, Class AI6,
3.62%, 07/25/2033 242,345
Salomon Brothers Mortgage
Securities VII,
15,367 Series 1997-LB6, Class A6,
6.82%, 12/25/2027 15,358
------------
22,863,723
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 2.3%
1,200,000 GE Capital Commercial
Mortgage Corporation,
Series 2002-3A, Class AR,
5.00%, 12/10/2037 1,194,862
250,000 GMAC Commercial
Mortgage Securities, Inc.,
Series 2003-C1, Class A2,
4.08%, 05/10/2036 235,223
Government National
Mortgage Association
(GNMA):
850,000 4.49%, 04/16/2023 827,072
800,000 4.66%, 04/16/2029 779,139
550,000 Mach One Trust,
Series 2004-1A, Class A2,
4.78%, 05/28/2040
(Acquired 07/12/2004,
Cost $555,349)*<F20> 542,508
1,800,000 Wachovia Bank Commercial
Mortgage Trust,
Series 2003-C3, Class A2,
4.87%, 02/15/2035 1,772,527
------------
5,351,331
------------
FINANCIAL - 11.6%
600,000 American General Finance
Corporation Senior Notes,
8.45%, 10/15/2009 666,527
200,000 AmSouth Bancorporation
Subordinated Debentures,
6.75%, 11/01/2025 223,048
275,000 AMVESCAP PLC Notes,
5.38%, 02/27/2013 F<F21> 271,008
447,000 Associates Corporation
North America
Subordinated Debentures,
8.15%, 08/01/2009 493,485
300,000 BAC Capital Trust VI,
5.63% 03/08/2035 295,952
315,000 Bank of America Corporation
Subordinated Notes,
10.20%, 07/15/2015 429,408
400,000 Bank of Oklahoma
Subordinated Notes,
7.13%, 08/15/2007 413,928
909,000 Bank One Corporation
Subordinated Notes,
10.00%, 08/15/2010 1,084,119
250,000 Beaver Valley Funding
Corporation Debentures,
9.00%, 06/01/2017 286,767
325,000 CIT Group Company
of Canada,
5.20%, 06/01/2015
(Acquired 05/25/2005,
Cost $324,080)*<F20> F<F21> 321,234
300,000 CIT Group, Inc.
Senior Notes,
7.75%, 04/02/2012 340,239
590,000 Citigroup, Inc.
Subordinated Notes,
5.00%, 09/15/2014 580,769
1,081,000 Compass Bank
Subordinated Notes,
8.10%, 08/15/2009 1,196,110
Countrywide Home
Loans Inc.:
175,000 5.63%, 07/15/2009 177,647
850,000 4.00%, 03/22/2011 799,797
375,000 Credit Suisse First Boston
USA, Inc. Notes,
6.13%, 11/15/2011 393,653
1,070,000 Dime Capital Trust,
9.33%, 05/06/2027 1,171,177
175,000 Dresdner Bank-New York
Subordinated Debentures,
7.25%, 09/15/2015 200,395
230,000 First Empire Capital Trust I,
8.23%, 02/01/2027 245,465
625,000 First Empire Capital Trust II,
8.28%, 06/01/2027 672,389
696,815 First National Bank
of Chicago Pass Thru
Certificates,
8.08%, 01/05/2018 808,974
675,000 First National Bank of
Omaha Subordinated Notes,
7.32%, 12/01/2010 711,427
460,000 First Union Capital,
7.94%, 01/15/2027 488,963
250,000 FMR Corporation Notes,
4.75%, 03/01/2013
(Acquired 02/26/2003,
Cost $250,583)*<F20> 246,236
875,000 Glencore Funding LLC,
6.00%, 04/15/2014
(Acquired 03/31/2004,
02/02/2005 and 10/31/2005;
Cost $496,425, $122,281
and $231,448 respectively)*<F20> 822,974
850,000 Goldman Sachs Capital I,
6.35%, 02/15/2034 892,953
150,000 The Goldman Sachs
Group, Inc. Notes,
6.60%, 01/15/2012 161,128
355,000 HSBC Bank PLC
Subordinated Notes,
6.95%, 03/15/2011 382,842
900,000 J.P. Morgan Chase &
Company Notes,
5.88%, 03/15/2035 894,808
KeyCorp Institution:
496,000 7.83%, 12/01/2026 525,134
400,000 8.25%, 12/15/2026 425,764
900,000 Kinder Morgan Finance,
5.70%, 01/05/2016
(Acquired 12/12/2005,
Cost $895,104)*<F20> 907,780
565,000 Liberty Mutual Insurance
Notes, 8.00%, 10/15/2097
(Acquired 03/26/2003,
Cost $361,573)*<F20> 595,588
300,000 Marsh & Mclennan
Companies, Inc.,
5.38%, 07/15/2014 295,267
400,000 Morgan Stanley
Subordinated Notes,
4.75%, 04/01/2014 383,627
600,000 Phoenix Companies,
6.68%, 02/16/2008 605,618
1,000,000 PNC Financial Services,
Series C,
8.88%, 03/15/2027 1,083,392
400,000 Republic New York
Corporation Subordinated
Notes, 9.70%, 02/01/2009 450,453
700,000 Residential Capital
Corporation,
6.88%, 06/30/2015 743,810
350,000 Santander Central
Hispano Issuances,
7.63%, 09/14/2010 F<F21> 387,627
500,000 SLM Corporation Notes,
5.63%, 08/01/2033 502,301
200,000 Transamerica Capital II,
7.65%, 12/01/2026
(Acquired 10/21/2003,
Cost $216,762)*<F20> 233,810
275,000 UFJ Bank Ltd/New York
Subordinated Notes,
7.40%, 06/15/2011 303,666
225,000 UFJ Finance Aruba AEC,
6.75%, 07/15/2013 F<F21> 245,670
350,000 Union Planters Corporation
Subordinated Notes,
7.75%, 03/01/2011 394,024
280,000 Washington Mutual
Capital I,
8.38%, 06/01/2027 301,734
200,000 Washington Mutual,
Inc. Subordinated Notes,
8.25%, 04/01/2010 222,693
1,534,000 Westdeutsche Landesbank
Subordinated Notes,
5.00%, 07/15/2015 1,504,794
750,000 Willis Group NA,
5.63%, 07/15/2015 749,708
------------
26,535,882
------------
INDUSTRIAL - 10.2%
500,000 Alcan, Inc.,
5.75%, 06/01/2035 F<F21> 486,835
1,000,000 Ameritech Capital Funding,
6.45%, 01/15/2018 1,044,353
AOL Time Warner, Inc.:
1,100,000 7.63%, 04/15/2031 1,225,014
175,000 7.70%, 05/01/2032 196,815
AT&T Wireless Services,
Inc. Senior Notes,
775,000 8.75%, 03/01/2031 1,026,734
441,000 Auburn Hills Trust
Debentures,
12.38%, 05/01/2020 655,737
450,000 British Telecom PLC,
8.88%, 12/15/2030 F<F21> 602,074
600,000 Bunge Ltd. Finance
Corporation Notes,
5.35%, 04/15/2014 593,456
275,000 Caesars Entertainment
Senior Notes,
7.50%, 09/01/2009 292,870
700,000 ConAgra Foods, Inc.
Subordinated Notes,
9.75%, 03/01/2021 906,299
Continental Airlines, Inc.
Pass Thru Certificates:
51,480 6.80%, 07/02/2007 49,117
77,232 6.54%, 09/15/2008 73,358
173,043 8.31%, 10/02/2012 154,806
497,840 6.90%, 01/02/2018 495,845
1,025,000 Cox Communications Inc.,
7.13%, 10/01/2012 1,098,263
231,000 Delta Air Lines, Inc.
Pass Thru Certificates,
9.50%, 11/18/2008
(Acquired 11/24/2004,
Cost $231,000) @<F18> ^<F19> *<F20> 203,280
250,000 Deutsche Telekom
International Finance BV,
8.75%, 06/15/2030 F<F21> 317,967
500,000 Dominion Resources Inc.,
7.20%, 09/15/2014 555,484
158,146 FedEx Corp.
Pass Thru Certificates,
6.85%, 07/15/2020 171,171
475,000 Ford Capital BV
Debentures,
9.50%, 06/01/2010 397,813
403,000 Ford Motor Company
Debentures,
9.22%, 09/15/2021 298,220
General Motors Acceptance
Corporation Notes:
100,000 7.25%, 03/02/2011 91,914
150,000 6.75%, 12/01/2014 134,943
350,000 Halliburton Company Notes,
5.50%, 10/15/2010 357,476
100,000 Hanson Australia Funding,
5.25%, 03/15/2013 F<F21> 99,131
500,000 Health Care Service
Corporation Notes,
7.75%, 06/15/2011
(Acquired 06/20/2001 and
01/26/2005; Cost $199,106
and $339,319 respectively)*<F20> 559,625
275,000 Highmark, Inc. Notes,
6.80%, 08/15/2013
(Acquired 08/14/2003,
Cost $274,373)*<F20> 297,723
625,000 Hutchison Whampoa
International Ltd.,
6.25%, 01/24/2014
(Acquired 06/02/2004 and
02/08/2005; Cost $335,845
and $297,024 respectively)*<F20> F<F21> 654,068
449,000 ICI North America
Debentures,
8.88%, 11/15/2006 462,535
650,000 Knight-Ridder, Inc.,
5.75%, 09/01/2017 551,311
400,000 Laboratory Corporation
of America,
5.63%, 12/15/2015 405,303
100,000 Marathon Oil Corporation,
6.00%, 07/01/2012 105,623
503,750 The May Department
Stores Companies Debentures,
9.75%, 02/15/2021 610,893
444,642 Northwest Airlines, Inc.,
7.25%, 07/02/2014 57,803
29,967 Northwest Airlines, Inc.
Pass Thru Certificates,
Series 1991-C,
8.13%, 08/01/2015 7,192
320,000 Pactiv Corporation,
7.95%, 12/15/2025 365,393
400,000 PCCW Capital II Ltd.,
6.00%, 07/15/2013
(Acquired 07/10/2003,
Cost $398,132)*<F20> F<F21> 408,578
700,000 Plum Creek Timberlands,
5.88%, 11/15/2015 709,084
Qwest Capital Funding, Inc.,
300,000 7.00%, 08/03/2009 303,000
200,000 7.25%, 02/15/2011 202,500
250,000 Sealed Air Corporation
Senior Notes,
5.38%, 04/15/2008
(Acquired 04/09/2003,
Cost $248,650)*<F20> 250,938
Sprint Capital Corporation:
125,000 7.63%, 01/30/2011 137,841
200,000 8.75%, 03/15/2032 265,416
680,000 TCI Communications,
Inc. Debentures,
7.88%, 08/01/2013 768,581
1,000,000 Telecom Italia Capital,
4.95%, 09/30/2014 F<F21> 955,088
Tyco International
Group S.A.: F<F21>
175,000 6.38%, 10/15/2011 181,754
300,000 6.00%, 11/15/2013 306,446
United AirLines, Inc.
Pass Thru Certificates:
269,803 7.76%, 04/01/2007 @<F18> ^<F19> 160,932
588,659 6.20%, 03/01/2010 577,093
249,712 U.S. Airways
Pass Thru Certificate,
Series 1998-1,
6.85%, 07/30/2019 247,478
350,000 Vale Overseas Limited,
8.25%, 01/17/2034 F<F21> 402,938
675,000 Viacom, Inc.,
7.70%, 07/30/2010 728,598
1,000,000 Wal-Mart Stores,
5.25%, 09/01/2035 970,676
175,000 Waste Management
Inc. Notes,
7.00%, 10/15/2006 177,405
------------
23,360,790
------------
UTILITIES - 4.3%
300,000 Aquila, Inc.,
7.63%, 11/15/2009 306,000
1,000,000 Duke Capital LLC Notes,
5.67%, 08/15/2014 1,008,523
250,000 Edison Mission Energy
Senior Notes,
9.88%, 04/15/2011 291,563
750,000 Energy Transfer Partners,
5.65%, 08/01/2012
(Acquired 08/10/2005,
Cost $744,368)*<F20> 741,403
300,000 Exelon Corporation
Senior Notes,
6.75%, 05/01/2011 319,386
278,737 Kiowa Power Partners LLC,
4.81%, 12/30/2013
(Acquired 11/19/2004;
Cost $278,737)*<F20> 269,756
Korea Electric Power
Corporation: F<F21>
100,000 7.75%, 04/01/2013 115,365
365,000 6.75%, 08/01/2027 407,540
750,000 MidAmerican Energy
Holdings Company
Senior Notes,
7.63%, 10/15/2007 781,644
425,000 ONEOK, Inc.
Senior Notes,
7.13%, 04/15/2011 459,506
850,000 Pacific Gas &
Electric Company,
6.05%, 03/01/2034 879,715
300,000 PPL Energy Supply, LLC
Senior Notes,
6.40%, 11/01/2011 316,211
175,000 PSE&G Energy Holdings
LLC Senior Notes,
8.50%, 06/15/2011 187,250
PSE&G Power LLC:
250,000 7.75%, 04/15/2011 276,795
350,000 5.00%, 04/01/2014 337,692
544,737 RGS (I&M) Funding
Corporation Debentures,
9.82%, 12/07/2022 698,979
1,000,000 System Energy Resources
1st Mortgage,
4.88%, 10/01/2007 992,945
200,000 Tristate Gen & Trans
Assn, Series 2003,
6.04%, 01/31/2018
(Acquired 10/14/2003;
Cost $200,000)*<F20> 205,918
500,000 Vectren Utility Holdings,
6.63%, 12/01/2011 535,618
550,000 The Williams Companies,
Inc. Notes,
8.13%, 03/15/2012 599,500
------------
9,731,309
------------
MORTGAGE-BACKED SECURITIES - 30.5%
Bank of America
Alternative Loan Trust:
870,520 Series 2003-4, Class 2A1,
5.00%, 06/25/2018 860,797
1,143,235 Series 2003-11, Class 4A1,
4.75%, 01/25/2019 1,112,868
828,616 Series 2004-11, Class 4A1,
5.50%, 12/25/2019 829,651
1,453,382 Series 2005-2, Class 4A1,
5.500, 03/25/2020 1,453,442
1,698,937 Series 2005-2, Class 1CB2,
5.50%, 03/25/2035 1,692,410
1,659,584 Series 2005-9, Class 1CB3,
5.50%, 10/25/2035 1,654,855
992,031 Series 2005-11, Class 1CB4,
5.50%, 12/25/2035 989,628
1,293,539 Chase Mortgage
Finance Corporation,
Series 2003-S13, Class A11,
5.50%, 11/25/2033 1,291,061
887,430 Citicorp Mortgage
Securities, Inc.,
Series 2004-3, Class A2,
5.25%, 05/25/2034 880,032
1,500,000 Countrywide Alternative
Loan Trust, Series
2005-10CB, Class 1A6,
5.50%, 05/25/2035 1,484,067
1,159,679 Countrywide Home
Loans, Inc.,
Series 2003-39, Class A5,
5.00%, 05/25/2012 1,146,806
1,801,396 CS First Boston Mortgage
Securities Corporation,
Series 2004-4, Class 2A5,
5.50%, 06/25/2015 1,797,829
45,434 Deutsche Mortgage
Securities, Inc.,
Series 2004-1, Class 3A3,
3.69%, 09/25/2033 45,279
1,794,136 Federal Gold Loan Mortgage
Corporation (FGLMC),
6.50%, 06/01/2029 1,845,514
Federal Home
Loan Mortgage
Corporation (FHLMC):
399,356 6.50%, 07/01/2014 410,282
299,528 6.00%, 05/01/2017 305,761
1,073,109 5.50%, 11/01/2022 1,074,214
944,955 5.50%, 07/01/2023 945,713
613,197 Series 2695, Class UA,
5.50%, 09/15/2014 617,911
871,150 Series R001, Class AE,
4.38%, 04/15/2015 851,885
1,122,859 Series 2539, Class QB,
5.00%, 09/15/2015 1,121,978
866,216 Series 2857, Class VA,
5.00%, 09/15/2015 859,227
1,977,164 Series R003, Class VA,
5.50%, 08/15/2016 1,995,288
250,000 Series 2533, Class PC,
5.00%, 10/15/2017 249,988
348,930 Series 206, Class E,
0.00%, 07/15/2019 345,907
235,387 Series 141, Class D,
5.00%, 05/15/2021 234,738
147,849 Series 1074, Class I,
6.75%, 05/15/2021 147,594
210,707 Series 1081, Class K,
7.00%, 05/15/2021 210,649
81,493 Series 1101, Class M,
6.95%, 07/15/2021 81,496
151,129 Series 163, Class F,
6.00%, 07/15/2021 150,766
298,881 Series 188, Class H,
7.00%, 09/15/2021 298,161
155,547 Series 1286, Class A,
6.00%, 05/15/2022 155,277
157,583 Series 2531, Class N,
4.00%, 07/15/2027 155,848
132,722 Series 2141, Class N,
5.55%, 11/15/2027 133,292
575,000 Series 2664, Class LG,
5.50%, 07/15/2028 577,534
Federal National Mortgage
Association (FNMA):
1,915,140 5.50%, 07/01/2015 1,932,719
705,402 5.50%, 12/01/2016 710,573
626,081 5.00%, 10/01/2017 620,381
699,322 5.00%, 11/01/2017 692,956
1,084,462 5.00%, 12/01/2017 1,074,589
3,220,189 5.00%, 02/01/2018 3,190,873
589,040 5.00%, 06/01/2018 583,815
780,669 5.00%, 10/01/2018 773,439
1,108,626 5.50%, 01/01/2023 1,109,180
1,020,250 5.50%, 07/01/2023 1,020,452
184,000 5.00%, 10/01/2023 180,086
315,518 5.50%, 01/01/2032 313,352
1,051,362 5.50%, 07/01/2033 1,043,652
665,559 5.00%, 11/01/2033 647,203
1,571,188 5.50%, 02/01/2035 1,557,307
1,150,836 5.50%, 02/01/2035 1,140,669
1,135,223 5.50%, 03/01/2035 1,124,343
1,000,000 Series 2002-73, Class OC,
5.00%, 04/25/2014 998,760
1,175,000 Series 2002-82, Class XC,
5.00%, 05/25/2014 1,173,484
525,000 Series 2003-4, Class PC,
5.00%, 12/25/2014 524,009
260,897 Series 2002-70, Class PL,
5.00%, 04/25/2015 260,498
1,000,000 Series 2003-27, Class OJ,
5.00%, 07/25/2015 997,032
1,150,000 Series 2002-94, Class MC,
5.00%, 08/25/2015 1,146,834
500,000 Series 2003-24, Class PC,
5.00%, 11/25/2015 498,515
2,000,000 Series 2002-74, Class TD,
5.00%, 12/25/2015 1,991,484
1,000,000 Series 2003-18, Class GB,
5.00%, 03/25/2016 997,921
144,037 Series 2002-56, Class MC,
5.50%, 09/25/2017 145,545
91,526 Series 1989-37, Class G,
8.00%, 07/25/2019 96,218
130,766 Series 1989-94, Class G,
7.50%, 12/25/2019 137,154
34,380 Series 1990-58, Class J,
7.00%, 05/25/2020 35,713
150,643 Series 1990-105, Class J,
6.50%, 09/25/2020 151,457
56,517 Series 1990-105, Class G,
7.00%, 09/25/2020 57,916
52,965 Series 1991-1, Class G,
7.00%, 01/25/2021 54,464
129,380 Series 1991-86, Class Z,
6.50%, 07/25/2021 130,810
462,369 Series 2003-28, Class KA,
4.25%, 03/25/2022 440,360
55,973 Series G92-30, Class Z,
7.00%, 06/25/2022 57,913
93,306 Series 1992-150, Class MA,
5.50%, 09/25/2022 92,447
161,861 Series 1993-58, Class H,
5.50%, 04/25/2023 162,856
1,125,000 Series 2003-17, Class QR,
4.50%, 11/25/2025 1,117,683
1,190,796 Series 2003-31, Class KG,
4.50%, 12/25/2028 1,189,004
195,831 Series 1998-66, Class C,
6.00%, 12/25/2028 197,048
152,539 Series 2003-44, Class AB,
3.75%, 05/25/2033 144,724
1,907,029 First Horizon Alternative
Mortgage Securities,
Series 2005-FA7, Class 2A1,
5.00%, 09/25/2020 1,887,693
400,000 GMAC Mortgage
Corporation Loan Trust:
Series 2004-GH1,
4.39%, 12/25/2025 396,659
Government National
Mortgage Association
(GNMA):
77,697 4.00%, 02/16/2026 77,224
126,475 6.00%, 09/16/2028 126,364
98,844 6.00%, 12/20/2028 101,159
803,189 6.00%, 11/20/2033 821,583
152,562 Impac CMB Trust,
Series 2004-4, Class 2A2,
5.25%, 09/25/2034 150,653
1,423,547 Master Alternative
Loans Trust,
Series 2003-5, Class 6A1,
6.00%, 08/25/2033 1,417,709
1,006,027 Residential Accredit
Loans, Inc.,
Series 2004-QS6, Class A1,
5.00%, 05/25/2019 991,728
800,000 Residential Funding
Mortgage Security I,
Series 2003-S11, Class A2,
4.00%, 06/25/2018 746,590
287,140 Salomon Brothers Mortgage
Securities VII,
Series 2003-UP2, Class A2,
4.00%, 06/25/2033 277,406
Structured Asset Securities
Corporation:
1,500,000 Series 2004-11XS,
Class 1A3A,
4.76%, 06/25/2034 1,494,503
90,050 Series 2004-16XS,
Class A2, 4.91%,
08/25/2034 89,736
1,204,506 Washington Mutual, Inc.
Pass-Thru Certificates,
5.00%, 06/25/2019 1,190,658
1,327,325 Series 2004-CB4,
Class 21A, 5.50%,
12/25/2019 1,330,212
------------
69,623,063
------------
INTERNATIONAL (U.S. $ DOMINATED) - 0.9%
50,000 Corp Andina De
Fomento Notes,
7.38%, 01/18/2011 F<F21> 54,865
175,000 Landesbank Baden-
Wurttemgerg
Subordinated Notes,
6.35%, 04/01/2012 F<F21> 190,929
PEMEX Project Funding
Master Trust: F<F21>
75,000 6.13%, 08/15/2008 76,500
450,000 9.13%, 10/13/2010 517,950
United Mexican
States Notes: F<F21>
150,000 9.88%, 02/01/2010 175,950
400,000 7.50%, 04/08/2033 473,600
510,000 National Bank of Hungary
Yankee Debentures,
8.88%, 11/01/2013 645,064
------------
2,134,858
------------
MUNICIPAL BONDS - 0.4%
Tobacco Settlement
Financing Corporation:
180,000 Series 2001-A,
5.92%, 06/01/2012 178,888
667,896 Series 2001-A,
6.36%, 05/15/2025 673,019
------------
851,907
------------
U.S. GOVERNMENT AGENCY ISSUES - 13.2%
27,600,000 Federal National Mortgage
Association (FNMA),
7.25%, 01/15/2010 30,072,435
------------
30,072,435
------------
U.S. TREASURY OBLIGATIONS - 12.1%
U.S. Treasury Bonds:
4,175,000 9.25%, 02/15/2016 5,785,799
18,200,000 6.25%, 08/15/2023 21,733,366
------------
27,519,165
------------
Total Long-Term
Investments
(Cost $218,631,188) 218,044,463
------------
Shares
- ------
SHORT-TERM INVESTMENTS - 3.6%
MONEY MARKET FUNDS - 3.6%
8,308,157 Investment Company
Cash Reserve Portfolio -
AIM Fund 8,308,157
------------
Total Short-Term
Investments
(Cost $8,308,157) 8,308,157
------------
Total Investments
(Cost $226,939,345) -
99.1% 226,352,620
------------
Other Assets in Excess
of Liabilities - 0.9% 2,069,705
------------
TOTAL NET
ASSETS - 100.0% $228,422,325
------------
------------
@<F18> Security in Default
^<F19> Non Income Producing
*<F20> Unregistered Security
F<F21> Foreign Securities
See notes to the financial statements
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
DECEMBER 31, 2005
The Baird Intermediate Municipal Bond Fund seeks current income that is
substantially exempt from federal income tax. A secondary objective is to
provide total return with relatively low volatility of principal.
The Fund generated positive results in 2005 despite the increase in short and
intermediate-term interest rates. The Fund's relative performance fell short of
the Lehman Brothers 7-Year and 10-Year General Obligation Bond Indices. The
Fund's minimal exposure to shorter maturities helped the Fund's relative
performance while the Fund's limited exposure to issues longer than ten years in
maturity detracted from relative performance. The average maturity of the bonds
in the Fund's portfolio at December 31, 2005 was 5.82 years, compared to 9.8
years for the Lehman Brothers 10-Year General Obligation Bond Index and 6.9
years for the Lehman Brothers 7-Year General Obligation Bond Index. The Fund's
focus on high quality, pre-refunded issues also detracted from performance to
some degree when compared to both indices, as heavy new issuance limited
relative returns in this sector. The Lehman Brothers 7-Year and 10-Year General
Obligation Bond Indices do not include any pre-refunded or escrowed-to-maturity
bonds. With yield spreads on lower quality issues relatively tight by
historical standards, we continue to emphasize high quality, intermediate
holdings in the Fund. The Fund held a diversified portfolio of 50 municipal
bonds across various states at year-end. A December 31, 2005 summary of the
Fund's portfolio characteristics including quality distribution and sector
allocation appears below.
Please note that we are comparing the Fund's 2005 performance to that of the
Lehman Brothers 7-Year General Obligation Bond Index, reflecting a decision to
make a change in our benchmark. Beginning in 2006, the benchmark to which the
Fund will compare its performance is the Lehman Brothers 7-Year General
Obligation Bond Index rather than the Lehman Brothers 10-Year General Obligation
Bond Index. The Lehman Brothers 7-Year General Obligation Bond Index is an
unmanaged, market value weighted index of investment grade state and local
general obligation bonds with a maturity of six to eight years. This 7-Year
Index is identical in all material respects to the 10-Year Index, except with
regard to the maturity of the bonds in the index. We have selected the Lehman
Brothers 7-Year General Obligation Bond Index as the Fund's new benchmark
because the maturities of the bonds in that index are closer to the historical
and expected average maturities of the bonds held by the Fund than are the
maturities of the bonds in the 10-Year Index, which are on the long side of the
intermediate spectrum.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F22>
AAA 95%
AA 4%
BBB 1%
SECTOR WEIGHTINGS*<F22>
Pre-refunded ETM 71%
Insured 22%
General Obligation 4%
Cash 2%
Revenue 1%
NET ASSETS: $55,323,514
SEC 30-DAY YIELD:**<F23>
Institutional Class: 3.80%
Investor Class: 3.57%
AVERAGE DURATION: 4.84 years
AVERAGE MATURITY: 5.82 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
Investor Class: 0.55%***<F24>
PORTFOLIO TURNOVER RATIO:****<F25> 13.7%
TOTAL NUMBER OF HOLDINGS: 50
*<F22> Percentages shown are based on the Fund's total net assets.
**<F23> SEC yields are based on SEC guidelines and are calculated for the
30 days ended December 31, 2005.
***<F24> Includes 0.25% 12b-1 fee.
****<F25> Not annualized.
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
BAIRD INTERMEDIATE MUNICIPAL BOND FUND -
INSTITUTIONAL CLASS
VALUE OF A $250,000 INVESTMENT
Baird Intermediate Lehman Brothers Lehman Brothers
Municipal Bond 10-Year General 7-Year General
Fund - Institutional Obligation Obligation
Date Class Shares Bond Index Index
---- -------------------- --------------- ---------------
3/30/2001 $250,000 $250,000 $250,000
6/30/2001 $255,511 $250,675 $251,525
12/31/2001 $262,544 $255,106 $255,876
6/30/2002 $275,570 $268,754 $269,335
12/31/2002 $290,693 $281,322 $281,429
6/30/2003 $302,139 $294,597 $292,827
12/31/2003 $304,973 $297,785 $297,131
6/30/2004 $300,175 $296,147 $295,081
12/31/2004 $313,163 $311,064 $309,923
6/30/2005 $317,383 $319,401 $315,099
12/31/2005 $317,314 $319,587 $315,540
GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION
DATE (3/30/01), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD INTERMEDIATE MUNICIPAL BOND FUND -
INVESTOR CLASS
VALUE OF A $10,000 INVESTMENT
Baird Intermediate Lehman Brothers Lehman Brothers
Municipal Bond 10-Year General 7-Year General
Fund - Investor Obligation Obligation
Date Class Shares Bond Index Index
---- ------------------ --------------- --------------
3/30/2001 $10,000 $10,000 $10,000
6/30/2001 $10,217 $10,027 $10,061
12/31/2001 $10,474 $10,204 $10,235
6/30/2002 $10,980 $10,750 $10,773
12/31/2002 $11,569 $11,253 $11,257
6/30/2003 $12,007 $11,784 $11,713
12/31/2003 $12,111 $11,912 $11,885
6/30/2004 $11,911 $11,846 $11,803
12/31/2004 $12,402 $12,443 $12,397
6/30/2005 $12,560 $12,776 $12,604
12/31/2005 $12,542 $12,784 $12,622
GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE
(3/30/01), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
AVERAGE ANNUAL TOTAL RETURNS
For the Periods Ended December 31, 2005 ONE YEAR SINCE INCEPTION(1)<F26>
- --------------------------------------- -------- -----------------------
Baird Intermediate Municipal Bond Fund - Institutional Class Shares 1.33% 5.14%
Baird Intermediate Municipal Bond Fund - Investor Class Shares 1.13% 4.88%
Lehman Brothers 7-Year General Obligation Bond Index(2)<F27> 1.81% 4.85%
Lehman Brothers 10-Year General Obligation Bond Index(3)<F28> 2.74% 5.76%
(1)<F26> For the period from March 30, 2001 (commencement of operations)
through December 31, 2005.
(2)<F27> The Lehman Brothers 7-Year General Obligation Bond Index is an
unmanaged, market value weighted index comprised of investment grade
state and local general obligation bonds that have been issued as part
of an offering of at least $50 million, have a minimum amount
outstanding of at least $5 million, have been issued within the last
five years and have a maturity of six to eight years. This index does
not reflect any deduction for fees, expenses or taxes. A direct
investment in an index is not possible. The Lehman Brothers 7-Year
General Obligation Bond Index has been selected to replace the Lehman
Brothers 10-Year General Obligation Bond Index as the Fund's benchmark
because the average maturity of the bonds owned by the Fund are closer
to the maturity of the bonds in the Lehman Brothers 7-Year General
Obligation Bond Index (6-8 years) than the maturity of the bonds in
the Lehman Brothers 10-Year General Obligation Bond Index (8-12
years).
(3)<F28> The Lehman Brothers 10-Year General Obligation Bond Index is an
unmanaged, market value weighted index of bond prices compiled by
Lehman Brothers. The index is comprised of investment grade state and
local general obligation bonds that have been issued as part of an
offering of at least $50 million, have a minimum amount outstanding of
at least $5 million, have been issued within the last five years, and
have a maturity of eight to twelve years. This index does not reflect
any deduction for fees, expenses or taxes. A direct investment in an
index is not possible.
THE RETURNS IN THE LINE GRAPHS AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS
AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT
REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM.
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
Principal
Amount Value
--------- -----
MUNICIPAL BONDS - 95.6%
ALABAMA - 0.9%
$ 460,000 Mobile Alabama, 6.20%,
02/15/2007 (ETM) $ 471,978
-----------
ARKANSAS - 1.3%
690,000 Springdale Arkansas Sales
& Use Tax Revenue,
4.00%, 07/01/2016
(MBIA Insured) 691,835
-----------
CALIFORNIA - 1.8%
500,000 Golden State Tobacco
Securitization Corporation,
6.25%, 06/01/2033 543,760
400,000 Santa Rosa California
Hospital Revenue, 10.30%,
03/01/2011 (ETM) 471,272
-----------
1,015,032
-----------
COLORADO - 4.9%
2,000,000 Adams County Colorado
Single Family Mortgage
Revenue, 8.88%,
08/01/2012 (Pre-refunded
to 08-01-2012) 2,578,580
110,000 Colorado Springs Colorado
Utilities Revenue,
5.80%, 11/15/2010 (ETM) 116,438
-----------
2,695,018
-----------
DELAWARE - 3.1%
1,500,000 Delaware State Economic
Development Authority
Revenue, 6.75%,
01/01/2013 (ETM) 1,716,420
-----------
FLORIDA - 1.3%
300,000 Jacksonville Florida Health
Facility Authority Hospital
Revenue, 11.50%,
10/01/2012 (ETM) 438,405
270,000 Orange County Florida
Health Revenue, 8.75%,
10/01/2009 (ETM) 300,100
-----------
738,505
-----------
GEORGIA - 2.2%
1,020,000 Fulton County Georgia
Hospital Authority Revenue,
7.88%, 10/01/2013 (ETM) 1,231,354
-----------
HAWAII - 6.5%
3,245,000 Honolulu Hawaii City &
County, 5.25%, 03/01/2017
(Pre-refunded to 3-01-2013) 3,569,208
-----------
ILLINOIS - 5.0%
1,440,000 Chicago Illinois Metropolitan
Water Reclamation District
General Obligation,
7.00%, 12/01/2010 (ETM) 1,667,419
1,000,000 Lake County Community
High School District No
128, 5.00%, 01/01/2013 1,076,860
-----------
2,744,279
-----------
INDIANA - 2.0%
745,000 Baugo Indiana School
Building Corporation,
5.50%, 01/15/2012
(AMBAC Insured) (ETM) 822,778
215,000 Indiana Toll Road
Commission, 9.00%,
01/01/2015 (ETM) 282,175
-----------
1,104,953
-----------
IOWA - 3.1%
1,010,000 Des Moines Iowa
Metropolitan Wastewater
Reclamation Authority,
5.00%, 06/01/2015
(MBIA Insured) 1,090,436
585,000 Muscatine Iowa Electric
Revenue, 6.70%,
01/01/2013 (ETM) 645,536
-----------
1,735,972
-----------
LOUISIANA - 7.5%
745,000 Denham Springs-Livingston
Housing and Mortgage
Finance Authority,
7.20%, 08/01/2010 (ETM) 859,827
1,000,000 Houma-Terrebonne Public
Trust Financing Authority
Single Family Mortgage
Revenue, 7.30%,
04/01/2011 (ETM) 1,170,460
400,000 Houma-Terrebonne Public
Trust Financing Authority,
7.30%, 04/01/2010 (ETM) 457,840
1,450,000 Jefferson Parish Louisiana
Home Mortgage Authority,
7.10%, 08/01/2010 (ETM) 1,674,039
-----------
4,162,166
-----------
MINNESOTA - 1.4%
695,000 Western Minnesota
Municipal Power Agency,
6.38%, 01/01/2016 (ETM) 776,586
-----------
MISSISSIPPI - 1.9%
600,000 Mississippi Housing
Financial Corporation,
0.00%, 06/01/2015 (ETM) 396,966
610,000 Mississippi State,
6.20%, 02/01/2008 (ETM) 640,781
-----------
1,037,747
-----------
NEVADA - 3.9%
1,965,000 Reno Nevada Capital
Improvement Revenue,
5.50%, 06/01/2019
(Pre-refunded to
06-01-2012) 2,170,893
-----------
NEW JERSEY - 4.1%
400,000 New Jersey State Transit
Trust, 5.00%, 06/15/2017
(Pre-refunded to
06-15-2009) 421,296
1,000,000 New Jersey State
Transportation Trust Fund
Authority, 6.00%,
12/15/2017 (Pre-refunded
to 12-15-2011) 1,130,240
New Jersey State Turnpike
Authority: (ETM)
577,000 6.75%, 01/01/2009 575,915
130,000 6.50%, 01/01/2016 153,175
-----------
2,280,626
-----------
NEW YORK - 1.9%
1,000,000 Triborough Bridge &
Tunnel Authority,
5.25%, 01/01/2014 (ETM) 1,045,620
-----------
OHIO - 0.3%
160,000 Miamisburg Ohio
Water Revenue,
7.00%, 11/15/2016 (ETM) 187,658
-----------
OKLAHOMA - 5.0%
2,360,000 Tulsa County Oklahoma
Home Financing Authority
Single Family Mortgage
Revenue,
6.90%, 08/01/2011 (ETM) 2,760,350
-----------
PENNSYLVANIA - 6.3%
850,000 Philadelphia Pennsylvania
Gas Works, 7.00%,
05/15/2020 (ETM) 1,029,460
1,405,000 Pittsburgh Pennsylvania
Water & Sewer Authority,
7.25%, 09/01/2014 (ETM) 1,619,572
1,000,000 Wilson Pennsylvania Area
School District,
0.00%, 05/15/2011
(AMBAC Insured) 811,680
-----------
3,460,712
-----------
SOUTH CAROLINA - 0.6%
285,000 Greenville South Carolina
Waterworks Revenue,
7.00%, 02/01/2010 (ETM) 323,817
-----------
SOUTH DAKOTA - 1.6%
755,000 Heartland Consumers
Power District,
7.00%, 01/01/2016 (ETM) 868,507
-----------
TENNESSEE - 4.3%
520,000 Metropolitan Government
Nashville & Davidson
County Tennessee H&E,
6.10%, 07/01/2010 (ETM) 550,358
1,545,000 Metropolitan Government
Nashville & Davidson
County Tennessee Water
& Sewer Revenue,
6.50%, 12/01/2014 (ETM) 1,831,273
-----------
2,381,631
-----------
TEXAS - 19.5%
1,125,000 Barbers Hill Texas
Independent School
District General Obligation,
5.00%, 02/15/2017
(PSF Guaranteed) 1,207,485
1,195,000 Bell County Texas General
Obligation, 5.00%,
02/15/2012 (FSA Insured) 1,283,968
1,000,000 Copperas Cove Texas
Independent School District,
5.00%, 08/15/2016
(PSF Guaranteed) 1,077,450
1,920,000 Houston Texas Sewer
System Revenue,
9.38%, 10/01/2013 (ETM) 2,462,554
1,735,000 Lufkin Texas Independent
School District,
5.00%, 08/15/2015
(PSF Guaranteed) 1,872,065
730,000 Sam Rayburn Texas
Municipal Power Agency,
6.00%, 09/01/2010 (ETM) 793,663
575,000 Socorro Texas Independent
School District,
5.25%, 08/15/2012
(PSF Guaranteed) 625,767
345,000 Texas Public Building
Authority Revenue,
7.13%, 08/01/2011 (ETM) 390,526
1,000,000 University of Houston Texas,
5.25%, 02/15/2012
(FSA Insured) 1,088,610
-----------
10,802,088
-----------
UTAH - 1.3%
605,000 Salt Lake City Utah
Hospital Revenue, 8.13%,
05/15/2015 (ETM) 734,815
-----------
WASHINGTON - 3.9%
1,025,000 Clark County School
District No. 037,
5.13%, 12/01/2011 1,099,005
1,000,000 Washington State,
5.00%, 09/01/2013
(FGIC Insured) 1,069,930
-----------
2,168,935
-----------
Total Municipal Bonds
(Cost $52,835,288) 52,876,705
-----------
Shares
- ------
SHORT-TERM INVESTMENTS - 1.9%
MONEY MARKET FUNDS - 1.9%
1,074,551 Tax Free Investment
Company Cash Reserve
Portfolio - AIM Fund 1,074,551
-----------
Total Short-Term
Investment
(Cost $1,074,551) 1,074,551
-----------
Total Investments
(Cost $53,909,839) -
97.5% 53,951,256
-----------
Other Assets in Excess
of Liabilities - 2.5% 1,372,258
-----------
TOTAL NET
ASSETS - 100.0% $55,323,514
-----------
-----------
ETM - Escrowed to maturity
See notes to the financial statements
BAIRD CORE PLUS BOND FUND
DECEMBER 31, 2005
The Baird Core Plus Bond Fund seeks an annual rate of total return, before Fund
expenses, greater than the annual rate of total return of the Lehman Brothers
U.S. Universal Bond Index. The Lehman Brothers U.S. Universal Bond Index is an
unmanaged, market value weighted index of fixed income securities issued in U.S.
dollars, including U.S. government and investment grade debt, non-investment
grade debt, asset-backed and mortgage-backed securities, Eurobonds, 144A
securities and emerging market debt, with maturities of at least one year.
The Fund delivered positive results in 2005 but trailed the Index. The
following factors contributed positively to the Fund's relative performance:
o The Fund's overall portfolio structure (designed to under-weight 2-
year, 7 to 10-year and 30-year maturities and over-weight 4 to 5-year,
11-year and 20-year maturities) which benefited from flattening in the
yield curve;
o The Fund's significantly greater exposure to asset-backed securities
than the Index; and
o Strong performance of individual corporate issues owned by the Fund.
Detracting from the Fund's relative performance in 2005 were its overweighting
of BBB-rated corporate bonds relative to the Index, underweighting of below
investment grade emerging market issuers, underweighting of mortgage-pass
through securities, and exposure to issues in the airline, auto and media
sectors. The Fund maintained its duration-neutral strategy vis-a-vis the Index,
holding a broadly diversified portfolio of over 120 securities at year end.
The Fund ended 2005 with a yield advantage versus the Index. This yield
advantage, combined with exposure to specific sectors which we believe have
superior total return potential (asset-backed securities, well-structured
mortgage-backed securities and issues in the airline, auto and media sectors),
should enhance the Fund's prospects of adding value over its benchmark in the
coming year.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F29>
U.S. Treasury 15%
U.S. Gov't Agency 38%
AAA 9%
A 7%
BBB 22%
Below Baa 6%
Not Rated 3%
SECTOR WEIGHTINGS*<F29>
Asset-Backed 6%
Commercial Mortgage-Backed 3%
Financials 9%
Industrials 20%
Utilities 6%
Mortgage-Backed 30%
International 1%
Municipal 1%
U.S. Gov't Agency 7%
U.S. Treasuries 14%
Cash 3%
NET ASSETS: $32,623,168
SEC 30-DAY YIELD:**<F30>
Institutional Class: 5.31%
Investor Class: 5.08%
AVERAGE DURATION: 4.61 years
AVERAGE MATURITY: 8.50 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
Investor Class: 0.55%***<F31>
PORTFOLIO TURNOVER RATIO:****<F32> 37.6%
TOTAL NUMBER OF HOLDINGS: 127
*<F29> Percentages shown are based on the Fund's total net assets.
**<F30> SEC yields are based on SEC guidelines and are calculated for the
30 days ended December 31, 2005.
***<F31> Includes 0.25% 12b-1 fee.
****<F32> Not annualized.
BAIRD CORE PLUS BOND FUND
BAIRD CORE PLUS BOND FUND - INSTITUTIONAL CLASS
VALUE OF A $250,000 INVESTMENT
Baird Core Plus Bond Fund - Lehman Brothers U.S.
Date Institutional Class Shares Universal Bond Index
---- -------------------------- --------------------
9/29/2000 $250,000 $250,000
12/31/2000 $264,734 $259,261
6/30/2001 $273,977 $268,929
12/31/2001 $282,819 $280,238
6/30/2002 $287,185 $289,675
12/31/2002 $302,329 $307,801
6/30/2003 $321,649 $323,008
12/31/2003 $329,342 $325,717
6/30/2004 $331,030 $326,267
12/31/2004 $350,298 $341,904
6/30/2005 $360,122 $350,493
12/31/2005 $358,114 $351,187
GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION
DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD CORE PLUS BOND FUND - INVESTOR CLASS
VALUE OF A $10,000 INVESTMENT
Baird Core Plus Bond Fund - Lehman Brothers U.S.
Date Investor Class Shares Universal Bond Index
---- --------------------------- --------------------
9/29/2000 $10,000 $10,000
12/31/2000 $10,573 $10,370
6/30/2001 $10,932 $10,757
12/31/2001 $11,281 $11,210
6/30/2002 $11,443 $11,587
12/31/2002 $12,024 $12,312
6/30/2003 $12,787 $12,920
12/31/2003 $13,057 $13,029
6/30/2004 $13,119 $13,051
12/31/2004 $13,860 $13,676
6/30/2005 $14,221 $14,020
12/31/2005 $14,127 $14,047
GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE
(9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD CORE PLUS BOND FUND
AVERAGE ANNUAL TOTAL RETURNS
SINCE
For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS INCEPTION(1)<F33>
- --------------------------------------- -------- ---------- -----------------
Baird Core Plus Bond Fund - Institutional Class Shares 2.23% 6.23% 7.08%
Baird Core Plus Bond Fund - Investor Class Shares 1.93% 5.96% 6.80%
Lehman Brothers U.S. Universal Bond Index(2)<F34> 2.72% 6.26% 6.69%
(1)<F33> For the period from September 29, 2000 (commencement of operations)
through December 31, 2005.
(2)<F34> The Lehman Brothers U.S. Universal Bond Index is an unmanaged, market
value weighted index of fixed income securities issued in U.S.
dollars, including U.S. government and investment grade debt, non-
investment grade debt, asset-backed and mortgage-backed securities,
Eurobonds, 144A securities and emerging market debt, with maturities
of at least one year. This index does not reflect any deduction for
fees, expenses or taxes. A direct investment in an index is not
possible.
THE RETURNS IN THE LINE GRAPHS AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS
AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS DO NOT
REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
FOR INFORMATION ABOUT THE PERFOMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM.
BAIRD CORE PLUS BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
Principal
Amount Value
--------- -----
LONG-TERM INVESTMENTS - 97.5%
ASSET-BACKED SECURITIES - 6.4%
$ 103,494 Bear Stearns Asset Backed
Securities Trust, Series
2003-AC1, Class A1,
4.10%, 05/25/2033 $ 100,883
140,000 GMAC Mortgage
Corporation Loan Trust,
Series 2004-HE5, Class A3,
3.97%, 09/25/2034 137,814
Green Tree Financial
Corporation:
458,012 Series 1998-4, Class A5,
6.18%, 12/01/2017 451,155
52,907 Series 1997-1, Class A5,
6.86%, 03/15/2028 54,420
166,776 New Century Home
Equity Loan Trust,
Series 2003-5, Class AI3,
3.56%, 11/25/2033 165,805
94,537 Oakwood Mortgage
Investors, Inc.,
Series 1999-B, Class A3,
6.45%, 11/15/2017 87,089
Residential Asset Mortgage
Products, Inc.:
65,990 Series 2003-RS11, Class AI3,
3.56%, 08/25/2028 65,781
300,000 Series 2003-RS10, Class AI7,
4.85%, 11/25/2033 298,024
450,000 Residential Asset
Securities Corporation,
Series 2003-KS5, Class AI6,
3.62%, 07/25/2033 436,220
300,000 Structured Asset Securities
Corporation, Series
2005-7XS, Class 1A4B,
5.44%, 04/25/2035 296,037
-----------
2,093,228
-----------
COMMERCIAL MORTGAGE - 3.0%
300,000 GE Capital Commercial
Mortgage Corporation,
Series 2002-3A, Class AR,
5.00%, 12/10/2037 298,716
Government National
Mortgage Association
(GNMA):
250,000 4.49%, 04/16/2023 243,257
300,000 4.66%, 04/16/2029 292,177
150,000 Mach One Trust,
Series 2004-1A, Class A2,
4.78%, 05/28/2040
(Acquired 07/12/2004;
Cost $151,431)*<F37> 147,957
-----------
982,107
-----------
FINANCIAL - 8.7%
175,000 AMVESCAP, Inc.
Senior Notes,
5.90%, 01/15/2007 175,601
200,000 American General Finance
Corporation Senior Notes,
8.45%, 10/15/2009 222,176
100,000 Countrywide Home
Loans, Inc.,
6.25%, 04/15/2009 103,117
350,000 First National Bank of
Omaha Subordinated Notes,
7.32%, 12/01/2010 368,888
250,000 First Union Capital,
7.94%, 01/15/2027 265,741
150,000 Glencore Funding LLC,
6.00%, 04/15/2014
(Acquired 03/31/2004,
Cost $148,928 respectively)*<F37> 141,081
375,000 Liberty Mutual Insurance
Notes, 7.70%, 10/15/2097
(Acquired 03/26/2003;
Cost $239,982)*<F37> 395,302
100,000 Marsh & McLennan
Companies, Inc.,
5.38%, 07/15/2014 98,422
50,000 Met Life Global Funding I
Notes, 4.75%, 06/20/2007
(Acquired 09/15/2004,
Cost $50,848)*<F37> 49,828
175,000 PNC Funding Corporation,
6.13%, 02/15/2009 180,611
100,000 Principal Financial Group
(AU) Senior Notes,
8.20%, 08/15/2009
(Acquired 09/16/2005,
Cost $111,206)*<F37> F<F38> 109,632
100,000 Residential Capital
Corporation,
6.38%, 06/30/2010 101,611
100,000 Transamerica Capital II,
7.65%, 12/01/2026
(Acquired 10/21/2003,
Cost $108,381)*<F37> 116,905
457,000 Washington Mutual
Capital I,
8.38%, 06/01/2027 492,473
-----------
2,821,388
-----------
INDUSTRIAL - 19.8%
40,059 America West Airlines,
Pass Thru Certificate,
8.54%, 07/02/2007 39,623
300,000 AOL Time Warner, Inc.
Senior Notes,
7.63%, 04/15/2031 334,095
100,000 AT&T Wireless Services,
Inc. Senior Notes,
8.75%, 03/01/2031 132,482
565,104 Atlas Air, Inc. Pass-Thru
Certificates,
8.71%, 07/02/2021 576,157
75,000 Best Foods Notes, Series C,
6.15%, 01/15/2006 75,023
Bunge Ltd. Finance
Corporation Notes:
150,000 5.35%, 04/15/2014 148,364
100,000 5.10%, 07/15/2015 96,752
375,000 Clear Channel
Communications,
4.50%, 01/15/2010 358,650
Continental Airlines, Inc.
Pass Thru Certificates:
78,936 6.80%, 07/02/2007 75,313
3,653 7.42%, 10/01/2008 3,381
76,282 6.90%, 01/02/2018 75,976
100,000 Cox Communications Inc.
Notes, 7.88%, 08/15/2009 107,429
462,000 Delta Air Lines, Inc.
Pass Thru Certificates,
9.50%, 11/18/2008
(Acquired 11/24/2004,
Cost $462,000)*<F37> ^<F36> @<F35> 406,560
100,000 Deutsche Telekom
International Finance BV,
8.75%, 06/15/2030 F<F38> 127,187
250,000 Dollar General Corporation,
8.63%, 06/15/2010 274,375
400,000 Ford Motor Company
Debentures,
9.22%, 09/15/2021 296,000
General Motors Acceptance
Corporation Notes:
75,000 6.75%, 01/15/2006 74,951
150,000 6.75%, 12/01/2014 134,943
175,000 General Motors Nova Scotia
Finance Company,
6.85%, 10/15/2008 131,250
100,000 Halliburton Company
Notes, 5.50%, 10/15/2010 102,136
100,000 Health Care Service
Corporation Notes,
7.75%, 06/15/2011
(Acquired 01/26/2005;
Cost $113,106)*<F37> 111,925
150,000 Hutchison Whampoa
International Limited,
6.25%, 01/24/2014
(Acquired 06/23/2005;
Cost $160,918)*<F37> F<F38> 156,976
271,250 The May Department Stores
Companies Debentures,
9.75%, 02/15/2021 328,942
533,570 Northwest Airlines, Inc.,
7.25%, 07/02/2014 69,364
PCCW Capital II Ltd.,
200,000 6.00%, 07/15/2013
(Acquired 07/10/2003,
Cost $199,066)*<F37> F<F38> 204,289
273,370 Southwest Airlines Company
Pass-Thru Certificates,
7.67%, 01/02/2014 284,903
100,000 Sprint Capital Corporation,
8.75%, 03/15/2032 132,708
250,000 Sungard Data Systems Inc.
Notes, 3.75%, 01/15/2009 227,500
175,000 TCI Communications, Inc.
Debentures,
7.88%, 08/01/2013 197,797
25,000 Time Warner Entertainment
Senior Notes,
8.88%, 10/01/2012 29,119
50,000 Tyco International Group S.A.,
6.00%, 11/15/2013 F<F38> 51,074
640,879 United AirLines, Inc.
Pass Thru Certificates,
6.20%, 09/01/2008 628,287
83,000 Univision Communication,
Inc., 3.50%, 10/15/2007 80,516
100,000 Vale Overseas Limited,
8.25%, 01/17/2034 115,125
Viacom, Inc.,
150,000 7.70%, 07/30/2010 161,911
100,000 Wharf International
Finance Ltd,
7.63%, 03/13/2007 F<F38> 102,983
-----------
6,454,066
-----------
UTILITIES - 5.7%
300,000 Edison Mission Energy
Senior Notes,
9.88%, 04/15/2011 349,875
150,000 Energy Transfer Partner,
5.65%, 08/01/2012
(Acquired 08/10/2005,
Cost $148,874)*<F37> 148,281
92,913 Kiowa Power Partners LLC,
4.81%, 12/30/2013
(Acquired 11/19/2004;
Cost $92,913)*<F37> 89,937
400,000 ONEOK, Inc. Senior Notes,
7.13%, 04/15/2011 432,476
50,000 Pacific Gas & Electric
Company 1st Mortgage,
6.05%, 03/01/2034 51,748
200,000 PSE&G Energy Holdings
LLC Senior Notes,
8.50%, 06/15/2011 214,000
50,000 PSI Energy, Inc. Debentures,
7.85%, 10/15/2007 52,294
297,129 RGS (I&M) Funding
Corporation Debentures,
9.82%, 12/07/2022 381,261
100,000 Tristate Gen & Trans Assn,
Series 2003, 6.04%,
01/31/2018 (Acquired
10/14/2003;
Cost $100,000)*<F37> 102,959
50,000 Williams Cos. Inc. Notes,
7.13%, 09/01/2011 51,937
-----------
1,874,768
-----------
MORTGAGE-BACKED SECURITIES - 30.3%
256,479 Bank of America
Alternative Loan Trust,
Series 2005-2, Class 4A1,
5.50%, 03/25/2020 256,490
Federal Gold Loan Mortgage
Corporation (FGLMC):
134,787 6.00%, 05/01/2017 137,593
100,914 6.50%, 09/01/2028 103,842
164,869 6.50%, 12/01/2028 169,652
121,584 6.50%, 05/01/2029 125,065
123,154 6.50%, 06/01/2029 126,680
Federal Home Loan Mortgage
Corporation (FHLMC):
261,345 Series R001, Class AE,
4.38%, 04/15/2015 255,566
400,000 Series 2567, Class OD,
5.00%, 08/15/2015 399,634
439,380 Series 2539, Class QB,
5.00%, 09/15/2015 439,035
30,411 Series 1053, Class G,
7.00%, 03/15/2021 30,392
66,971 Series 136, Class E,
6.00%, 04/15/2021 66,757
300,000 Series 2673, Class NC,
5.50%, 05/15/2021 304,451
282,544 Series 2804, Class VC,
5.00%, 07/15/2021 276,736
55,669 Series 1122, Class G,
7.00%, 08/15/2021 55,573
129,055 Series 1186, Class I,
7.00%, 12/15/2021 129,124
250,000 Series 2598, Class QC,
4.50%, 06/15/2027 246,533
140,074 Series 2531, Class N,
4.00%, 07/15/2027 138,531
Federal National Mortgage
Association (FNMA):
368,707 5.00%, 02/01/2018 365,351
260,223 5.00%, 10/01/2018 257,813
259,499 5.00%, 11/01/2018 257,095
197,054 5.50%, 03/01/2023 197,093
346,518 5.50%, 07/01/2023 346,586
79,349 6.50%, 09/01/2028 81,739
137,161 6.50%, 02/01/2029 141,292
283,966 5.50%, 01/01/2032 282,017
308,479 5.50%, 02/01/2035 305,754
277,053 5.50%, 02/01/2035 274,606
400,000 Series 2002-82, Class XC,
5.00%, 05/25/2014 399,484
401,279 Series 2002-74, Class TC,
5.00%, 03/25/2015 400,648
94,872 Series 2002-70, Class PL,
5.00%, 04/25/2015 94,726
350,000 Series 2002-57, Class PE,
5.50%, 09/25/2015 351,916
300,000 Series 2003-16, Class PC,
5.00%, 10/25/2015 299,184
25,147 Series 1989-94, Class G,
7.50%, 12/25/2019 26,376
32,900 Series 1990-15, Class J,
7.00%, 02/25/2020 33,462
89,269 Series 1990-76, Class G,
7.00%, 07/25/2020 92,319
21,074 Series 1991-21, Class J,
7.00%, 03/25/2021 21,589
478,250 Series 1992-129, Class L,
6.00%, 07/25/2022 486,527
153,953 Series 1993-32, Class H,
6.00%, 03/25/2023 154,760
194,233 Series 1993-58, Class H,
5.50%, 04/25/2023 195,427
428,687 Series 2003-31, Class KG,
4.50%, 12/25/2028 428,041
73,191 Series 2003-44, Class AB,
3.75%, 05/25/2033 69,441
Government National
Mortgage Association
(GNMA):
141,158 6.50%, 08/15/2027 147,811
228,578 6.00%, 12/20/2028 233,929
83,551 6.50%, 01/20/2029 86,831
78,855 6.50%, 02/20/2029 81,950
214,184 6.00%, 11/20/2033 219,089
280,396 Master Alternative
Loans Trust,
Series 2003-5, Class 6A1,
6.00%, 08/25/2033 279,246
-----------
9,873,756
-----------
INTERNATIONAL (U.S. $ DOMINATED) - 1.4%
400,000 PEMEX Project Funding
Master Trust,
9.13%, 10/13/2010 F<F38> 460,400
-----------
TAXABLE MUNICIPAL BONDS - 0.6%
200,656 Tobacco Settlement
Financing Corporation,
Series 2001-A, Class A,
6.36%, 05/15/2025 202,194
-----------
Total Municipal Bonds
(Cost $200,598) 202,194
-----------
U.S. GOVERNMENT AGENCY ISSUES - 7.3%
2,175,000 Federal National Mortgage
Association (FNMA):
7.25%, 01/15/2010 2,369,839
-----------
2,369,839
-----------
U.S. TREASURY OBLIGATIONS - 14.3%
U.S. Treasury Bonds:
500,000 9.25%, 02/15/2016 692,910
3,325,000 6.25%, 08/15/2023 3,970,519
-----------
4,663,429
-----------
Total Long-Term
Investments
(Cost $32,063,253) 31,795,175
-----------
Shares
- ------
SHORT-TERM INVESTMENTS - 2.0%
MONEY MARKET FUND - 2.0%
648,004 Investment Company
Cash Reserve Portfolio -
AIM Fund 648,004
-----------
Total Short-Term
Investments
(Cost $648,004) 648,004
-----------
Total Investments
(Cost $32,711,257) -
99.5% 32,443,179
-----------
Other Assets in Excess
of Liabilities - 0.5% 179,989
-----------
TOTAL NET
ASSETS - 100.0% $32,623,168
-----------
-----------
@<F35> Security in Default
^<F36> Non Income Producing
*<F37> Unregistered Security
F<F38> Foreign Securities
See notes to the financial statements
BAIRD SHORT-TERM BOND FUND
DECEMBER 31, 2005
The Baird Short-Term Bond Fund seeks an annual rate of total return, before Fund
expenses, greater than the annual rate of return of the Lehman Brothers 1-3 Year
Government/Credit Bond Index. The Lehman Brothers 1-3 Year Government/Credit
Bond Index is an unmanaged, market value weighted index of investment grade,
fixed rate debt including government and corporate securities with maturities
between one and three years.
The Fund outperformed the Index in 2005, although absolute returns were modest.
An overweighting of shorter BBB-rated corporate bonds and exposure to mortgage-
backed and asset-backed securities contributed positively to the Fund's
performance. The Fund's exposure to individual issues in the auto and media
sectors detracted from relative performance in 2005. The Fund maintained its
duration-neutral strategy vis-a-vis the Index, holding a broadly diversified
portfolio of over 150 securities at year end.
The Fund ended 2005 with a yield advantage versus the Index. This yield
advantage, combined with exposure to specific sectors which we believe have
superior total return potential (mortgage and asset-backed securities and issues
in the auto and media sectors), enhance the Fund's prospects of continuing to
add value over its benchmark in the coming year.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F39>
U.S. Treasury 10%
U.S. Gov't Agency 27%
AAA 21%
AA 5%
A 14%
BBB 22%
Below BBB 1%
SECTOR WEIGHTINGS*<F39>
Asset-Backed 11%
Financials 19%
Industrials 16%
Utilities 5%
Mortgage-Backed 10%
International 1%
Municipal 2%
U.S. Gov't Agency 23%
U.S. Treasuries 10%
Cash 3%
NET ASSETS: $97,057,968
SEC 30-DAY YIELD:**<F40>
Institutional Class: 4.74%
AVERAGE DURATION: 1.77 years
AVERAGE MATURITY: 2.94 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
PORTFOLIO TURNOVER RATIO:***<F41> 31.8%
TOTAL NUMBER OF HOLDINGS: 155
*<F39> Percentages shown are based on the Fund's total net assets.
**<F40> SEC yields are based on SEC guidelines and are calculated for the 30
days ended December 31, 2005.
***<F41> Not annualized.
BAIRD SHORT-TERM BOND FUND
BAIRD SHORT-TERM BOND FUND - INSTITUTIONAL CLASS*<F42>
VALUE OF A $250,000 INVESTMENT
Baird Short-Term Bond Fund - Lehman 1-3 Year U.S.
Date Institutional Class Shares Government/Credit Index
---- ---------------------------- -----------------------
8/31/2004 $250,000 $250,000
9/30/2004 $249,602 $249,862
12/31/2004 $250,238 $250,114
3/31/2005 $249,651 $249,411
6/30/2005 $252,823 $252,509
9/30/2005 $253,151 $252,834
12/31/2005 $254,859 $254,548
GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION
DATE (8/31/04), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
*<F42> The Baird Short-Term Bond Fund is currently offering only the
Institutional Class shares to investors.
BAIRD SHORT-TERM BOND FUND
AVERAGE ANNUAL TOTAL RETURNS
For the Periods Ended December 31, 2005 ONE YEAR SINCE INCEPTION(1)<F43>
- --------------------------------------- -------- -----------------------
Baird Short-Term Bond Fund - Institutional Class 1.85% 1.45%
Lehman Brothers 1-3 Year Government/Credit Bond Index(2)<F44> 1.77% 1.36%
(1)<F43> For the period from August 31, 2004 (commencement of operations) to
December 31, 2005.
(2)<F44> The Lehman Brothers 1-3 Year Government/Credit Bond Index is an
unmanaged, market value weighted index of investment grade, fixed-
rate debt including government and corporate securities with
maturities between one and three years. This index does not reflect
any deduction for fees, expenses or taxes. A direct investment in
an index is not possible.
THE RETURNS IN THE LINE GRAPH AND TABLE ABOVE REFLECT REINVESTMENT OF DIVIDENDS
AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. RETURNS DO NOT REFLECT
THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE
REDEMPTION OF FUND SHARES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
FOR INFORMATION ABOUT THE PERFOMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM.
BAIRD SHORT-TERM BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
Principal
Amount Value
--------- -----
LONG-TERM INVESTMENTS - 96.7%
ASSET-BACKED SECURITIES - 11.2%
$ 150,000 Advanta Business Card
Master Trust,
Series 2003-B, Class A,
2.95%, 12/20/2008 $ 150,229
400,000 AESOP Funding II LLC,
Series 2005-1A, Class A1,
3.95%, 04/20/2008 391,428
500,000 Bayview Financial
Acquisition Trust,
Series 2005-B, Class 1A2,
4.70%, 04/28/2039 494,275
250,000 Capital One Multi-Asset
Execution Trust,
Series 2003-A1, Class A1,
3.20%, 01/15/2009 250,207
120,000 Chase Manhattan Auto
Owner Trust,
Series 2003-C, Class A4,
2.94%, 06/15/2010 117,145
850,370 Chemical Master Credit
Card Trust I:
Series 1996-2, Class A,
5.98%, 09/15/2008 850,825
475,000 Series 1996-3, Class A,
7.09%, 02/15/2009 479,854
CitiFinancial Mortgage
Securities, Inc.:
14,776 Series 2003-2, Class AF2,
2.13%, 05/25/2033 14,729
208,949 Series 2003-3, Class AF2,
3.08%, 08/25/2033 207,494
400,000 CNH Equipment Trust,
Series 2005-A, Class A3,
4.02%, 04/15/2009 395,626
Countrywide Asset-Backed
Certificates:
118,553 Series 2004-10, Class AF2,
3.32%, 05/25/2022 118,156
71,675 Series 2004-9, Class AF2,
3.34%, 09/25/2023 71,455
1,000,000 Series 2005-10, Class AF2,
4.49%, 02/25/2036 987,471
1,153,000 Series 2005-12, Class 1A2,
4.85%, 02/25/2036 1,144,523
725,000 Series 2005-13, Class AF2,
5.29%, 04/25/2036 725,354
500,000 Ford Credit Auto
Owner Trust,
Series 2005-B, Class A4,
4.38%, 01/15/2010 495,123
175,000 Household Automobile
Trust, 2.22%, 11/17/2009 170,856
300,000 MBNA Credit Card
Master Note Trust,
Series 2003-A3, Class A3,
2.93%, 08/15/2010 300,732
416,940 New Century Home
Equity Loan Trust,
Series 2003-5, Class AI3,
3.56%, 11/25/2033 414,513
347,733 Renaissance Home
Equity Loan Trust,
Series 2004-3, Class AF2,
3.57%, 11/25/2034 344,989
Residential Asset Mortgage
Products, Inc.:
29,807 Series 2003-RS9, Class AI3,
3.61%, 10/25/2028 29,692
140,000 Series 2003-RS7, Class AI6,
5.34%, 08/25/2033 139,598
Residential Asset Securities
Corporation:
145,744 Series 2003-KS5, Class AI3,
2.28%, 07/25/2028 144,934
383,231 Series 2003-KS9, Class AI3,
3.25%, 12/25/2028 378,936
1,000,000 Series 2004-KS2, Class AI3,
3.02%, 05/25/2029 986,594
593,450 Series 2003-KS10, Class AI3,
3.25%, 05/25/2029 589,824
504,754 Residential Funding
Mortgage Securities,
Series 2003-HS3, Class AI2,
3.15%, 07/25/2018 497,203
-----------
10,891,765
-----------
FINANCIAL - 19.4%
ABN-AMRO Bank NV,
880,000 7.00%, 04/01/2008 918,678
250,000 Ahmanson Capital
Trust I Bonds,
8.36%, 12/01/2026
(Acquired 08/25/2005,
Cost $270,100)*<F46> 264,640
380,000 Allfirst Financial, Inc.
Subordinated Notes,
7.20%, 07/01/2007 393,561
140,000 American General
Finance Corporation Notes,
4.50%, 11/15/2007 139,087
594,000 Bank of Oklahoma
Subordinated Notes,
7.13%, 08/15/2007 614,682
251,000 Bank United Notes,
8.00%, 03/15/2009 274,544
472,000 Bankers Trust Corporation
Subordinated Notes,
7.38%, 05/01/2008 497,013
110,000 BB&T Corporation
Subordinated Notes,
7.25%, 06/15/2007 113,509
400,000 Bear Stearns & Co. Inc.
Notes, 7.80%, 08/15/2007 417,810
623,000 Block Financial
Corporation Notes,
8.50%, 04/15/2007 648,534
1,000,000 BNY Capital I Notes,
Series B,
7.97%, 12/31/2026 1,063,471
500,000 Capital One Bank Notes,
4.88%, 05/15/2008 497,965
100,000 Chubb Corporation
Senior Notes,
7.13%, 12/15/2007 103,867
210,000 CIT Group Inc.
Senior Notes,
5.50%, 11/30/2007 212,062
643,000 Citicorp Capital II Notes,
8.02%, 02/15/2027 686,826
200,000 Citicorp Subordinated Notes,
7.00%, 07/01/2007 206,075
375,000 Citifinancial Debentures,
10.00%, 05/15/2009 431,249
675,000 Comerica Incorporated
Subordinated Notes,
7.25%, 08/01/2007 698,564
537,000 Credit Suisse First Boston
USA Inc. Senior Notes,
6.50%, 06/01/2008 554,865
200,000 Franchise Finance
Corporation Notes,
7.07%, 01/15/2008 209,550
400,000 HSBC Finance
Corporation Notes,
6.88%, 03/01/2007 407,878
500,000 ING Security Life
Institutional Funding Notes,
2.70%, 02/15/2007
(Acquired 05/26/2005;
Cost $492,335)*<F46> 485,953
200,000 J.P. Morgan & Company
Incorporated Subordinated
Notes, 6.70%, 11/01/2007 205,694
325,000 Key Bank NA
Subordinated Notes,
6.50%, 10/15/2027 334,774
KeyCorp
Subordinated Notes:
100,000 6.75%, 03/15/2006 100,366
200,000 7.50%, 06/15/2006 202,209
Lehman Brothers
Holdings, Inc. Notes:
203,000 8.50%, 05/01/2007 212,046
400,000 3.50%, 08/07/2008 386,061
500,000 MBNA Corporation Notes,
6.25%, 01/17/2007 505,695
500,000 MBNA Europe Funding PLC,
3.88%, 09/07/2007
(Acquired 08/30/2005,
Cost $500,000)*<F46> F<F47> 500,185
180,000 Merrill Lynch & Co, Inc.,
7.00%, 01/15/2007 183,994
200,000 Met Life Global Funding I
Notes, 4.75%, 06/20/2007
(Acquired 02/11/2005;
Cost $203,862)*<F46> 199,312
200,000 Morgan Stanley Group,
Inc. Debentures,
8.33%, 01/15/2007 206,414
700,000 Phoenix Companies,
6.68%, 02/16/2008 706,554
633,000 PNC Financial Services
Subordinated Notes,
9.65%, 06/15/2009 724,036
Principal Life Global:
150,000 5.13%, 06/28/2007
(Acquired 12/28/2004,
Cost $154,880)*<F46> 150,016
275,000 3.63%, 04/30/2008
(Acquired 08/17/2005,
Cost $268,735)*<F46> 267,210
1,050,000 Providian Capital I,
9.53%, 02/01/2027
(Acquired 10/19/2005
and 10/20/2005, Cost
$438,724 and $712,517,
respectively)*<F46> 1,137,942
300,000 Reliastar Financial Notes,
8.00%, 10/30/2006 306,621
155,000 Republic New York
Corporation Subordinated
Notes, 9.70%, 02/01/2009 174,551
487,000 SAFECO Corporation
Senior Notes,
6.88%, 07/15/2007 498,425
300,000 Santander Financial
Issuances,
7.25%, 05/30/2006 F<F47> 302,759
750,000 Southern Company
Capital Trust I,
8.19%, 02/01/2037 799,934
200,000 Transamerica Corporation
Debentures,
9.38%, 03/01/2008 216,398
162,000 Washington Mutual, Inc.
Notes, 7.50%, 08/15/2006 164,459
313,000 Wells Fargo & Company
Subordinated Notes,
6.25%, 04/15/2008 322,654
211,000 Westdeutsche Landesbank
Subordinated Notes,
4.80%, 07/15/2015 206,983
-----------
18,855,675
-----------
INDUSTRIAL - 16.1%
306,000 Bell Telephone Co.
Pennsylvania Debentures,
7.38%, 07/15/2007 315,239
150,000 BellSouth Telecommunication
Debentures,
5.88%, 01/15/2009 153,529
375,000 Bunge Limited Finance
Corporation,
4.38%, 12/15/2008 368,529
700,000 Cadbury Schweppes U.S.
Finance Notes,
3.88%, 10/01/2008
(Acquired 08/30/2005,
Cost $685,854)*<F46> 679,785
420,000 Caremark RX Inc.
Senior Notes,
7.38%, 10/01/2006 427,160
500,000 Clear Channel
Communication Senior
Notes, 3.13%, 02/01/2007 488,897
200,000 Comcast Cable
Communications, Inc. Notes,
6.20%, 11/15/2008 205,307
300,000 Conagra Foods, Inc. Notes,
6.00%, 09/15/2006 302,077
386,000 Cooper Cameron
Corporation Senior Notes,
2.65%, 04/15/2007 373,209
600,000 Corning Inc. Notes,
6.30%, 03/01/2009 615,829
279,000 Devon Energy
Corporation Debentures,
10.13%, 11/15/2009 325,760
1,000,000 Fiserv Inc.,
3.00%, 06/27/2008 945,904
300,000 Ford Motor Credit
Company Senior Notes,
4.95%, 01/15/2008 268,798
600,000 France Telecom SA Notes,
7.07%, 03/01/2006 F<F47> 602,407
General Motors Acceptance
Corporation Notes:
200,000 6.75%, 01/15/2006 199,868
200,000 6.13%, 09/15/2006 194,271
250,000 6.13%, 08/28/2007 231,744
225,000 Halliburton Company
Notes, 5.63%, 12/01/2008 229,514
260,000 Harrahs Operating
Company Inc.,
7.13%, 06/01/2007 266,598
700,000 ICI North America
Debentures,
8.88%, 11/15/2006 721,101
International Paper
Company Notes:
500,000 7.00%, 08/15/2006 504,243
250,000 7.63%, 01/15/2007 254,866
600,000 Johnson Controls Inc.
Notes, 6.30%, 02/01/2008 613,745
Marathon Oil
Corporation Notes:
310,000 5.38%, 06/01/2007 311,653
463,000 6.85%, 03/01/2008 481,083
450,000 News America Holdings,
7.38%, 10/17/2008 475,045
402,000 Southwestern Bell
Telephone Company Notes,
6.63%, 07/15/2007 411,308
Sprint Capital
Corporation Notes:
175,000 6.00%, 01/15/2007 176,711
500,000 6.38%, 05/01/2009 518,949
300,000 Telecom Italia Capital,
4.00%, 11/15/2008 F<F47> 290,938
686,000 Telus Corporation Notes,
7.50%, 06/01/2007 F<F47> 708,388
255,000 Time Warner Companies,
Inc., 8.18%, 08/15/2007 266,738
600,000 Tyco International Group
S.A., 6.38%, 02/15/2006 F<F47> 600,980
217,000 Union Pacific Corporation,
6.40%, 02/01/2006 217,233
600,000 Univision
Communication, Inc.,
3.50%, 10/15/2007 582,043
500,000 Viacom, Inc.,
5.63%, 05/01/2007 502,662
784,000 Waste Management Inc.
Notes, 7.00%, 10/15/2006 794,775
-----------
15,626,886
-----------
UTILITIES - 4.9%
391,000 American Electric Power
Notes, 6.13%, 05/15/2006 392,768
300,000 Baltimore Gas & Electric
Company Notes,
5.25%, 12/15/2006 300,783
189,000 FPL Group Capital, Inc.
Notes, 7.63%, 09/15/2006 192,441
220,000 Indiana Michigan Power
Company Senior Notes,
Series C, 6.13%,
12/15/2006 222,126
211,000 Jersey Central Power
& Light Company
1st Mortgage,
6.85%, 11/27/2006 214,266
MidAmerican Energy
Holdings Company
Senior Notes:
200,000 4.63%, 10/01/2007 198,555
575,000 7.63%, 10/15/2007 599,260
245,000 PanEnergy Corporation
Notes, 7.00%, 10/15/2006 247,379
475,000 Pepco Holdings, Inc. Notes,
3.75%, 02/15/2006 474,407
500,000 Progress Energy, Inc.
Senior Notes,
6.75%, 03/01/2006 501,570
300,000 PSEG Power LLC,
6.88%, 04/15/2006 301,554
200,000 Public Service Electric &
Gas Co. Notes,
6.25%, 01/01/2007 202,748
860,000 System Energy Resources
1st Mortgage,
4.88%, 10/01/2007 853,933
-----------
4,701,790
-----------
MORTGAGE-BACKED SECURITIES - 10.1%
Bank of America
Alternative Loan Trust,
1,334,797 Series 2003-4, Class 2A1,
5.00%, 06/25/2018 1,319,889
Citicorp Mortgage
Securities, Inc.:
301,918 Series 2003-11, Class 2A8,
5.50%, 12/25/2033 301,422
887,430 Series 2004-3, Class A2,
5.25%, 05/25/2034 880,032
312,823 Series 2004-4, Class A2,
5.25%, 06/25/2034 304,236
975,665 Countrywide Alternative
Loan Trust Series
2005-50CB, Class 4A1,
5.00%, 11/25/2020 965,694
1,000,000 Deutsche Alternative
Securities Inc. Mortgage,
Series 2005-4, Class A2,
5.05%, 09/25/2035 991,501
Federal Home Loan
Mortgage Corporation
(FHLMC):
166,682 Series 2548, Class HA,
4.50%, 01/15/2010 165,415
238,162 Series 2835, Class VK,
5.50%, 11/15/2012 239,881
729,557 Series 3033, Class LU,
5.50%, 03/15/2013 740,441
200,000 Series 2592, Class PD,
5.00%, 07/15/2014 199,837
266,702 Series 2789, Class VM,
5.50%, 04/15/2015 269,072
Federal National
Mortgage Association
(FNMA):
936,383 5.50%, 07/01/2015 944,978
200,000 Series 2003-4, Class PC,
5.00%, 12/25/2014 199,622
1,175,000 Series 2003-24, Class LC,
5.00%, 12/25/2015 1,171,453
250,000 Series 2002-94, Class BG,
5.00%, 04/25/2016 249,414
Washington Mutual,
834,796 Series 2004-CB4, Class 21A,
5.50%, 12/25/2019 836,611
-----------
9,779,498
-----------
INTERNATIONAL (U.S. $ DOMINATED) - 1.0%
175,000 Export-Import Bank
Korea Notes,
4.63%, 03/16/2010 F<F47> 172,096
200,000 PEMEX Project Funding
Master Trust:
6.13%, 08/15/2008 F<F47> 204,000
600,000 Korea Development
Bank Notes,
3.88%, 03/02/2009 F<F47> 580,524
-----------
956,620
-----------
TAXABLE MUNICIPAL BONDS - 1.5%
190,000 Erie, Pennsylvania
General Obligation,
5.60%, 11/15/2007 191,305
450,000 New Jersey Economic
Development Authority,
0.00%, 02/15/2007 ^<F45> ETM 427,081
605,000 Redding California
Redevelopment Agency
Tax Allocation,
6.00%, 09/01/2010 624,638
229,321 Tobacco Settlement
Financing Corporation,
Series 2001-A, Class A,
6.36%, 05/15/2025 231,080
-----------
1,474,104
-----------
U.S. GOVERNMENT AGENCY ISSUES - 22.6%
1,000,000 Federal Home Loan
Bank (FHLB),
4.70%, 10/07/2010 984,064
Federal National Mortgage
Association (FNMA):
11,675,000 2.38%, 02/15/2007 11,371,053
8,150,000 7.25%, 01/15/2010 8,880,085
750,000 Government Backed
Trusts, Series T-1,
0.00%, 11/15/2006 ^<F45> 721,178
-----------
21,956,380
-----------
U.S. TREASURY OBLIGATIONS - 9.9%
U.S. Treasury Notes:
3,300,000 3.00%, 12/31/2006 3,253,464
3,850,000 3.25%, 08/15/2008 3,743,374
2,500,000 6.00%, 08/15/2009 2,634,765
-----------
9,631,603
-----------
Total Long-Term
Investments
(Cost $94,879,882) 93,874,321
-----------
Shares
- ------
SHORT-TERM INVESTMENTS - 4.2%
MONEY MARKET FUND - 4.2%
4,070,651 Investment Company
Cash Reserve Portfolio-
AIM Fund 4,070,651
-----------
Total Short-Term
Investments
(Cost $4,070,651) 4,070,651
-----------
Total Investments
(Cost $98,950,533) -
100.9% 97,944,972
-----------
Liabilities in Excess
of Other Assets - (0.9)% (887,004)
-----------
TOTAL NET
ASSETS - 100.0% $97,057,968
-----------
-----------
Percentages are stated as a percent of net assets.
^<F45> Non-Income Producing Security
*<F46> Unregistered Security
F<F47> Foreign Security
ETM Escrow to Maturity
See notes to the financial statements
BAIRD FUNDS, INC.
ADDITIONAL INFORMATION ON FUND EXPENSES DECEMBER 31, 2005
EXAMPLE
As a shareholder of a mutual fund, you incur two types of costs: (1) transaction
costs, which may include sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, such as management fees; distribution and/or service (12b-1)
fees; and other fund expenses. Although the Funds do not charge any sales
loads, redemption fees, or other transaction fees, you will be assessed fees for
outgoing wire transfers, returned checks and stop payment orders at prevailing
rates charged by U.S. Bancorp Fund Services, LLC, the Funds' transfer agent. If
you request that a redemption be made by wire transfer, currently the Funds'
transfer agent charges a $15.00 fee.
This Example is intended to help you understand your ongoing costs (in dollars)
of investing in each Fund and to compare these costs with the ongoing costs of
investing in other mutual funds. The Example is based on an investment of
$1,000 invested at the beginning of the period and held for the entire period
(7/1/05 - 12/31/05).
ACTUAL EXPENSES
The third and fourth columns of the table below provide information about
account values based on actual returns and actual expenses. You may use the
information in these columns, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the fourth column entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fifth and sixth columns of the table below provide information about
hypothetical account values and hypothetical expenses based on the Funds' actual
expense ratios and an assumed rate of return of 5% per year before expenses,
which is not the Funds' actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Funds and other mutual funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other mutual funds. Please note that
the expenses shown in the table are meant to highlight your ongoing costs only
and do not reflect any transactional costs. Therefore, the sixth column of the
table (entitled "Expenses Paid During Period") is useful in comparing ongoing
costs only, and will not help you determine the relative total costs of owning
different mutual funds. In addition, if these transactional costs were included,
your costs could have been higher.
ACTUAL VS. HYPOTHETICAL RETURNS
For the Six Months Ended December 31, 2005
HYPOTHETICAL (5% RETURN
ACTUAL BEFORE EXPENSES)
-------------------------- --------------------------
FUND'S BEGINNING ENDING EXPENSES ENDING EXPENSES
ANNUALIZED ACCOUNT ACCOUNT PAID ACCOUNT PAID
EXPENSE VALUE VALUE DURING VALUE DURING
RATIO(1)<F48> 7/1/05 12/31/05 PERIOD(1)<F48> 12/31/05 PERIOD(1)<F48>
------------- --------- -------- -------------- -------- --------------
BAIRD INTERMEDIATE BOND FUND
Institutional Class 0.30% $1,000.00 $1,000.40 $1.51 $1,023.69 $1.53
Investor Class 0.55% $1,000.00 $ 999.10 $2.77 $1,022.43 $2.80
BAIRD AGGREGATE BOND FUND
Institutional Class 0.30% $1,000.00 $ 999.50 $1.51 $1,023.69 $1.53
Investor Class 0.55% $1,000.00 $ 997.40 $2.77 $1,022.43 $2.80
BAIRD INTERMEDIATE MUNICIPAL
BOND FUND
Institutional Class 0.30% $1,000.00 $ 999.80 $1.51 $1,023.69 $1.53
Investor Class 0.55% $1,000.00 $ 998.50 $2.77 $1,022.43 $2.80
BAIRD CORE PLUS BOND FUND
Institutional Class 0.30% $1,000.00 $ 994.40 $1.51 $1,023.69 $1.53
Investor Class 0.55% $1,000.00 $ 993.40 $2.76 $1,022.43 $2.80
BAIRD SHORT-TERM BOND FUND
Institutional Class 0.30% $1,000.00 $1,008.00 $1.52 $1,023.69 $1.53
(1)<F48> Expenses are equal to the Fund's annualized expense ratio multiplied
by the average account value over the period, multiplied by 184 days
and divided by 365 to reflect the one-half year period.
BAIRD FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2005
BAIRD
BAIRD BAIRD INTERMEDIATE BAIRD BAIRD
INTERMEDIATE AGGREGATE MUNICIPAL CORE PLUS SHORT-TERM
BOND FUND BOND FUND BOND FUND BOND FUND BOND FUND
------------ --------- ------------ --------- ----------
ASSETS:
Investments, at value (cost $239,561,356,
$226,939,345, $53,909,839, and $32,711,257
and $98,950,533 respectively) $237,374,510 $226,352,620 $53,951,256 $32,443,179 $97,944,972
Cash 14,553 8,732 -- 2,911 --
Interest receivable 3,754,082 3,113,643 948,528 449,753 1,295,894
Receivable for Fund shares sold 235,000 138,143 443,197 6,475 536,131
------------ ------------ ----------- ----------- -----------
Total assets 241,378,145 229,613,138 55,342,981 32,902,318 99,776,997
------------ ------------ ----------- ----------- -----------
LIABILITIES:
Payable for securities purchased 1,414,317 1,125,527 -- 196,967 2,673,435
Payable for Fund shares purchased 5,187,506 502 1,000 38,547 21,500
Payable to Advisor and Distributor 63,109 50,867 18,467 8,594 24,094
Payable to the Custodian 82,747 5,422 -- -- --
Other liabilities -- 8,495 -- 35,042 --
------------ ------------ ----------- ----------- -----------
Total liabilities 6,747,679 1,190,813 19,467 279,150 2,719,029
------------ ------------ ----------- ----------- -----------
NET ASSETS $234,630,466 $228,422,325 $55,323,514 $32,623,168 $97,057,968
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
NET ASSETS CONSIST OF:
Capital stock $238,209,625 $229,105,188 $55,498,092 $32,948,372 $98,186,511
Accumulated undistributed net
investment income 154,379 10,472 19,139 -- 40,220
Accumulated net realized gain (loss)
on investments sold (1,546,692) (106,610) (235,134) (57,126) (163,202)
Net unrealized appreciation (depreciation)
on investments (2,186,846) (586,725) 41,417 (268,078) (1,005,561)
------------ ------------ ----------- ----------- -----------
NET ASSETS $234,630,466 $228,422,325 $55,323,514 $32,623,168 $97,057,968
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
INSTITUTIONAL CLASS SHARES
Net assets $231,800,807 $227,132,399 $53,831,848 $32,173,459 $97,057,968
Shares outstanding ($0.01 par value,
unlimited shares authorized) 21,970,265 21,554,417 5,095,975 3,199,736 9,912,823
Net asset value, offering and
redemption price per share $ 10.55 $ 10.54 $ 10.56 $ 10.06 $ 9.79
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
INVESTOR CLASS SHARES
Net assets $ 2,829,659 $ 1,289,926 $ 1,491,666 $ 449,709
Shares outstanding ($0.01 par value,
unlimited shares authorized) 260,531 119,948 138,700 43,664
Net asset value, offering and
redemption price per share $ 10.86 $ 10.75 $ 10.75 $ 10.30
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2005
BAIRD
BAIRD BAIRD INTERMEDIATE BAIRD BAIRD
INTERMEDIATE AGGREGATE MUNICIPAL CORE PLUS SHORT-TERM
BOND FUND BOND FUND BOND FUND BOND FUND BOND FUND
------------ --------- ------------ --------- ----------
INVESTMENT INCOME:
Interest income $10,104,354 $7,208,612 $1,876,463 $1,693,252 $2,544,668
----------- ---------- ---------- ---------- ----------
Total investment income 10,104,354 7,208,612 1,876,463 1,693,252 2,544,668
----------- ---------- ---------- ---------- ----------
EXPENSES:
Investment advisory fee 544,767 370,489 119,102 81,034 166,443
Administration fee 108,953 74,097 23,820 16,207 33,288
Distribution expense - Investor Class Shares 7,415 2,467 6,704 767 --
----------- ---------- ---------- ---------- ----------
Total expenses 661,135 447,053 149,626 98,008 199,731
----------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME 9,443,219 6,761,559 1,726,837 1,595,244 2,344,937
----------- ---------- ---------- ---------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments (687,811) 294,456 (209,761) 22,747 (162,401)
Change in unrealized appreciation/
depreciation on investments (4,795,310) (3,005,159) (847,084) (938,103) (797,479)
----------- ---------- ---------- ---------- ----------
Net realized and unrealized
loss on investments (5,483,121) (2,710,703) (1,056,845) (915,356) (959,880)
----------- ---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 3,960,098 $4,050,856 $ 669,992 $ 679,888 $1,385,057
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD INTERMEDIATE BOND FUND
-------------------------------------
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
OPERATIONS:
Net investment income $ 9,443,219 $ 7,270,283
Net realized loss on investments (687,811) (599,286)
Change in unrealized appreciation/depreciation on investments (4,795,310) (282,245)
------------ ------------
Net increase in net assets resulting from operations 3,960,098 6,388,752
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 71,651,001 67,465,697
Shares issued to holders in reinvestment of dividends 8,680,587 6,659,149
Cost of shares redeemed (34,654,355) (29,883,566)
------------ ------------
Net increase in net assets resulting from capital share transactions 45,677,233 44,241,280
------------ ------------
DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (9,464,170) (7,099,177)
From realized gains -- (27,024)
------------ ------------
Total Distributions (9,464,170) (7,126,201)
------------ ------------
DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS:
From net investment income (118,722) (85,930)
From realized gains -- (377)
------------ ------------
Total Distributions (118,722) (86,307)
------------ ------------
TOTAL INCREASE IN NET ASSETS 40,054,439 43,417,524
NET ASSETS:
Beginning of year 194,576,027 151,158,503
------------ ------------
End of year (including undistributed net investment
income of $84,156 and $223,829, respectively) $234,630,466 $194,576,027
------------ ------------
------------ ------------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD AGGREGATE BOND FUND
------------------------------------
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
OPERATIONS:
Net investment income $ 6,761,559 $ 4,787,456
Net realized gain on investments 294,456 425,360
Change in unrealized appreciation/depreciation on investments (3,005,159) 42,347
------------ ------------
Net increase in net assets resulting from operations 4,050,856 5,255,163
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 119,986,464 49,052,903
Shares issued to holders in reinvestment of dividends 6,520,179 4,563,691
Cost of shares redeemed (11,028,752) (29,904,273)
------------ ------------
Net increase in net assets resulting from capital share transactions 115,477,891 23,712,321
------------ ------------
DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (7,004,294) (4,819,107)
From realized gains (149,762) (311,207)
------------ ------------
Total Distributions (7,154,056) (5,130,314)
------------ ------------
DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS:
From net investment income (43,249) (13,976)
From realized gains (837) (1,852)
------------ ------------
Total Distributions (44,086) (15,828)
------------ ------------
TOTAL INCREASE IN NET ASSETS 112,330,605 23,821,342
NET ASSETS:
Beginning of year 116,091,720 92,270,378
------------ ------------
End of year (including undistributed net investment
income (loss) of $18,641 and $134,477, respectively) $228,422,325 $116,091,720
------------ ------------
------------ ------------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
--------------------------------------
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
OPERATIONS:
Net investment income $ 1,726,837 $ 1,357,546
Net realized loss on investments (209,761) (24,020)
Change in unrealized appreciation/depreciation on investments (847,084) (508,690)
----------- -----------
Net increase in net assets resulting from operations 669,992 824,836
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 29,861,346 16,224,440
Shares issued to holders in reinvestment of dividends 1,440,536 1,121,415
Cost of shares redeemed (16,406,963) (6,337,831)
----------- -----------
Net increase (decrease) in net assets resulting
from capital share transactions 14,894,919 11,008,024
----------- -----------
DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (1,658,407) (1,230,984)
----------- -----------
DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS:
From net investment income (83,967) (91,886)
----------- -----------
TOTAL INCREASE IN NET ASSETS 13,822,537 10,509,990
NET ASSETS:
Beginning of year 41,500,977 30,990,987
----------- -----------
End of year (including undistributed net investment
income of $19,139 and $34,676, respectively) $55,323,514 $41,500,977
----------- -----------
----------- -----------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD CORE PLUS BOND FUND
-------------------------------------
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
OPERATIONS:
Net investment income $ 1,595,244 $ 1,651,430
Net realized gain on investments 22,747 944,452
Change in unrealized appreciation/depreciation on investments (938,103) (365,553)
----------- -----------
Net increase in net assets resulting from operations 679,888 2,230,329
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 4,215,390 2,987,818
Shares issued to holders in reinvestment of dividends 936,473 1,182,113
Cost of shares redeemed (4,100,728) (14,342,365)
----------- -----------
Net increase (decrease) in net assets resulting
from capital share transactions 1,051,135 (10,172,434)
----------- -----------
DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (1,692,217) (1,712,108)
From realized gains (21,380) (550,721)
----------- -----------
Total Distributions (1,713,597) (2,262,829)
----------- -----------
DISTRIBUTIONS TO INVESTOR CLASS SHAREHOLDERS:
From net investment income (15,455) (5,608)
From realized gains (291) (2,085)
----------- -----------
Total Distributions (15,746) (7,693)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,680 (10,212,627)
NET ASSETS:
Beginning of year 32,621,488 42,834,115
----------- -----------
End of year (including undistributed net investment
income of $27,534 and $44,701, respectively) $32,623,168 $32,621,488
----------- -----------
----------- -----------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD SHORT-TERM BOND FUND
-----------------------------------------
For the Period
August 31, 2004(1)<F49>
Year Ended through
December 31, 2005 December 31, 2004
----------------- -----------------
OPERATIONS:
Net investment income $ 2,344,937 $ 243,185
Net realized loss on investments (162,401) (8,613)
Change in unrealized appreciation/depreciation on investments (797,479) (208,082)
----------- -----------
Net increase in net assets resulting from operations 1,385,057 26,490
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 81,066,185 33,919,057
Shares issued to holders in reinvestment of dividends 2,142,819 158,249
Cost of shares redeemed (17,200,778) (1,899,021)
----------- -----------
Net increase in net assets resulting from capital share transactions 66,008,226 32,178,285
----------- -----------
DISTRIBUTIONS TO INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (2,308,315) (231,775)
----------- -----------
TOTAL INCREASE IN NET ASSETS 65,084,968 31,973,000
NET ASSETS:
Beginning of period 31,973,000 --
----------- -----------
End of period (including undistributed net investment
income of $37,960 and $12,668, respectively) $97,057,968 $31,973,000
----------- -----------
----------- -----------
(1)<F49> Commencement of operations.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD INTERMEDIATE BOND FUND - INSTITUTIONAL CLASS
-------------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.83 $ 10.88 $ 10.86 $ 10.60 $ 10.55
------------ ------------ ------------ ------------ -----------
Income from investment operations:
Net investment income 0.46 0.47(3) 0.49 0.56 0.62(3)
<F52> <F52>
Net realized and unrealized
gains (losses) on investments (0.27) (0.05) 0.14 0.27 0.08(4)
<F53>
------------ ------------ ------------ ------------ -----------
Total from investment operations 0.19 0.42 0.63 0.83 0.70
------------ ------------ ------------ ------------ -----------
Less distributions:
Dividends from net investment income (0.47) (0.47) (0.49) (0.56) (0.62)
Distributions from net realized gains -- (0.00)(2) (0.12) (0.01) (0.03)
<F51>
------------ ------------ ------------ ------------ -----------
Total distributions (0.47) (0.47) (0.61) (0.57) (0.65)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period $ 10.55 $ 10.83 $ 10.88 $ 10.86 $ 10.60
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total return 1.77% 3.91% 5.89% 8.02% 6.68%
Supplemental data and ratios:
Net assets, end of period $231,800,807 $191,563,699 $149,836,855 $146,236,339 $89,682,104
Ratio of expenses to average net assets 0.30% 0.30% 0.30% 0.30% 0.30%
Ratio of net investment income
to average net assets 4.34% 4.32% 4.39% 5.20% 5.71%
Portfolio turnover rate(1)<F50> 42.1% 44.8% 64.4% 41.1% 79.5%
(1)<F50> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(2)<F51> Amount is less than $0.01.
(3)<F52> Calculated using average shares outstanding during the period.
(4)<F53> The amount shown may not correlate with the aggregate gains and losses
of portfolio securities due to the timing of subscriptions and
redemptions of Fund shares.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD INTERMEDIATE BOND FUND - INVESTOR CLASS
-------------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 11.13 $ 11.17 $ 11.13 $ 10.71 $ 10.56
------------ ------------ ------------ ------------ -----------
Income from investment operations:
Net investment income 0.45 0.45(3) 0.48 0.54(3) 0.59(3)
<F56> <F56> <F56>
Net realized and unrealized
gains (losses) on investments (0.28) (0.05) 0.14 0.27 0.08(4)
<F57>
------------ ------------ ------------ ------------ -----------
Total from investment operations 0.17 0.40 0.62 0.81 0.67
------------ ------------ ------------ ------------ -----------
Less distributions:
Dividends from net investment income (0.44) (0.44) (0.46) (0.38) (0.49)
Distributions from net realized gains -- (0.00)(2) (0.12) (0.01) (0.03)
<F55>
------------ ------------ ------------ ------------ -----------
Total distributions (0.44) (0.44) (0.58) (0.39) (0.52)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period $ 10.86 $ 11.13 $ 11.17 $ 11.13 $ 10.71
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total return 1.56% 3.65% 5.61% 7.74% 6.43%
Supplemental data and ratios:
Net assets, end of period $ 2,829,659 $ 3,012,328 $ 1,321,648 $ 1,127,162 $ 1,189,191
Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55%
Ratio of net investment income
to average net assets 4.09% 4.07% 4.14% 4.95% 5.46%
Portfolio turnover rate(1)<F54> 42.1% 44.8% 64.4% 41.1% 79.5%
(1)<F54> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(2)<F55> Amount is less than $0.01.
(3)<F56> Calculated using average shares outstanding during the period.
(4)<F57> The amount shown may not correlate with the aggregate gains and losses
of portfolio securities due to the timing of subscriptions and
redemptions of Fund shares.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD AGGREGATE BOND FUND - INSTITUTIONAL CLASS
-------------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.74 $ 10.71 $ 10.69 $ 10.51 $ 10.42
------------ ------------ ------------ ------------ -----------
Income from investment operations:
Net investment income 0.49(2)<F59> 0.49(2)<F59> 0.56 0.62 0.68
Net realized and unrealized
gains (losses) on investments (0.19) 0.07 0.20 0.23 0.17
------------ ------------ ------------ ------------ -----------
Total from investment operations 0.30 0.56 0.76 0.85 0.85
------------ ------------ ------------ ------------ -----------
Less distributions:
Dividends from net investment income (0.49) (0.50) (0.56) (0.62) (0.67)
Distributions from net realized gains (0.01) (0.03) (0.18) (0.05) (0.09)
------------ ------------ ------------ ------------ -----------
Total distributions (0.50) (0.53) (0.74) (0.67) (0.76)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period $ 10.54 $ 10.74 $ 10.71 $ 10.69 $ 10.51
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total return 2.85% 5.30% 7.19% 8.30% 8.33%
Supplemental data and ratios:
Net assets, end of period $227,132,399 $115,382,862 $ 91,550,534 $ 87,847,176 $83,392,652
Ratio of expenses to average net assets 0.30% 0.30% 0.30% 0.30% 0.30%
Ratio of net investment income
to average net assets 4.56% 4.58% 4.85% 5.75% 6.33%
Portfolio turnover rate(1)<F58> 46.0% 72.6% 106.7% 51.2% 79.2%
(1)<F58> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(2)<F59> Calculated using average shares outstanding throughout the period.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD AGGREGATE BOND FUND - INVESTOR CLASS
-------------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.95 $ 10.88 $ 10.84 $ 10.57 $ 10.43
------------ ------------ ------------ ------------ -----------
Income from investment operations:
Net investment income 0.47(2) 0.48(2) 0.55 0.60(2) 0.65(2)
<F61> <F61> <F61> <F61>
Net realized and unrealized
gains (losses) on investments (0.19) 0.07 0.19 0.23 0.17
------------ ------------ ------------ ------------ -----------
Total from investment operations 0.28 0.55 0.74 0.83 0.82
------------ ------------ ------------ ------------ -----------
Less distributions:
Dividends from net investment income (0.47) (0.45) (0.52) (0.51) (0.59)
Distributions from net realized gains (0.01) (0.03) (0.18) (0.05) (0.09)
------------ ------------ ------------ ------------ -----------
Total distributions (0.48) (0.48) (0.70) (0.56) (0.68)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period $ 10.75 $ 10.95 $ 10.88 $ 10.84 $ 10.57
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total return 2.54% 5.20% 6.95% 8.08% 7.98%
Supplemental data and ratios:
Net assets, end of period $ 1,289,926 $ 708,858 $ 719,844 $ 845,481 $ 166,622
Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55%
Ratio of net investment income
to average net assets 4.31% 4.33% 4.60% 5.50% 6.08%
Portfolio turnover rate(1)<F60> 46.0% 72.6% 106.7% 51.2% 79.2%
(1)<F60> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(2)<F61> Calculated using average shares outstanding during the period.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD INTERMEDIATE MUNICIPAL BOND FUND - INSTITUTIONAL CLASS
--------------------------------------------------------------------------------
March 30,
2001(1)<F62>
Year Ended December 31, through
------------------------------------------------------------- December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.81 $ 10.91 $ 10.86 $ 10.25 $ 10.00
------------ ------------ ------------ ------------ -----------
Income from investment operations:
Net investment income 0.39(2) 0.40(2) 0.42(2) 0.43(2) 0.34(2)
<F63> <F63> <F63> <F63> <F63>
Net realized and unrealized
gains (losses) on investments (0.25) (0.11) 0.10 0.64 0.17(3)
<F64>
------------ ------------ ------------ ------------ -----------
Total from investment operations 0.14 0.29 0.52 1.07 0.51
------------ ------------ ------------ ------------ -----------
Less distributions:
Dividends from net investment income (0.39) (0.39) (0.43) (0.46) (0.25)
Distributions from net realized gains -- -- (0.04) (0.00)(4) (0.01)
<F65>
------------ ------------ ------------ ------------ -----------
Total distributions (0.39) (0.39) (0.47) (0.46) (0.26)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period $ 10.56 $ 10.81 $ 10.91 $ 10.86 $ 10.25
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total return 1.33% 2.69% 4.91% 10.72% 5.02%(5)
<F66>
Supplemental data and ratios:
Net assets, end of period $ 53,831,848 $ 36,889,211 $ 30,234,195 $ 31,221,508 $14,448,572
Ratio of expenses to average net assets 0.30% 0.30% 0.30% 0.30% 0.30%(6)
<F67>
Ratio of net investment income
to average net assets 3.64% 3.70% 3.88% 4.11% 4.32%(6)
<F67>
Portfolio turnover rate(7)<F68> 13.7% 4.2% 17.7% 32.6% 14.8%(5)
<F66>
(1)<F62> Commencement of operations.
(2)<F63> Calculated using average shares outstanding during the period.
(3)<F64> The amount shown may not correlate with the aggregate gains and losses
of portfolio securities due to the timing of subscriptions and
redemptions of Fund shares.
(4)<F65> Amount is less than $0.01.
(5)<F66> Not annualized.
(6)<F67> Annualized.
(7)<F68> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD INTERMEDIATE MUNICIPAL BOND FUND - INVESTOR CLASS
---------------------------------------------------------------------------------
March 30,
2001(1)<F69>
Year Ended December 31, through
------------------------------------------------------------- December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.99 $ 11.09 $ 11.02 $ 10.27 $ 10.00
------------ ------------ ------------ ------------ -----------
Income from investment operations:
Net investment income 0.37(2) 0.38(2) 0.40(2) 0.41(2) 0.31(2)
<F70> <F70> <F70> <F70> <F70>
Net realized and unrealized
gains (losses) on investments (0.25) (0.12) 0.10 0.64 0.17(3)
<F71>
------------ ------------ ------------ ------------ -----------
Total from investment operations 0.12 0.26 0.50 1.05 0.48
------------ ------------ ------------ ------------ -----------
Less distributions:
Dividends from net investment income (0.36) (0.36) (0.39) (0.30) (0.20)
Distributions from net realized gains -- -- (0.04) (0.00)(4) (0.01)
<F72>
------------ ------------ ------------ ------------ -----------
Total distributions (0.36) (0.36) (0.43) (0.30) (0.21)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period $ 10.75 $ 10.99 $ 11.09 $ 11.02 $ 10.27
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total return 1.13% 2.40% 4.69% 10.46% 4.74%(5)
<F73>
Supplemental data and ratios:
Net assets, end of period $ 1,491,666 $ 4,611,766 $ 756,792 $ 706,207 $ 624,209
Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55%(6)
<F74>
Ratio of net investment income
to average net assets 3.39% 3.45% 3.63% 3.86% 4.07%(6)
<F74>
Portfolio turnover rate(7)<F75> 13.7% 4.2% 17.7% 32.6% 14.8%(5)
<F73>
(1)<F69> Commencement of operations.
(2)<F70> Calculated using average shares outstanding during the period.
(3)<F71> The amount shown may not correlate with the aggregate gains and losses
of portfolio securities due to the timing of subscriptions and
redemptions of Fund shares.
(4)<F72> Amount is less than $0.01.
(5)<F73> Not annualized.
(6)<F74> Annualized.
(7)<F75> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD CORE PLUS BOND FUND - INSTITUTIONAL CLASS
-------------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.38 $ 10.45 $ 10.45 $ 10.42 $ 10.45
------------ ------------ ------------ ------------ -----------
Income from investment operations:
Net investment income 0.51(2) 0.54 0.56 0.62 0.65
<F77>
Net realized and unrealized
gains (losses) on investments (0.28) 0.10 0.36 0.07 0.05
------------ ------------ ------------ ------------ -----------
Total from investment operations 0.23 0.64 0.92 0.69 0.70
------------ ------------ ------------ ------------ -----------
Less distributions:
Dividends from net investment income (0.54) (0.53) (0.56) (0.62) (0.66)
Distributions from net realized gains (0.01) (0.18) (0.36) (0.04) (0.07)
------------ ------------ ------------ ------------ -----------
Total distributions (0.55) (0.71) (0.92) (0.66) (0.73)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period $ 10.06 $ 10.38 $ 10.45 $ 10.45 $ 10.42
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total return 2.23% 6.29% 8.94% 6.90% 6.84%
Supplemental data and ratios:
Net assets, end of period $ 32,173,459 $ 32,495,641 $ 42,709,634 $ 54,221,923 $69,182,002
Ratio of expenses to average net assets 0.30% 0.30% 0.30% 0.30% 0.30%
Ratio of net investment income
to average net assets 4.92% 4.85% 4.56% 6.03% 6.25%
Portfolio turnover rate(1)<F76> 37.6% 52.5% 103.1% 66.8% 47.0%
(1)<F76> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(2)<F77> Calculated using average shares outstanding during the period.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD CORE PLUS BOND FUND - INVESTOR CLASS
-------------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.62 $ 10.67 $ 10.65 $ 10.49 $ 10.45
------------ ------------ ------------ ------------ -----------
Income from investment operations:
Net investment income 0.49(2) 0.53 0.53(2) 0.60(2) 0.64(2)
<F79> <F79> <F79> <F79>
Net realized and unrealized
gains (losses) on investments (0.29) 0.10 0.37 0.07 0.05
------------ ------------ ------------ ------------ -----------
Total from investment operations 0.20 0.63 0.90 0.67 0.69
------------ ------------ ------------ ------------ -----------
Less distributions:
Dividends from net investment income (0.51) (0.50) (0.52) (0.47) (0.58)
Distributions from net realized gains (0.01) (0.18) (0.36) (0.04) (0.07)
------------ ------------ ------------ ------------ -----------
Total distributions (0.52) (0.68) (0.88) (0.51) (0.65)
------------ ------------ ------------ ------------ -----------
Net asset value, end of period $10.30 $10.62 $10.67 $10.65 $10.49
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
Total return 1.93% 6.09% 8.60% 6.58% 6.70%
Supplemental data and ratios:
Net assets, end of period $ 449,709 $ 125,847 $ 124,481 $ 296,026 $ 258,351
Ratio of expenses to average net assets 0.55% 0.55% 0.55% 0.55% 0.55%
Ratio of net investment income
to average net assets 4.67% 4.60% 4.31% 5.78% 6.00%
Portfolio turnover rate(1)<F78> 37.6% 52.5% 103.1% 66.8% 47.0%
(1)<F78> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(2)<F79> Calculated using average shares outstanding during the period.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD SHORT-TERM BOND FUND -
INSTITUTIONAL CLASS
--------------------------------------
Year Ended August 31, 2004(1)<F80>
December 31, through
2005 December 31, 2004
------------ -----------------
Per Share Data:
Net asset value, beginning of period $ 9.93 $ 10.00
----------- -----------
Income from investment operations:
Net investment income 0.33 0.08
Net realized and unrealized
losses on investments (0.15) (0.07)
----------- -----------
Total from investment operations 0.18 0.01
----------- -----------
Less distributions:
Dividends from net investment income (0.32) (0.08)
----------- -----------
Net asset value, end of period $ 9.79 $ 9.93
----------- -----------
----------- -----------
Total return 1.85% 0.10%(2)<F81>
Supplemental data and ratios:
Net assets, end of period $97,057,968 $31,973,000
Ratio of expenses to average net assets 0.30% 0.30%(3)<F82>
Ratio of net investment income
to average net assets 3.52% 2.60%(3)<F82>
Portfolio turnover rate(4)<F83> 31.8% 16.7%(2)<F81>
(1)<F80> Commencement of operations.
(2)<F81> Not annualized.
(3)<F82> Annualized.
(4)<F83> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2005
1. ORGANIZATION
Baird Funds, Inc. (the "Corporation") was incorporated on June 9, 2000 as a
Wisconsin corporation and is registered as an open-end investment management
company under the Investment Company Act of 1940, as amended (the "1940 Act").
The accompanying financial statements include the Baird Intermediate Bond Fund,
Baird Aggregate Bond Fund, Baird Intermediate Municipal Bond Fund, Baird Core
Plus Bond Fund and Baird Short-Term Bond Fund (each, a "Fund" and collectively,
the "Funds"), five of the eight portfolios comprising the Corporation, each of
which is diversified within the meaning of the 1940 Act. Robert W. Baird & Co.
Incorporated ("Baird" or the "Advisor") serves as investment advisor to the
Funds.
The Baird Intermediate Bond Fund, Baird Aggregate Bond Fund and Baird Core Plus
Bond Fund commenced operations with the sale of both Institutional and Investor
class shares on September 29, 2000. The Baird Intermediate Municipal Bond Fund
commenced operations with the sale of both Institutional and Investor class
shares on March 30, 2001. The Baird Short-Term Bond Fund commenced operations
with the sale of Institutional Class Shares on August 31, 2004. The
Institutional Class Shares are not subject to a distribution and service (12b-1)
fee, while the Investor Class Shares are subject to a distribution and service
(12b-1) fee up to 0.25%.
The investment objective of the Baird Intermediate Bond Fund is to provide an
annual rate of total return, before Fund expenses, greater than the annual rate
of total return of the Lehman Brothers Intermediate Government/Credit Bond
Index. The Lehman Brothers Intermediate Government/Credit Bond Index is an
unmanaged, market value weighted index of investment grade, fixed-rate debt,
including government and corporate securities, with maturities between one and
ten years.
The investment objective of the Baird Aggregate Bond Fund is to provide an
annual rate of total return, before Fund expenses, greater than the annual rate
of total return of the Lehman Brothers Aggregate Bond Index. The Lehman
Brothers Aggregate Bond Index is an unmanaged, market value weighted index of
investment grade, fixed-rate debt issues, including government, corporate,
asset-backed, and mortgage-backed securities, with maturities of at least one
year.
The primary investment objective of the Baird Intermediate Municipal Bond Fund
is to provide current income that is substantially exempt from federal income
tax. A secondary objective is to provide total return with relatively low
volatility of principal.
The investment objective of the Baird Core Plus Bond Fund is to provide an
annual rate of total return, before Fund expenses, greater than the annual rate
of total return of the Lehman Brothers U.S. Universal Bond Index. The Lehman
Brothers U.S. Universal Bond Index is an unmanaged, market value weighted index
of fixed income securities issued in U.S. dollars, including U.S. government and
investment grade debt, non-investment grade debt, asset-backed and mortgage-
backed securities, Eurobonds, 144A securities and emerging market debt, with
maturities of at least one year.
The investment objective of the Baird Short-Term Bond Fund is to provide an
annual rate of total return, before Fund expenses, greater than the annual rate
of total return of the Lehman Brothers 1-3 Year Government/Credit Bond Index.
The Lehman Brothers 1-3 Year Government/Credit Bond Index is an unmanaged,
market value weighted index of investment grade, fixed-rate debt including
government and corporate securities with maturities between one and three years.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with accounting principles generally accepted in the
United States of America.
a) Investment Valuation - Because market quotations for most debt securities
are not readily available, debt securities are stated at fair value as
furnished by an independent pricing service, which uses valuation methods
such as matrix pricing and other analytical pricing models, as well as on
market transactions and dealer quotations. Debt securities purchased with
a remaining maturity of 60 days or less are valued at acquisition cost,
plus or minus any amortized discount or premium. Investments in mutual
funds are valued at their stated net asset value. Common stocks that are
listed on a securities exchange are valued at the last quoted sales price.
Securities traded on the Nasdaq Stock Market are valued at the Nasdaq
Official Closing Price. Price information on listed stocks is taken from
the exchange where the security is primarily traded. If such securities
were not traded on the valuation date they are valued at the average of the
current bid and asked price. Other assets and securities for which no
quotations are readily available are valued at fair value as determined in
good faith by a valuation committee of the Advisor pursuant to authority
delegated, and in accordance with procedures approved, by the Board of
Directors. In determining fair value, the valuation committee takes into
account all relevant factors and available information. Consequently, the
price of the security used by a Fund to calculate its NAV may differ from
quoted or published prices for the same security. Fair value pricing
involves subjective judgments and there is no single standard for
determining a security's fair value. As a result, different mutual funds
could reasonably arrive at a different fair value for the same security.
It is possible that the fair value determined for a security is materially
different from the value that could be realized upon the sale of that
security or from the values that other mutual funds may determine.
b) Unregistered Securities - Four of the Funds own certain investment
securities which are unregistered and thus restricted to resale. These
securities are valued by the Funds after giving due consideration to
pertinent factors including recent private sales, market conditions and the
issuer's financial performance. The value of such securities for the Baird
Intermediate Bond, Baird Aggregate Bond, Baird Core Plus Bond and Baird
Short-Term Bond Funds were $11,830,828 (5.04% of net assets), $7,261,419
(3.18% of net assets), $2,181,632 (6.69% of net assets) and $3,685,043
(3.80% of net assets), respectively, at December 31, 2005. Restricted
securities may be deemed to be liquid as determined by the Advisor based on
several factors. These securities generally consist of securities issued
pursuant to Rule 144A under the Securities Act of 1933.
c) Foreign Securities - The Funds may invest in U.S. dollar-denominated debt
obligations of foreign companies and foreign governments. Investing in
securities of foreign companies and foreign governments involves special
risks and consideration not typically associated with investing in U.S.
companies and the U.S. government. These risks include currency rate
fluctuations, political and economic instability and differences in
financial reporting standards and less strict regulation of securities
markets. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies and the U.S.
government. Occasionally, events that affect these values and exchange
rates may occur after the close of the exchange on which such securities
are traded. If such events materially affect the value of a Fund's
securities, these securities may be valued at their fair value pursuant to
procedures adopted by the Board of Directors.
d) Federal Income Taxes - The Funds intend to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of their taxable income to their
shareholders in a manner which results in no tax cost to the Funds.
Therefore, no federal income or excise tax provision is recorded.
e) Allocation of Income and Expenses - Each Fund is charged for those expenses
directly attributable to it. Expenses directly attributable to a class of
shares, such as Rule 12b-1 distribution fees, are charged to that class of
shares. Income, expenses and realized and unrealized gains and losses are
allocated to the classes based on their respective net assets. Expenses
that are not directly attributable to a Fund are allocated among the Funds
in the series in proportion to their assets.
f) Distributions to Shareholders - Dividends from net investment income are
declared and paid monthly. Distributions of net realized capital gains, if
any, are declared and paid at least annually.
g) Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
h) Other - Investment and shareholder transactions are recorded on trade date.
The Funds determine the gain or loss realized from investment transactions
by comparing the original cost of the security lot sold with the net sales
proceeds. Dividend income is recognized on the ex-dividend date and
interest income is recognized on an accrual basis. Premiums and discounts
on the purchase of securities are amortized/accreted using the effective
interest method. Accounting principles generally accepted in the United
States of America require that permanent financial reporting and tax
differences be reclassified in the capital accounts.
i) Guarantees and Indemnifications - In the normal course of business, the
Funds enter into contracts with service providers that contain general
indemnification clauses. The Funds' maximum exposure under these
arrangements is unknown and would involve future claims against the Funds
that have not yet occurred. Based on experience, the Funds would expect
the risk of loss to be remote.
3. CAPITAL SHARE TRANSACTIONS
The following table summarizes the capital share transactions of each Fund for
the past two fiscal periods:
BAIRD INTERMEDIATE BOND FUND
Year Ended Year Ended
December 31, 2005 December 31, 2005
--------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $ 71,323,424 6,670,157 Shares sold $ 327,577 29,867
Shares issued through Shares issued through
reinvestment of dividends 8,583,507 804,972 reinvestment of dividends 97,080 8,844
Shares redeemed (34,120,091) (3,198,827) Shares redeemed (534,264) (48,785)
------------ ---------- ---------- -------
Net Increase $ 45,786,840 4,276,302 Net Decrease $ (109,607) (10,074)
------------ ----------
------------ ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 17,693,963 Beginning of period 270,605
---------- -------
End of period 21,970,265 End of period 260,531
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2004 December 31, 2004
--------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $ 65,558,500 6,038,526 Shares sold $1,907,197 170,365
Shares issued through Shares issued through
reinvestment of dividends 6,589,217 608,839 reinvestment of dividends 69,932 6,291
Shares redeemed (29,612,681) (2,727,641) Shares redeemed (270,885) (24,345)
------------ ---------- ---------- -------
Net Increase $ 42,535,036 3,919,724 Net Increase $1,706,244 152,311
------------ ----------
------------ ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 13,774,239 Beginning of period 118,294
---------- -------
End of period 17,693,963 End of period 270,605
---------- -------
---------- -------
BAIRD AGGREGATE BOND FUND
Year Ended Year Ended
December 31, 2005 December 31, 2005
--------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $119,199,176 11,216,865 Shares sold $ 787,288 72,544
Shares issued through Shares issued through
reinvestment of dividends 6,483,075 609,270 reinvestment of dividends 37,104 3,418
Shares redeemed (10,800,456) (1,013,347) Shares redeemed (228,296) (20,735)
------------ ---------- --------- -------
Net Increase $114,881,795 10,812,788 Net Increase $ 596,096 55,227
------------ ---------
------------ ---------
Shares Outstanding: Shares Outstanding:
Beginning of period 10,741,629 Beginning of period 64,721
---------- -------
End of period 21,554,417 End of period 119,948
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2004 December 31, 2004
-------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $ 48,367,650 4,492,828 Shares sold $ 685,253 62,158
Shares issued through Shares issued through
reinvestment of dividends 4,549,171 425,224 reinvestment of dividends 14,520 1,326
Shares redeemed (29,182,312) (2,725,437) Shares redeemed (721,961) (64,948)
------------ ---------- --------- -------
Net Increase $ 23,734,509 2,192,615 Net Decrease $ (22,188) (1,464)
------------ ---------
------------ ---------
Shares Outstanding: Shares Outstanding:
Beginning of period 8,549,014 Beginning of period 66,185
---------- -------
End of period 10,741,629 End of period 64,721
---------- -------
---------- -------
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
Year Ended Year Ended
December 31, 2005 December 31, 2005
--------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $ 28,720,646 2,699,678 Shares sold $ 1,140,700 104,296
Shares issued through Shares issued through
reinvestment of dividends 1,391,125 130,582 reinvestment of dividends 49,411 4,548
Shares redeemed (12,175,572) (1,147,777) Shares redeemed (4,231,391) (389,626)
------------ ---------- ----------- --------
Net Increase $ 17,936,199 1,682,483 Net Decrease $(3,041,280) (280,782)
------------ -----------
------------ -----------
Shares Outstanding: Shares Outstanding:
Beginning of period 3,413,492 Beginning of period 419,482
---------- --------
End of period 5,095,975 End of period 138,700
---------- --------
---------- --------
Year Ended Year Ended
December 31, 2004 December 31, 2004
--------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $ 11,175,557 1,016,975 Shares sold $ 5,048,883 456,491
Shares issued through Shares issued through
reinvestment of dividends 1,044,261 96,858 reinvestment of dividends 77,154 7,040
Shares redeemed (5,105,189) (471,111) Shares redeemed (1,232,642) (112,263)
------------ ---------- ----------- --------
Net Increase $ 7,114,629 642,722 Net Increase $ 3,893,395 351,268
------------ -----------
------------ -----------
Shares Outstanding: Shares Outstanding:
Beginning of period 2,770,770 Beginning of period 68,214
---------- --------
End of period 3,413,492 End of period 419,482
---------- --------
---------- --------
BAIRD CORE PLUS BOND FUND
Year Ended Year Ended
December 31, 2005 December 31, 2005
--------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $ 3,826,490 370,555 Shares sold $ 388,900 36,683
Shares issued through Shares issued through
reinvestment of dividends 923,131 90,264 reinvestment of dividends 13,342 1,281
Shares redeemed (4,036,994) (391,795) Shares redeemed (63,734) (6,148)
------------ ---------- --------- -------
Net Increase $ 712,627 69,024 Net Increase $ 338,508 31,816
------------ ---------
------------ ---------
Shares Outstanding: Shares Outstanding:
Beginning of period 3,130,712 Beginning of period 11,848
---------- -------
End of period 3,199,736 End of period 43,664
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2004 December 31, 2004
--------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $ 2,974,318 282,586 Shares sold $ 13,500 1,261
Shares issued through Shares issued through
reinvestment of dividends 1,177,007 113,096 reinvestment of dividends 5,106 480
Shares redeemed (14,326,134) (1,353,665) Shares redeemed (16,231) (1,555)
------------ ---------- --------- -------
Net Decrease $(10,174,809) (957,983) Net Increase $ 2,375 186
------------ ---------
------------ ---------
Shares Outstanding: Shares Outstanding:
Beginning of period 4,088,695 Beginning of period 11,662
---------- -------
End of period 3,130,712 End of period 11,848
---------- -------
---------- -------
BAIRD SHORT-TERM BOND FUND
August 31, 2004(1)<F84>
Year Ended through
December 31, 2005 December 31, 2004
--------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
------------ ---------- ------------ ----------
Shares sold $ 81,066,185 8,221,158 Shares sold $33,919,057 3,395,735
Shares issued through Shares issued through
reinvestment of dividends 2,142,819 217,900 reinvestment of dividends 158,249 15,909
Shares redeemed (17,200,778) (1,746,644) Shares redeemed (1,899,021) (191,235)
------------ ---------- ----------- ---------
Net Increase $ 66,008,226 6,692,414 Net Increase $32,178,285 3,220,409
------------ -----------
------------ -----------
Shares Outstanding: Shares Outstanding:
Beginning of period 3,220,409 Beginning of period --
---------- ---------
End of period 9,912,823 End of period 3,220,409
---------- ---------
---------- ---------
(1)<F84> Commencement of operations.
4. INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION
During the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term investments) were as follows:
Baird
Baird Baird Intermediate Baird Baird
Intermediate Aggregate Municipal Core Plus Short-Term
Bond Fund Bond Fund Bond Fund Bond Fund Bond Fund
------------ --------- ------------ --------- ----------
Purchases:
U.S. Government $55,580,226 $100,762,279 $ -- $8,354,348 $29,554,206
Other $76,147,301 $ 75,385,080 $22,009,646 $5,376,258 $54,551,653
Sales:
U.S. Government $53,759,324 $ 44,340,210 $ -- $6,064,469 $ 6,693,208
Other $33,854,631 $ 20,986,759 $ 6,186,845 $5,564,558 $12,635,326
At December 31, 2005, gross unrealized appreciation and depreciation of
investments and distributable ordinary income and long-term capital gains for
federal tax purposes were as follows:
INTERMEDIATE
INTERMEDIATE AGGREGATE MUNICIPAL CORE PLUS SHORT-TERM
BOND FUND BOND FUND BOND FUND BOND FUND BOND FUND
------------ --------- ------------ --------- ----------
Cost of Investments $239,607,514 $227,139,832 $53,915,238 $32,740,923 $98,961,175
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
Gross unrealized appreciation $ 2,412,159 $ 2,579,325 $ 457,271 $ 839,033 $ 30,812
Gross unrealized depreciation (4,645,163) (3,366,537) (421,253) (1,136,777) (1,047,015)
------------ ------------ ----------- ----------- -----------
Net unrealized appreciation/depreciation $ (2,233,004) $ (787,212) $ 36,018 $ (297,744) $(1,016,203)
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
Undistributed ordinary income $ 154,379 $ 10,472 $ 19,139 $ -- $ 40,220
Undistributed long-term capital gain -- 121,173 -- -- --
------------ ------------ ----------- ----------- -----------
Total distributable earnings $ 154,379 $ 131,645 $ 19,139 $ -- $ 40,220
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
Other accumulated gains (losses) $ (1,500,534) $ (27,296) $ (229,735) $ (27,460) $ (152,560)
------------ ------------ ----------- ----------- -----------
Total accumulated earnings (losses) $ (3,579,159 $ (682,863) $ (174,578) $ (325,204) $(1,128,543)
------------ ------------ ----------- ----------- -----------
------------ ------------ ----------- ----------- -----------
Undistributed income or net realized gains for financial statement purposes may
differ from federal income tax purposes due to differences in the recognition
and characterization of income, expense and capital gain items for financial
statement and tax purposes.
The tax components of dividends paid during the periods ended December 31, 2005
and 2004 were:
2005 2004
--------------------------------- ---------------------------------
ORDINARY LONG-TERM ORDINARY LONG-TERM
INCOME CAPITAL GAINS INCOME CAPITAL GAINS
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
------------- ------------- ------------- -------------
Baird Intermediate Bond Fund $9,582,892 $ -- $7,212,508 $ --
Baird Aggregate Bond Fund $7,047,543 $ 150,599 $5,007,328 $ 138,814
Baird Intermediate Municipal Bond Fund $ -- $ -- $ 8,850 $ --
Baird Core Plus Bond Fund $1,707,672 $ 21,671 $1,816,264 $ 454,258
Baird Short-Term Bond Fund $2,308,315 $ -- $ 231,775 $ --
For the years ended December 31, 2005 and 2004, distributions of $1,742,374 and
$1,314,020, respectively, from the Baird Intermediate Municipal Bond Fund were
tax-exempt.
Under the current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal year.
For the year ended December 31, 2005, the Baird Intermediate Bond, Baird
Aggregate Bond Fund, Baird Intermediate Municipal Bond, Baird Core Plus Bond
Fund and Baird Short-Term Bond Funds elected to defer capital losses occurring
between November 1, 2005 and December 31, 2005 in the amount of $79,987,
$24,385, $38,449, $21,481 and $85,220, respectively.
At December 31, 2005, the Baird Intermediate Bond, Baird Intermediate Municipal
Bond, Baird Core Plus Bond and Baird Short-Term Bond Funds had accumulated net
realized capital loss carryovers of $1,423,683, $191,286, $5,975 and $67,340,
respectively. With respect to the Baird Intermediate Bond Fund, $485,569 of the
capital loss carryover expires in 2012 and $938,114 expires in 2013. With
respect to the Baird Intermediate Municipal Bond Fund, $6,626 of the capital
loss carryover expires in 2012 and $184,660 in 2013. With respect to the Baird
Core Plus Bond Fund, $5,975 of the capital loss carryover expires in 2013. With
respect to the Baird Short-Term Bond Fund, $8,150 of the capital loss carryover
expires in 2012 and $59,190 expires in 2013. To the extent these Funds realize
future net capital gains, those gains will be offset by any unused capital loss
carryforward.
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into an Investment Advisory Agreement with Baird for the
provision of investment advisory services. Pursuant to the Investment Advisory
Agreement, the Advisor is entitled to receive a fee, calculated daily and
payable monthly, at the annual rate of 0.25% for the Baird Intermediate Bond
Fund, Baird Aggregate Bond Fund, Baird Intermediate Municipal Bond Fund, Baird
Core Plus Bond Fund and Baird Short-Term Bond Fund as applied to the respective
Fund's average daily net assets. Certain officers of the Advisor are also
officers of the Funds.
The Funds have entered into an Administration Agreement with Baird. Under the
Administration Agreement, the Advisor assumes and pays all expenses of the
applicable Fund other than the investment advisory fees and fees under the 12b-1
plan. Pursuant to the Administration Agreement, the Advisor is entitled to
receive a fee, calculated daily and payable monthly, at the annual rate of 0.05%
for the Baird Intermediate Bond Fund, Baird Aggregate Bond Fund, Baird
Intermediate Municipal Bond Fund, Baird Core Plus Bond Fund and Baird Short-Term
Bond Fund as applied to the respective Fund's average daily net assets.
U.S. Bancorp Fund Services, LLC serves as transfer agent, administrator, and
accounting services agent for the Funds. U.S. Bank, N.A. serves as custodian
for the Funds.
Baird (the "Distributor") is the distributor of the Funds pursuant to a
distribution agreement.
6. DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
The Funds have adopted a distribution and shareholder service plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. The Plan allows the Funds to
compensate the Distributor for the costs incurred in distributing the Funds'
Investor Class Shares, including amounts paid to brokers or dealers, at an
annual rate not to exceed 0.25% of the average daily net assets of the Funds'
Investor Class Shares. The Baird Intermediate Bond, Baird Aggregate Bond, Baird
Intermediate Municipal Bond and Baird Core Plus Bond Funds incurred $7,415,
$2,467, $6,704 and $767, respectively, in fees pursuant to the Plan during the
year ended December 31, 2005.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders Baird Funds, Inc:
We have audited the accompanying statements of assets and liabilities of Baird
Intermediate Bond Fund, Baird Aggregate Bond Fund, Baird Intermediate Municipal
Bond Fund, Baird Core Plus Bond Fund and Baird Short-Term Bond Fund (five of the
portfolios constituting Baird Funds, Inc., hereafter referred to as the
"Funds"), including the schedules of investments as of December 31, 2005, and
the related statements of operations and changes in net assets, and financial
highlights for the year then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The statements of changes in net assets and the financial
highlights of the Funds for the years or periods ended December 31, 2004 and
prior were audited by other auditors. Those auditors expressed an unqualified
opinion on those financial statements and financial highlights in their report
dated February 22, 2005.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Funds were not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Funds' internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 2005 by correspondence with
the Custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds of Baird Funds, Inc. as of December 31, 2005, the
results of their operations, changes in their net assets and their financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/Grant Thornton LLP
Chicago, Illinois
February 15, 2006
BAIRD FUNDS, INC.
DIRECTORS & OFFICERS AS OF DECEMBER 31, 2005
Number of
Portfolios Other
Position(s) Term of Office Principal in Complex Directorships
Held with and Length of Occupation(s) Overseen Held
Name, Address, and Age the Funds Time Served During Past 5 Years by Director by Director
- ---------------------- ----------- -------------- ------------------- ----------- -------------
G. Frederick Kasten, Jr.* Director Indefinite; Retired; Chairman, the Advisor (January 8 Director of
<F85> And Since September 2000-December 2005); Chairman & CEO, the Regal-Beloit
777 East Wisconsin Avenue Chairman 2000 Advisor (January 1998-January 2000); Corporation,
Milwaukee, WI 53202 President, Chairman and CEO, the Advisor a manufacturing
Age: 66 (June 1983-January 1998); President, the company
Advisor (January 1979-January 1983)
John W. Feldt Independent Indefinite; Senior Vice President-Finance, University 8 Director of
University of Director Since September of Wisconsin Foundation since 1985; Vice Thompson
Wisconsin Foundation 2000 President-Finance, University of Wisconsin Plumb Funds,
1848 University Avenue Foundation (1980-1985); Associate Director, Inc., a mutual
Madison, WI 53705 University of Wisconsin Foundation fund complex
Age: 63 (1967-1980) of which Mr.
Feldt oversees
2 portfolios
George C. Kaiser Independent Indefinite; CEO, George Kaiser & Co., a business 8 None
759 N. Milwaukee Street Director Since September consulting company, since 1999; Chairman
Milwaukee, WI 53202 2000 and CEO, Hanger Tight Company, a
Age: 72 manufacturing company (1988-1999);
Chairman and CEO, Interstore Transfer
Systems, Ltd., a manufacturing company
(1992-1999); Chairman, International
Retail Services Group, Ltd. (1995-1999);
Executive Vice President, Arandell Schmidt
Co., a catalog printer company (1984-1987);
various positions Arthur Andersen & Co.
(1957-1964, 1967-1984), most recently serving
as Partner (1969-1984); Secretary of Administration,
State of Wisconsin (1965-1967)
Frederick P. Stratton, Jr. Independent Indefinite; Retired; Chairman Emeritus, Briggs & 8 Director of
777 East Wisconsin Avenue Director Since May Stratton Corporation, a manufacturing Midwest Air
Suite 1400 2004 company, since 2003; Chairman of the Board, Group, Inc., an
Milwaukee, WI 53202 Briggs & Stratton Corporation (2001-2002); airline company;
Age: 66 Chairman and CEO, Briggs & Stratton Weyco Group,
Corporation (1986-2001) Inc., a men's
footwear
distributor;
Wisconsin
Energy
Corporation and
its subsidiaries
Wisconsin
Electric
Company and
Wisconsin Gas
Company
Mary Ellen Stanek President Indefinite; Managing Director, the Advisor, and Chief N/A N/A
777 East Wisconsin Avenue Since September Investment Officer, Baird Advisors, a
Milwaukee, WI 53202 2000 department of the Advisor, since March 2000;
Age: 49 President and CEO, Firstar Investment
Research & Management Company, LLC ("FIRMCO")
(November 1998-February 2000); President,
Firstar Funds, Inc. (December 1998-March 2000);
President and Chief Operating Officer, FIRMCO
(March 1994-November 1998)
J. Bary Morgan Senior Vice Indefinite; Chief Investment Officer, Baird Investment N/A N/A
777 East Wisconsin Avenue President Since February Management, a department of the Advisor,
Milwaukee, WI 53202 2003 since January 2004; Managing Director, the
Age: 40 Advisor, since January 2001; Director, Baird
Investment Management (January 2001-January
2004); Senior Vice President, the Advisor
(January 2000-January 2001); First Vice
President, the Advisor (January 1996-
January 2000)
Todd S. Nichol Vice Indefinite; Chief Compliance Officer, the Advisor since N/A N/A
777 East Wisconsin Avenue President Since August October 2004; Assistant Compliance Director,
Milwaukee, WI 53202 and Chief 2004 the Advisor since August 2002; Senior Vice
Age: 43 Compliance President, the Advisor since January 2005;
Officer First Vice President, the Advisor (January
2004-January 2005): Vice President, the
Advisor (August 2002-January 2004); Vice
President-Risk Management, BNY Clearing
Services, LLC, a division of The Bank of
New York (August 1995-August 2002)
Russell P. Schwei Vice Indefinite; Operations Director, the Advisor since N/A N/A
777 East Wisconsin Avenue President Since September July 1992; Managing Director, the Advisor
Milwaukee, WI 53202 2000 since January 1997; Chief Financial
Age: 46 Officer and Managing Director, the Advisor
(February 1999-December 1999).
Leonard M. Rush Treasurer Indefinite; Chief Financial Officer, the Advisor since N/A N/A
777 East Wisconsin Avenue Since September January 2000
Milwaukee, WI 53202 2000
Age: 59
Charles M. Weber Secretary Indefinite; Senior Vice President and Associate General N/A N/A
777 East Wisconsin Avenue Since August Counsel, the Advisor since July 2005;
Milwaukee, WI 53202 2005 Partner, Quarles & Brady LLP, a law firm
Age: 42 (October 1998-June 2005)
*<F85> Mr. Kasten is an "interested person" of the Corporation (as defined in
the 1940 Act) because he serves as the Chairman of the Advisor.
Additional information about the Funds' directors is available in the Statement
of Additional Information which may be obtained without charge, upon request, by
calling 1-866-44BAIRD.
BAIRD FUNDS, INC.
DISCLOSURE REGARDING THE BOARD OF DIRECTORS APPROVAL OF THE INVESTMENT ADVISORY
AGREEMENT FOR THE BAIRD BOND FUNDS
The Board of Directors (the "Board") of Baird Funds, Inc (the "Corporation") met
on August 15, 2005 to consider the annual renewal of the Investment Advisory
Agreement with Robert W. Baird & Co. Incorporated ("Baird" or the "Advisor") for
the management of the Baird Intermediate Bond, Aggregate Bond, Intermediate
Municipal Bond, Core Plus Bond and Short-Term Bond Funds (the "Funds"). The
Board reviewed and discussed numerous documents that had been provided prior to
the meeting, including the Investment Advisory Agreement, memoranda prepared by
outside legal counsel and the Secretary of the Funds discussing in detail the
Board's fiduciary obligations and the factors it should assess in considering
the renewal of the Investment Advisory Agreement, information about the Advisor
(including its Form ADV, Annual Report and statement of financial condition),
comparative information about the Funds' performance, management fees and
expense ratios for the periods ended June 30, 2005, and other pertinent
information. The Directors who are not "interested persons" of the Corporation
or the Advisor ("Independent Directors"), within the meaning of the Investment
Company Act of 1940 (the "1940 Act"), met separately in executive session with
counsel to consider the agreement. The Board also received information
periodically throughout the year that was relevant to its Investment Advisory
Agreement renewal process, including performance, management fee and other
expense information. Based on its evaluation of information provided by the
Advisor, in conjunction with the Funds' other service providers, the Board,
including all of the Independent Directors, approved the annual continuation of
the Investment Advisory Agreement for the Funds for an additional one-year
period.
In considering the agreement and reaching its conclusions, the Board reviewed
and analyzed various factors that it determined were relevant, including the
factors below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED TO THE FUNDS
- ------------------------------------------------------------
The Board analyzed the nature, extent and quality of the services provided by
the Advisor to the Funds. The Board reviewed and considered the Advisor's
significant role in establishing the Funds and the construction of their
investment objectives, principal strategies, investment limitations and fee
structures. The Board noted the Advisor's overall reputation and positive name
recognition, the depth of the Advisor's personnel, resources and commitment to
the Funds, and the experience, credentials and continuity of the portfolio
management teams employed to manage the Funds' investments. The Board
considered the Advisor's disciplined investment decision-making process used for
the Funds. The Board also considered other services that the Advisor rendered
to the Funds in its capacity as their investment advisor, such as providing some
of its key personnel available to serve as officers of the Funds, selecting
broker-dealers for execution of portfolio transactions, ensuring adherence to
the Fund's investment policies and restrictions, providing support services to
the Board and the Audit Committee of the Board and overseeing the Funds' other
service providers. In addition, the Board considered that the Advisor provides
administrative services to each Fund at an annual rate of 0.05% of the Fund's
average daily net assets, and is responsible for paying the Fund's custody,
transfer agency, accounting, pricing, auditing, legal and director fees and
other ordinary expenses (except for advisory and 12b-1 fees), which has the
effect of capping the Funds' expense ratios at 0.55% and 0.30% for Investor and
Institutional Class shares, respectively. The Board further noted that the
Advisor, in its capacity as a registered broker-dealer, also serves as
distributor and principal underwriter of shares of the Funds and spends time and
effort marketing the Funds. The Board also considered the strength of the
Advisor's compliance department, including the Funds' chief compliance officer,
and the fact that the Advisor has not experienced any significant legal,
compliance or regulatory difficulties since the Funds were launched. The Board
concluded that the nature, extent and quality of the services provided by the
Advisor to the Fund were appropriate and that each Fund was likely to continue
to benefit from services provided under the Investment Advisory Agreement.
INVESTMENT PERFORMANCE OF THE ADVISOR AND THE FUNDS
- ---------------------------------------------------
In considering the investment performance of each Fund, the Board reviewed
information as of June 30, 2005 regarding the Fund's performance in comparison
to its benchmark index and its peer groups as determined by Lipper. With
respect to each Fund's performance relative to its benchmark index, the Board
noted that the Baird Intermediate Bond Fund had outperformed the Lehman Brothers
Intermediate Government/Credit Index, the Baird Aggregate Bond Fund had
outperformed the Lehman Brothers Aggregate Bond Index and the Baird Core Plus
Bond Fund had outperformed the Lehman Brothers U.S. Universal Bond Index, in
each case for the one-year, three-year and since inception periods ending June
30, 2005. The Board also noted that, while the performance of the Baird
Intermediate Municipal Bond Fund was comparable but lower than the Lehman
Brothers 10-Year General Obligation Bond Index for each of the one-year, three-
year and since inception periods ended June 30, 2005, the Advisor had kept the
Board informed of the investment strategy of the Fund and discussed with the
Board that the Fund was deliberately managed with measurably less interest rate
and credit risk than the benchmark index. The Board also reviewed the brief 10-
month performance history of the Baird Short-Term Bond Fund and considered that
it had outperformed its benchmark, the Lehman Brothers 1-3 Year
Government/Credit Index, during that time.
The Board also reviewed information regarding the performance of each Fund
relative to other mutual funds with a similar investment objective as determined
by Lipper. The Board observed that the performance of the Institutional and
Investor Class shares of the Baird Intermediate Bond Fund over the three-year
and since inception periods ended June 30, 2005 was better than the Lipper
Intermediate Investment Grade Debt Fund average; the performance of the
Institutional and Investor Class shares of the Baird Aggregate Bond Fund over
the one-year, three-year and since inception periods ended June 30, 2005 was
better than the Lipper Intermediate Investment Grade Debt Fund average (in the
top quartile for all periods); the performance of the Institutional and Investor
Class shares of the Baird Intermediate Municipal Bond Fund over the one-year,
three-year and since inception periods ended June 30, 2005 was better than the
Lipper Intermediate Municipal Debt Fund average (in the top quartile for the
three-year and since inception periods); the performance of the Institutional
and Investor Class shares of the Baird Core Plus Bond Fund over the one-year,
three-year and since inception periods ended June 30, 2005 was better than the
Lipper General Bond Fund average (in the top quartile for all periods); and the
performance of the Baird Short Term Bond Fund over the 10-month period ended
June 30, 2005 was slightly worse than the Lipper Short-Term Investment Grade
Debt Fund average.
The Board also considered the Advisor's quarterly portfolio commentaries and
reviews explaining the Funds' performance, the Advisor's consistent and
disciplined investment decision process and the investment strategies it employs
for the Funds. After considering all of the information, the Board concluded
that, although past performance is not a guarantee of future results, each Fund
and its shareholders were likely to benefit from the Advisor's continued
management.
COSTS OF SERVICES PROVIDED AND PROFITS REALIZED BY THE ADVISOR
- --------------------------------------------------------------
The Board examined the fee and expense information for each of the Baird
Intermediate Bond, Aggregate Bond, Intermediate Municipal Bond, Core Plus Bond
and Short-Term Bond Funds, including a comparison of such information to other
similarly situated mutual funds as determined by Lipper. The Board noted that
each Fund's investment management (or advisory) fee and total expense ratio (for
both its Investor Class and Institutional Class shares) were significantly lower
than the average and median advisory fees and expense ratios for all mutual
funds in its Lipper category.
The Board also reviewed and considered investment management fees charged by the
Advisor to other investment advisory clients and found that the fee paid by the
Funds (0.25%) was less than the fee that the Advisor charges on the first $25
million of a separately managed account (0.30%) and the same as the fee that the
Advisor charges on the next $25 million. The Board noted and discussed the
extent of the significant additional services provided to the Funds that the
Advisor did not provide in the other advisory relationships. Those services
included certain administrative services, oversight of the Fund's other service
providers, director support, risk management, regulatory compliance and various
other services.
The Board considered the fees realized, and the costs incurred, by the Advisor
in providing investment management services to the Fund and the profitability to
the Advisor of having a relationship with the Funds. The Board noted the unique
expense structure of the Funds whereby the Institutional Class shareholders were
charged only a management fee and an administration fee and the Adviser incurred
all of the other expenses on behalf of each Fund and that Investor Class
shareholders incurred the same expenses as the Institutional Class shareholders
plus a 0.25% 12b-1 fee. This structure means that the annual expense ratio for
each Fund (as a percentage of average daily net assets) is 0.55% for Investor
Class shares and 0.30% for Institutional Class shares. The Advisor informed the
Board that the profits realized by the Advisor (as a percentage of revenue) from
its relationship with the Funds were less than those realized by the Advisor on
its investment advisory business as a whole, particularly since the 0.05%
administration fee payable to the Advisor by each Fund was considerably less
than the Fund's expenses that the Advisor is required to pay. The Board
concluded that the profits realized by the Advisor from its relationship with
the Funds were appropriate. The Board also reviewed and considered the general
financial condition of the Advisor and determined it to be sound.
In light of all of the information that it received and considered, the Board
concluded that the management fee and total expense ratio of each Fund were
reasonable with respect to the services provided and the performance of the
Fund.
OTHER BENEFITS TO THE ADVISOR
- -----------------------------
The Board noted that the Advisor does not have any soft dollar arrangements and
does not realize any other tangible benefits in connection of its management of
the Baird Intermediate Bond, Aggregate Bond, Intermediate Municipal Bond, Core
Plus Bond and Short-Term Bond Funds. The Board believed that the Funds
generally benefit from their association with the Advisor and the use of the
"Baird" name. The Board concluded that the other benefits realized by the
Advisor from its relationship with the Funds were appropriate.
ECONOMIES OF SCALE AND FEE LEVELS REFLECTING THOSE ECONOMIES
- ------------------------------------------------------------
The Board noted that the Funds' advisory fee structure do not contain any
breakpoint reductions as the Funds grow in size. However, the Board recognized
that the Advisor essentially bears all of the Funds' expenses other than
management, distribution (12b-1) and administration fees. The Board also
recognized that the advisory fee rates paid by the Funds were designed to be
lower than the fees otherwise charged by the Advisor to its separately managed
account clients and to be comparable to the second or third breakpoint advisory
fee levels paid by other comparable mutual funds.
After consideration of the above factors as well as other factors, the Board,
including a majority of the Independent Directors, concluded that the approval
of the renewal of the investment advisory agreement was in the best interest of
each Fund and its shareholders.
ADDITIONAL INFORMATION
PROXY VOTING
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by calling toll free, 1-866-44BAIRD, or by accessing the Funds'
website at www.bairdfunds.com; and by accessing the SEC's website at
www.sec.gov.
Each Fund's proxy voting record, if applicable, is available without charge,
upon request, by calling toll free, 1-866-44BAIRD, or by accessing the Funds'
website at www.bairdfunds.com; and by accessing the SEC's website at
www.sec.gov. The Funds generally do not vote proxies because the securities
held in their portfolios, consisting of bonds and other fixed-income securities,
are not entitled to vote.
PORTFOLIO HOLDINGS DISCLOSURE
The Funds file a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Funds' Forms N-Q
are available on the SEC website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling
1-800-732-0330. The Funds' Forms N-Q may also be obtained by calling toll-free
1-866-44BAIRD or by accessing the Fund's website at www.bairdfunds.com.
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On October 10, 2005, the Audit Committee of the Corporation's Board of Directors
and the Board accepted the resignation of PricewaterhouseCoopers LLP as auditors
for the Funds.
The reports of PricewaterhouseCoopers LLP on the Funds' financial statements for
the past two years contained no adverse opinion or a disclaimer of opinion, and
were not qualified or modified as to uncertainty, audit scope or accounting
principle. In addition, during the Corporation's two most recent fiscal years
and through October 10, 2005, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principle or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused them to make a reference thereto in their report on the
Corporation's financial statements for such years.
On November 22, 2005, the Audit Committee recommended, and the Board approved,
the appointment of Grant Thornton LLP, an independent registered public
accounting firm, to audit the Funds' 2005 financial statements, subject to
completion of the terms of its engagement. Grant Thornton LLP was formally
engaged as auditors of the Funds on December 21, 2005.
BAIRD FUNDS, INC.
c/o U.S. Bancorp Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-866-44BAIRD
BOARD OF DIRECTORS
G. Frederick Kasten, Jr. (Chairman)
John W. Feldt
George C. Kaiser
Frederick P. Stratton, Jr.
INVESTMENT ADVISOR AND DISTRIBUTOR
Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ADMINISTRATOR AND TRANSFER AGENT
U.S. Bancorp Fund Services, LLC
P.O. Box 701
615 East Michigan Street
Milwaukee, WI 53202
CUSTODIAN
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Grant Thornton LLP
175 West Jackson Boulevard, 20th Floor
Chicago, Illinois 60604
(BAIRD FUNDS LOGO)
ANNUAL REPORT
December 31, 2005
Baird LargeCap Fund
Baird MidCap Fund
Baird SmallCap Fund
TABLE OF CONTENTS
PAGE
----
LETTER TO SHAREHOLDERS 1
2005 ECONOMIC AND STOCK MARKET COMMENTARY 2
BAIRD LARGECAP FUND 4
BAIRD MIDCAP FUND 11
BAIRD SMALLCAP FUND 18
ADDITIONAL INFORMATION ON FUND EXPENSES 25
STATEMENTS OF ASSETS AND LIABILITIES 27
STATEMENTS OF OPERATIONS 28
STATEMENTS OF CHANGES IN NET ASSETS 29
FINANCIAL HIGHLIGHTS 32
NOTES TO THE FINANCIAL STATEMENTS 38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 45
DIRECTORS AND OFFICERS 46
DISCLOSURE REGARDING THE BOARD OF DIRECTORS' APPROVAL
OF THE INVESTMENT ADVISORY AGREEMENT FOR BAIRD EQUITY FUNDS 48
ADDITIONAL INFORMATION 51
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
CAUTIONARY NOTE ON ANALYSES, OPINIONS AND OUTLOOKS: In this report we offer
- ---------------------------------------------------
analyses and opinions on the performance of individual securities, companies,
industries, sectors, markets, interest rates and governmental policies,
including predictions, forecasts and outlooks regarding possible future events.
These can generally be identified as such because the context of the statements
may include such words as "believe," "should," "will," "expects," "anticipates,"
"hopes" and words of similar effect. These statements reflect the portfolio
managers' good faith beliefs and judgments and involve risks and uncertainties,
including the risk that the portfolio managers' analyses, opinions and outlooks
are or will prove to be inaccurate. It is inherently difficult to correctly
assess and explain the performance of particular securities, sectors, markets,
interest rate movements, governmental actions or general economic trends and
conditions, and many unforeseen factors contribute to the performance of Baird
Funds. Investors are, therefore, cautioned not to place undue reliance on
subjective judgments contained in this report.
(BAIRD FUNDS LOGO)
1-866-442-2473
www.bairdfunds.com
------------------
February 28, 2006
Dear Shareholders,
We would like to thank you for investing in the Baird Funds. We appreciate the
opportunity to help our investors navigate the transitions and challenges
presented by the financial markets in 2005. The Baird Funds continued to grow
during the year with total net assets exceeding $820 million as of December 31,
2005. In addition, two of our Equity Funds and three of our Bond Funds
celebrated their 5-year anniversaries during the year.
In this Annual Report we review the equity market in 2005 and the performance
and composition of each of the Baird Equity Funds. We hope you find this report
both informative and helpful in achieving your investment goals. Thank you
again for choosing Baird Funds.
Sincerely,
/s/Mary Ellen Stanek
Mary Ellen Stanek, CFA
President
Baird Funds, Inc.
2005 ECONOMIC AND STOCK MARKET COMMENTARY
The Dow Jones Industrial Average (DJIA) and the S&P 500 Stock Index, the primary
benchmarks used to assess the performance of the stock markets generally, posted
modest total returns for 2005 of 1.74% and 4.91%, respectively. In the face of
eight interest rate hikes by the Federal Reserve, terrorist bombings in London,
a devastating hurricane season and record oil and natural gas prices, such
performance, in our view, is remarkable.
During the first half of the year, stable U.S. economic growth and robust
corporate profit gains were negated by rising short-term interest rates and $60
per barrel oil, keeping the DJIA stuck between 10,000 and 10,900 and the S&P 500
mired between 1140 and 1220. Reflecting a directionless market, total returns
for these benchmarks at the mid-year point were -3.64% and -0.82%, respectively.
The stock market's attempt at a summer rally in response to a decline in oil
prices and longer-term interest rates from their May highs was derailed by
Hurricanes Katrina, Rita and Wilma, resulting in a 5% decline in the broad
market averages from the August highs to the October lows. Share prices rallied
to finish the year with modest gains as stock market investors regained
confidence and the U.S. economy appeared to absorb the blows delivered by the
hurricanes. Specifically, the DJIA gained 5.59% and the S&P 500 advanced 5.76%
during the second half of the year, bringing full-year returns for these
benchmarks into positive territory.
Inflation-adjusted (i.e., "real") growth in U.S. gross domestic product (GDP)
was 3.5% in 2005 while job gains averaged nearly 170,000 per month. Consumer
spending was supported by record net worth thanks to rising home values and
higher stock prices. Rising net worth and persistent job gains bolstered
consumer confidence. Although debt levels are high, research firm ISI Group
reports that total consumer debt as a percentage of disposable personal income
is lower in the U.S. than in Japan and the U.K. In addition, American
households have over $5 trillion in cash and short-term investments on their
collective balance sheet according to the Federal Reserve. As long as U.S.
consumers remain confident, they should continue spending. Consequently, we
believe the most likely outcome for 2006 is for continued growth in consumer
spending, though some slowdown is expected as the housing market cools due to
rising interest rates and declining affordability. Importantly, job growth
should be sustained since U.S. businesses have the financial wherewithal to hire
and invest, and appear to have confidence in the economy. Improved U.S.
business confidence is supported by record profitability, strong balance sheets,
growing markets and easy access to capital. Nonetheless, history shows that
interest rate hikes by the Federal Reserve and sustained increases in energy
prices typically impact the economy with a lag. As a result, economic growth
should slow eventually. In the meantime, our economy continues to show
remarkable resilience.
Today's global economy is often characterized as being driven by U.S. consumers
buying imported manufactured goods with money borrowed from foreigners through
loans secured by appreciating assets (i.e., houses and stocks). PIMCO's Paul
McCulley refers to this phenomenon as "stable disequilibrium." In addition, the
Federal Reserve has created a global liquidity glut that keeps asset prices high
and interest rates low. With globalization providing an almost unlimited supply
of cheap labor, the liquidity glut stimulates the supply-side of the global
economy by fostering investment in new production capacity. This has worked to
keep inflation low by flooding the global market with increasingly cheaper
goods. This is the opposite result of the 1970's, when the Fed stimulated the
demand-side of a more insular U.S. economy and created high inflation. The
biggest risk to stable disequilibrium is a sharp decline in U.S. consumer
spending or a sudden drop in the value of the dollar against foreign currencies.
The Federal Reserve and other central banks are expected to do whatever is
necessary to prevent either of these developments. As long as globalization
keeps inflation low, the world's central banks have great flexibility to sustain
stable disequilibrium. Consequently, stable disequilibrium could last longer
than many observers expect. The low inflation, low interest rate, pro-growth
environment associated with sustained stable equilibrium is generally regarded
as positive for financial markets.
The U.S. continues to attract foreign investment because America has capitalized
on globalization and has been the most successful among the developed nations in
transitioning from an industrial to a service and knowledge-based economy. Our
success is largely attributable to a flexible labor force, a business-friendly
regulatory environment and an entrepreneurial culture that embraces innovation
and risk-taking. For example, many U.S. companies are moving away from the
vertical design/produce/sell business model. Where possible, U.S. companies
have outsourced production, the most volatile of the three processes, in order
to focus on the more profitable and higher value-added design and marketing
functions. GaveKal Research calls these businesses "platform companies." The
emergence of platform companies and a growing service sector have made the U.S.
economy more stable and less vulnerable to the volatile swings of the
manufacturing cycle (i.e., the volatility of the manufacturing cycle has been
outsourced along with the jobs). This is why recent economic cycles in the U.S.
have lasted longer and been less "bumpy" than previous cycles. Just as stable
businesses can carry more debt and produce higher returns than more volatile
businesses, stable economies can carry higher debt loads and sustain higher
living standards than more volatile economies.
Since U.S. economic cycles are more stable, U.S. businesses could be viewed as
less risky. Consequently, it could be argued that the additional return
investors demand to compensate them for risk (i.e., the risk premium) should be
lower in today's environment. Indeed, lower risk premiums for bond investors
are reflected in today's low real interest rates and narrow credit spreads. For
stock investors, lower risk premiums are reflected in today's high price-to-
earnings ratios and low dividend yields. In essence, a more stable economy
means lower returns for investors. When viewed from this perspective, the high
returns captured by investors in the 1980's and 1990's were primarily the result
of the transition from a more volatile to a more stable U.S. economy. With that
transition now largely complete, investors in U.S. assets should expect more
modest investment returns in the future.
OUTLOOK FOR 2006
To summarize, the most likely outcome for 2006 is decelerating economic growth
due to smaller increases in consumer spending. The slowdown in consumer
spending should be partially offset by continued job growth and double-digit
increases in business investment. Confident that inflation is contained, the
Federal Reserve will most likely stop raising short-term interest rates after
one or two more quarter-point hikes. Ironically, this could result in a modest
rise in longer-term interest rates. However, any rise in long-term rates is
unlikely to be substantial enough to be a drag on economic activity. Such an
environment should favor stock market investments over investments in the bond
market. But, America's unbalanced global financial position (stable
disequilibrium), the Federal budget crisis facing America if Medicare and Social
Security promises to aging baby boomers are to be kept, and the potential for
severe global economic dislocations from an unanticipated shock (e.g., oil,
Iran, Iraq, terrorism, bird flu, etc.) are likely to produce wider swings in
share prices in 2006 versus 2005's below-average volatility.
BAIRD LARGECAP FUND
DECEMBER 31, 2005
PORTFOLIO MANAGERS' COMMENTARY
Stock market performance trends in 2005 extended tendencies in place since the
market rebounded from the lows reached in late 2002. Like 2003 and 2004, stock
market performance in 2005 favored lower quality companies over high quality
companies and value stocks over growth stocks. In addition, investors continued
to favor companies benefiting from the sharp rise in commodity prices, such as
firms in the energy, metals and mining industries. These trends put the high
quality, persistent growth companies held in the Baird LargeCap Fund at a
performance disadvantage. Consequently, the Fund's equity performance trailed
the broad market benchmarks in 2005. Specifically, Baird LargeCap Fund
Institutional Class shares provided a 3.39% total return in 2005 (3.15% for
Investor Class shares), lagging the 5.27% and 4.91% returns on the Russell 1000
Growth Index (the Fund's primary benchmark) and the S&P 500 Index,
respectively. Last year's winning themes were not consistent with the Fund's
emphasis on high quality companies, i.e., companies that are leaders in their
----
respective industries and that have strong balance sheets and an established
record of consistent growth in sales, earnings, cash flows and dividends.
Indeed, Standard & Poor's reports that the growth stock component of the S&P 500
(S&P 500/Barra Growth Index) posted a 3.46% gain in 2005 while the value stock
component (S&P 500/Barra Value Index) gained 6.33%. Also, S&P 500 companies in
the highest quality categories (A+, A and A-) provided a 3.44% total return in
2005 versus a 9.55% return for companies in the lower quality categories (B, B-,
C and D).
The underperformance of the Fund's equities in recent years can be viewed as a
normal adjustment following the above-market returns posted by these stocks
during the market decline from the "bubble" highs in early 2000 to the lows of
October 2002. Investors should again embrace high quality, predictable growth
companies when, as we anticipate, the economy slows to a more sustainable growth
rate and profit gains moderate. We believe our emphasis on high quality growth
companies is a winning strategy over the full market cycle, delivering
competitive returns with less price volatility. Consequently, we intend to
adhere to our investment discipline despite recent performance trends.
The Fund's sector weightings were the major source of underperformance versus
the S&P 500 Index during the year with above benchmark exposure to the weak
consumer discretionary sector compounded by under exposure to the better
performing energy and financial sectors and by lack of exposure to the utilities
sector. In contrast, stock selection accounted for the bulk of the Fund's
underperformance versus the Russell 1000 Growth Index during the year with
disappointing results from core technology and industrial holdings Dell, Maxim
Integrated Products and UPS (-28%, -15% and -12%, respectively, in 2005)
compounded by the Fund's holdings in the energy sector gaining "only" 24% versus
56% for the more speculative energy holdings in the Russell benchmark. Stock
selections in the consumer groups and in the health care sector were bright
spots for the portfolio in 2005. Strong returns from core holdings Best Buy and
Walgreen (+10% and +15%, respectively, in 2005) and more recent additions eBay
and Starbucks (+17% and +31%, respectively, since their initial purchase dates
in April 2005) and standout returns from core health care holdings Teva
Pharmaceutical Industries and Caremark Rx (+44% and +31%, respectively in 2005)
and new addition Genentech (+92% since the initial purchase date in February
2005) positively affected the Fund's relative performance.
Four stocks eliminated from the portfolio in 2005, American International Group,
Cintas, IBM and Zebra Technologies, contributed meaningfully to the Fund's
disappointing relative performance. From the beginning of the year through the
dates the positions were eliminated, AIG declined 23%, Cintas dropped 13%, IBM
fell 19% and Zebra Technologies declined 23%.
In summary, our focus on high quality, large capitalization growth companies was
a performance liability for the Fund in 2005. But, as economic and corporate
profit growth slows and investors shift their focus from short-term speculative
opportunities to long-term investment merit, relative price performance should
favor the shares of higher quality, steady growth companies. Consequently, we
believe our investment strategy should be rewarded as the market cycle evolves.
Portfolio Managers:
David W. Bowman, CFA
Richard A. Burling, CFA
Douglas E. Guffy
J. Bary Morgan, CFA
Joel D. Vrabel, CFA
BAIRD LARGECAP FUND
A December 31, 2005 summary of the Fund's top 10 holdings and equity sector
analysis compared to the Russell 1000 Growth Index and the S&P 500 Index is
shown below.
TOP 10 HOLDINGS*<F86>
Teva Pharmaceutical Industries Ltd. 4.0%
Medtronic, Inc. 3.7%
Amgen, Inc. 3.6%
General Electric Company 3.5%
Emerson Electric Company 3.4%
Proctor & Gamble Company 3.2%
Illinois Tool Works, Inc. 3.2%
Target Corporation 3.2%
Best Buy Co., Inc. 3.2%
Genentech, Inc. 3.0%
NET ASSETS: $29,776,151
PORTFOLIO TURNOVER RATIO: 28.6%
NUMBER OF EQUITY HOLDINGS: 38
PORTFOLIO EXPENSE RATIO:***<F88>
INSTITUTIONAL CLASS: 0.75%
INVESTOR CLASS: 1.00%****<F89>
EQUITY SECTOR ANALYSIS**<F87>
LargeCap Russell 1000 S&P 500
Fund Growth Index Index
-------- ------------ -------
Consumer Discretionary 19.3% 14.7% 10.8%
Consumer Staples 12.7% 11.4% 9.5%
Energy 6.4% 3.6% 9.3%
Financials 6.7% 6.2% 21.3%
Health Care 26.2% 19.9% 13.3%
Industrials 13.2% 14.4% 11.4%
Information Technology 13.0% 26.6% 15.1%
Materials 2.7% 2.1% 3.0%
Telecommunication Services 0.0% 0.6% 3.0%
Utilities 0.0% 0.5% 3.4%
*<F86> The Fund's portfolio composition is subject to change and there is
no assurance that the Fund will continue to hold any particular
security. Percentages shown relate to the Fund's total net assets
as of December 31, 2005.
**<F87> Percentages shown in parentheses relate to the Fund's total equity
investments as of December 31, 2005, and may not add up to 100% due
to rounding.
***<F88> The Advisor has contractually agreed to limit the Fund's total
annual fund operating expenses to 0.75% of average daily net assets
for the Institutional Class shares and 1.00% of average daily net
assets for the Investor Class shares, at least through December 31,
2006.
****<F89> Includes 0.25% 12b-1 fee.
BAIRD LARGECAP FUND
BAIRD LARGECAP FUND - INSTITUTIONAL CLASS
VALUE OF A $100,000 INVESTMENT
Baird LargeCap Fund - Russell 1000 S&P 500
Date Institutional Class Shares Growth Index Index
---- -------------------------- ------------ -------
9/29/2000 $100,000 $100,000 $100,000
12/31/2000 $95,854 $78,655 $92,176
6/30/2001 $86,949 $67,454 $86,003
12/31/2001 $86,421 $62,591 $81,220
6/30/2002 $70,799 $49,587 $70,532
12/31/2002 $64,357 $45,138 $63,270
6/30/2003 $70,181 $51,045 $70,710
12/31/2003 $78,357 $58,566 $81,418
6/30/2004 $79,364 $60,170 $84,222
12/31/2004 $82,442 $62,256 $90,278
6/30/2005 $81,530 $61,185 $89,548
12/31/2005 $85,237 $65,533 $94,712
GROWTH OF A HYPOTHETICAL INVESTMENT OF $100,000 MADE ON THE FUND'S INCEPTION
DATE (9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD LARGECAP FUND - INVESTOR CLASS
VALUE OF A $10,000 INVESTMENT
Baird LargeCap Fund - Russell 1000 S&P 500
Date Investor Class Shares Growth Index Index
---- --------------------- ------------ -------
9/29/2000 $10,000 $10,000 $10,000
12/31/2000 $9,572 $7,865 $9,218
6/30/2001 $8,672 $6,745 $8,600
12/31/2001 $8,612 $6,259 $8,122
6/30/2002 $7,052 $4,959 $7,053
12/31/2002 $6,403 $4,514 $6,327
6/30/2003 $6,953 $5,105 $7,071
12/31/2003 $7,760 $5,857 $8,142
6/30/2004 $7,850 $6,017 $8,422
12/31/2004 $8,148 $6,226 $9,028
6/30/2005 $8,037 $6,118 $8,955
12/31/2005 $8,404 $6,553 $9,471
GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE
(9/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD LARGECAP FUND
AVERAGE ANNUAL TOTAL RETURNS
For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS SINCE INCEPTION(1)<F90>
- --------------------------------------- -------- ---------- -----------------------
Baird LargeCap Fund - Institutional Class Shares 3.39% -2.32% -2.99%
Baird LargeCap Fund - Investor Class Shares 3.15% -2.57% -3.25%
Russell 1000 Growth Index(2)<F91> 5.27% -3.59% -7.73%
S&P 500 Index(3)<F92> 4.91% 0.55% -1.03%
(1)<F90> For the period from September 29, 2000 (commencement of operations)
through December 31, 2005.
(2)<F91> The Russell 1000 Growth Index measures the performance of those
Russell 1000 companies with higher price-to-book ratios and higher
forecasted growth rates. The Russell 1000 Index consists of the 1,000
largest companies in the Russell 3000 Index, which represents
approximately 92% of the total market capitalization of the Russell
3000 Index, which in turn is comprised of the 3,000 largest U.S.
domiciled publicly traded common stocks by market capitalization.
These indices do not reflect any deduction for fees, expenses or
taxes. A direct investment in an index is not possible. The Russell
1000 Growth Index has been selected to replace the S&P 500 Index as
the Fund's primary benchmark because the Russell 1000 Growth Index
more accurately represents the performance of growth-style stocks in
which the Fund invests.
(3)<F92> The S&P 500 Index is an unmanaged, market-value weighted index of 500
stocks chosen by Standard & Poor's on the basis of market size,
liquidity and industry group representation. The S&P 500 Index is one
of the most widely used benchmarks of U.S. equity performance. This
index does not reflect any deduction for fees, expenses or taxes. A
direct investment in an index is not possible.
THE RETURNS SHOWN IN THE LINE GRAPH AND TABLE ABOVE REFLECT REINVESTMENT OF
DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM.
BAIRD LARGECAP FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
Shares Value
------ -----
COMMON STOCKS - 99.0%
AIR FREIGHT & LOGISTICS - 2.2%
8,837 United Parcel
Service, Inc. - Class B $ 664,100
-----------
BEVERAGES - 2.7%
13,560 PepsiCo, Inc. 801,125
-----------
BIOTECHNOLOGY - 6.6%
13,714 Amgen, Inc.*<F93> 1,081,486
9,740 Genentech, Inc.*<F93> 900,950
-----------
1,982,436
-----------
CHEMICALS - 2.5%
14,130 Praxair, Inc. 748,325
-----------
COMMERCIAL BANKS - 2.5%
11,652 Wells Fargo & Company 732,095
-----------
COMMUNICATIONS EQUIPMENT - 1.8%
31,030 Cisco Systems, Inc.*<F93> 531,234
-----------
COMPUTERS & PERIPHERALS - 2.4%
23,580 Dell, Inc.*<F93> 707,164
-----------
DIVERSIFIED FINANCIAL SERVICES - 2.6%
15,846 Citigroup, Inc. 769,006
-----------
ELECTRICAL EQUIPMENT - 3.4%
13,750 Emerson Electric Company 1,027,125
-----------
ENERGY EQUIPMENT & SERVICES - 2.0%
16,130 BJ Services Company 591,487
-----------
FOOD & STAPLES RETAILING - 6.1%
18,430 Sysco Corporation 572,252
14,990 Walgreen Company 663,457
12,270 Wal-Mart Stores, Inc. 574,236
-----------
1,809,945
-----------
HEALTH CARE EQUIPMENT & SUPPLIES - 6.1%
19,000 Medtronic, Inc. 1,093,830
10,790 Zimmer Holdings, Inc.*<F93> 727,678
-----------
1,821,508
-----------
HEALTH CARE PROVIDERS & SERVICES - 2.4%
13,840 Caremark Rx, Inc.*<F93> 716,774
-----------
HOTELS, RESTAURANTS & LEISURE - 2.3%
22,720 Starbucks Corporation*<F93> 681,827
-----------
HOUSEHOLD PRODUCTS - 3.2%
16,610 Procter &
Gamble Company 961,387
-----------
INDUSTRIAL CONGLOMERATES - 3.5%
29,600 General Electric Company 1,037,480
-----------
INSURANCE - 2.3%
14,800 AFLAC, Incorporated 687,016
-----------
INTERNET & CATALOG RETAIL - 3.0%
20,530 eBay, Inc.*<F93> 887,922
-----------
IT SERVICES - 2.1%
14,340 Fiserv, Inc.*<F93> 620,492
-----------
MACHINERY - 3.2%
10,880 Illinois Tool Works, Inc. 957,331
-----------
MEDIA - 2.5%
14,510 The McGraw-Hill
Companies, Inc. 749,151
-----------
MULTILINE RETAIL - 3.2%
17,280 Target Corporation 949,882
-----------
OIL & GAS - 6.0%
13,080 Apache Corporation 896,242
15,850 Exxon Mobil Corporation 890,294
-----------
1,786,536
-----------
PHARMACEUTICALS - 10.1%
12,510 Abbott Laboratories 493,269
11,460 Johnson & Johnson 688,746
11,840 Novartis AG - ADR F<F94> 621,363
27,780 Teva Pharmaceutical
Industries Ltd. - ADR F<F94> 1,194,818
-----------
2,998,196
-----------
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 3.2%
20,398 Intel Corporation 509,134
12,120 Maxim Integrated
Products, Inc. 439,229
-----------
948,363
-----------
SOFTWARE - 2.8%
31,700 Microsoft Corporation 828,955
-----------
SPECIALTY RETAIL - 8.3%
21,695 Best Buy Co., Inc. 943,299
18,196 Home Depot, Inc. 736,574
34,900 Staples, Inc. 792,579
-----------
2,472,452
-----------
Total Common Stocks
(Cost $22,943,465) 29,469,314
-----------
SHORT TERM INVESTMENTS - 0.1%
MONEY MARKET FUNDS - 0.1%
34,757 Investment Company
Cash Reserve Portfolio-
AIM Fund 34,757
-----------
Total Short-Term
Investments
(Cost $34,757) 34,757
-----------
Total Investments
(Cost $22,978,222) -
99.1% 29,504,071
-----------
Other Assets in Excess
of Liabilities - 0.9% 272,080
-----------
TOTAL NET
ASSETS - 100.0% $29,776,151
-----------
-----------
ADR - American Depository Receipt
*<F93> Non Income Producing
F<F94> Foreign Security
See notes to the financial statements
BAIRD MIDCAP FUND
DECEMBER 31, 2005
PORTFOLIO MANAGERS' COMMENTARY
For a third consecutive year, mid-cap shares advanced. Inflation-adjusted U.S.
GDP growth of 3.5% in 2005 was stronger than consensus expectations. Corporate
profit growth remained strong and balance sheets continue to improve. Growth
actually accelerated during the last six months of the year in the face of a 50%
year-over-year increase in energy costs, higher short-term interest rates,
unprecedented hurricane dislocations, and declining housing affordability.
These issues have scarcely impacted consumer spending.
Late in 2005 the quality growth stocks held by the Fund started to perform
better than the mid-cap benchmarks. However, since the beginning of the market
recovery in late 2002, investors have not shown a strong preference for higher
quality mid-cap companies. Market sectors such as basic materials, utilities
and, most notably, energy have been standout performers during the recent
economic advance. As you may remember, the Fund typically has little, if any
exposure in those more commodity oriented or heavily regulated areas. On the
other hand, the Fund's primary benchmark, the Russell Midcap Growth Index, as
well as the S&P MidCap 400 Index, have greater exposure to those very cyclical
parts of the economy, helping to explain the variation between the Fund's
performance and the performance of those benchmarks. We prefer to stay focused
on what we believe to be the true secular growth areas of the economy. Those
beliefs lead us to such sectors as financials, information technology, health
care and consumer discretionary - and to businesses that earn above average
returns on invested capital, grow faster than their peers and can fund their
growth without relying upon external sources. The Fund tends to have more
exposure than the benchmarks in several of those more consistent and higher
quality, growth areas. This period represents the longest time during Baird's
13-year mid-cap investment history that our strategy has been out of favor with
investors. History suggests that investors' emphasis will shift as this cycle
matures and profit growth decelerates. Additionally, during the past two years,
a significant portion of the Russell benchmark performance has been derived from
companies larger in market capitalization than our typical $2 billion to $10
billion range. While we have stayed true to our style and market cap size
parameters, this has meant being somewhat out of sync with the benchmarks.
Obviously, this has been challenging for you and us, but we remain convinced
that our long term, risk controlled strategy will prove successful over full
market cycles.
Our investments in quality industrial companies such as C.H. Robinson Worldwide,
Joy Global and Rockwell Automation helped the Fund's performance significantly
during 2005. Manufacturing and transportation related companies in the Fund's
portfolio enjoyed very strong earnings growth, which was reflected in solid
price appreciation. We see that pattern continuing and expect to maintain an
overweight in the industrial sector during 2006. Our conviction in those
businesses caused us to maintain an overweight position in the industrial sector
for most of 2005 when compared with the Russell Midcap Growth Index, which
bolstered the Fund's performance. Energy sector investments in oil service
companies such as XTO Energy, Cooper Cameron and Smith International performed
well, as you would expect, during the year. We will be opportunistic in adding
to this sector during the new year, as we expect price volatility for the
underlying commodities. Visibility of earnings growth, especially for oil
service companies, is very good. However, we did not have as much exposure to
the energy sector as either of the fund's benchmarks during 2005, which hurt
overall performance.
We were most disappointed in the performance of our holdings of growth companies
in the financial sector because of our consistent overweight of that sector
related to our primary benchmark. Solid performers in 2004, these companies
suffered from earnings-multiple pressure as the Federal Reserve (Fed) raised
rates during every scheduled meeting during the year. TCF Financial, Amegy Bank
and East West Bancorp lagged during the year. Earnings growth, however,
remained quite robust, providing us the comfort to be patient investors. As the
tightening cycle comes to a close, we expect multiples to rise again and will be
an opportunity to add to the sector.
Fund holdings in the consumer discretionary sector were also challenging during
2005. Typically an area of solid fundamental growth, shares in those stocks
faced the headwinds of higher oil prices and interest rates. Specifically, our
holdings in restaurants and traditional retail hurt performance as did a lack of
exposure to home builders.
Holdings within the information technology (IT) sector also underperformed for
the year. We generally maintained an underweight position versus the Russell
benchmark but stock selection was the primary reason for underperformance in IT.
Specifically, our exposure to the RFID sector and the shares of Symbol Tech as
well as long time holding Zebra Technologies hurt performance in 2005. We have
hired two new research analysts covering information technology companies in
order to improve our stock selection capabilities in that sector.
Finally, the health care sector, traditionally a more stable performer, was
nothing of the sort for us in 2005. We have historically maintained an equal-
to-overweight position in this sector compared to the Russell Midcap Growth
benchmark and an overweight position compared to the S&P Midcap 400. Early in
the year, as investors threw caution to the wind and added aggressively to the
commodity sectors, our health care stocks came under significant selling
pressure. Several of the stocks fell more than 25-30% during the first half of
the year, hurting performance of the Fund. Given the strong earnings outlooks,
we used the weakness to add to our holdings. The Fund was rewarded by remaining
long term investors as the shares rebounded in the second half of the year. For
the entire year, our healthcare exposure hurt Fund performance.
The Fed continued to raise short-term interest rates during the fourth quarter.
We believe sustainable domestic growth is important to the Fed's rate policy,
thus any interest rates hikes should not cause a significant slowdown. The Fed
raising the Funds rate to a "neutral" range of 4.50% - 4.75% is most likely and
should support the current environment of low inflation and stable growth.
Energy cost increases contributed to the 3.5% rise in the consumer price index
last year. While energy costs may trend higher next year, our 3% real GDP
growth forecast implies that increases should be more moderate. Increased
globalization, technology, and competition have kept core inflation contained,
offsetting higher energy prices.
Our outlook for 2006 calls for continued economic growth, solid corporate
profits growth and an advancing stock market led by a shift back to quality
growth companies. Confident that inflation is contained, the Fed will most
likely stop raising short-term interest rates after one or two more quarter-
point hikes. Low inflation is absolutely critical to the optimistic outlook
because it will keep the Fed from pursuing a restrictive monetary policy. If
inflation stays muted, then the liquidity backdrop should remain favorable for
financial markets.
Portfolio Management Team:
Greg P. Edwards, CFA
J. Bary Morgan, CFA
Charles F. Severson, CFA
BAIRD MIDCAP FUND
A December 31, 2005 summary of the Fund's top 10 holdings and equity sector
analysis compared to the Russell Midcap Growth Index and the S&P MidCap 400
Index is shown below.
TOP 10 HOLDINGS*<F95>
Cytyc Corporation 3.9%
Gen-Probe, Incorporated 3.2%
Smith International, Inc. 2.8%
Rockwell Automation, Inc. 2.8%
Investors Financial Services Corporation 2.8%
Medicis Pharmaceutical
Corporation - Class A 2.7%
Dick's Sporting Goods, Inc. 2.6%
Zebra Technologies Corporation - Class A 2.6%
Williams-Sonoma, Inc. 2.5%
Microchip Technology Incorporated 2.5%
NET ASSETS: $90,177,616
PORTFOLIO TURNOVER RATIO: 77.4%
NUMBER OF EQUITY HOLDINGS: 44
PORTFOLIO EXPENSE RATIO:***<F97>
INSTITUTIONAL CLASS: 0.85%
INVESTOR CLASS: 1.10%****<F98>
EQUITY SECTOR ANALYSIS**<F96>
MidCap Russell Midcap S&P 400
Fund Growth Index Index
------ -------------- -------
Consumer Discretionary 21.0% 23.0% 16.2%
Consumer Staples 2.2% 2.2% 3.3%
Energy 7.6% 10.0% 9.6%
Financials 11.7% 9.0% 18.5%
Health Care 23.3% 16.7% 11.5%
Industrials 12.8% 12.7% 13.3%
Information Technology 21.3% 21.1% 15.6%
Materials 0.0% 3.0% 4.3%
Telecommunication Services 0.0% 1.4% 0.4%
Utilities 0.0% 0.9% 7.4%
*<F95> The Fund's portfolio composition is subject to change and there is
no assurance that the Fund will continue to hold any particular
security. Percentages shown relate to the Fund's total net assets
as of December 31, 2005.
**<F96> Percentages shown in parentheses relate to the Fund's total equity
investments as of December 31, 2005, and may not add up to 100% due
to rounding.
***<F97> The Advisor has contractually agreed to limit the Fund's total
annual fund operating expenses to 0.85% of average daily net assets
for the Institutional Class shares and 1.10% of average daily net
assets for the Investor Class shares, at least through December 31,
2006.
****<F98> Includes 0.25% 12b-1 fee.
BAIRD MIDCAP FUND
BAIRD MIDCAP FUND - INSTITUTIONAL CLASS
VALUE OF A $100,000 INVESTMENT
Baird MidCap Fund - Russell Midcap S&P MidCap
Date Institutional Class Shares Growth Index 400 Index
---- -------------------------- -------------- ----------
12/29/2000 $100,000 $100,000 $100,000
6/30/2001 $93,807 $84,792 $99,105
12/31/2001 $91,108 $77,788 $97,562
6/30/2002 $85,310 $62,460 $94,427
12/31/2002 $76,610 $56,466 $83,398
6/30/2003 $83,400 $67,046 $93,756
12/31/2003 $97,200 $80,586 $113,108
6/30/2004 $103,800 $85,367 $119,991
12/31/2004 $109,289 $93,057 $131,753
6/30/2005 $106,688 $94,639 $136,825
12/31/2005 $115,372 $104,311 $148,305
GROWTH OF A HYPOTHETICAL INVESTMENT OF $100,000 MADE ON THE FUND'S INCEPTION
DATE (12/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD MIDCAP FUND - INVESTOR CLASS
VALUE OF A $10,000 INVESTMENT
Baird MidCap Fund - Russell Midcap S&P MidCap
Date Investor Class Shares Growth Index 400 Index
---- --------------------- -------------- ----------
12/29/2000 $10,000 $10,000 $10,000
6/30/2001 $9,370 $8,479 $9,910
12/31/2001 $9,091 $7,779 $9,756
6/30/2002 $8,511 $6,246 $9,443
12/31/2002 $7,631 $5,647 $8,340
6/30/2003 $8,300 $6,705 $9,376
12/31/2003 $9,650 $8,059 $11,311
6/30/2004 $10,300 $8,537 $11,999
12/31/2004 $10,839 $9,306 $13,175
6/30/2005 $10,568 $9,464 $13,683
12/31/2005 $11,406 $10,431 $14,830
GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE
(12/29/00), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD MIDCAP FUND
AVERAGE ANNUAL TOTAL RETURNS
For the Periods Ended December 31, 2005 ONE YEAR FIVE YEARS SINCE INCEPTION(1)<F99>
- --------------------------------------- -------- ---------- -----------------------
Baird MidCap Fund - Institutional Class Shares 5.56% 3.53% 2.90%
Baird MidCap Fund - Investor Class Shares 5.24% 3.29% 2.66%
Russell Midcap Growth Index(2)<F1> 12.10% 1.37% 0.85%
S&P MidCap 400 Index(3)<F2> 12.55% 8.60% 8.19%
(1)<F99> For the period from December 29, 2000 (commencement of operations)
through December 31, 2005.
(2)<F1> The Russell Midcap Growth Index measures the performance of those
Russell Midcap Index companies with higher price-to-book ratios and
higher forecasted growth rates. The Russell Midcap Index consists of
the 800 smallest companies in the Russell 1000 Index, which represent
approximately 24% of the total market capitalization of the Russell
1000 Index. The Russell 1000 Index consists of the largest companies
in the Russell 3000 Index, which in turn is comprised of the 3,000
largest U.S. domiciled publicly traded common stocks by market
capitalization. These indices do not reflect any deduction for fees,
expenses or taxes. A direct investment in an index is not possible.
The Russell MidCap Growth Index has been selected to replace the S&P
MidCap 400 Index as the Fund's primary benchmark because the Russell
MidCap Growth Index more accurately reflects the performance of the
growth-style stocks in which the Fund invests.
(3)<F2> The S&P MidCap 400 Index is an unmanaged, market-value weighted index
of 400 mid-cap stocks chosen by Standard & Poor's on the basis of
market size, liquidity and industry group representation. This index
does not reflect any deduction for fees, expenses or taxes. A direct
investment in an index is not possible.
THE RETURNS SHOWN IN THE LINE GRAPH AND TABLE ABOVE REFLECT REINVESTMENT OF
DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM.
BAIRD MIDCAP FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
Shares Value
------ -----
COMMON STOCKS - 98.1%
AIR FREIGHT & LOGISTICS - 1.8%
44,275 C.H. Robinson
Worldwide, Inc. $ 1,639,503
-----------
AUTO COMPONENTS - 4.6%
46,935 Autoliv, Inc. 2,131,788
103,890 Gentex Corporation 2,025,855
-----------
4,157,643
-----------
CAPITAL MARKETS - 4.8%
68,128 Eaton Vance Corporation 1,863,982
67,445 Investors Financial
Services Corporation 2,483,999
-----------
4,347,981
-----------
COMMERCIAL BANKS - 6.3%
61,335 East West Bancorp, Inc. 2,238,114
57,944 TCF Financial Corporation 1,572,600
33,619 Wintrust Financial
Corporation 1,845,683
-----------
5,656,397
-----------
COMMERCIAL SERVICES & SUPPLIES - 2.0%
30,241 Stericycle, Inc.*<F3> 1,780,590
-----------
COMMUNICATIONS EQUIPMENT - 1.7%
140,230 Tellabs, Inc.*<F3> 1,528,507
-----------
ELECTRICAL EQUIPMENT - 4.4%
42,451 Rockwell Automation, Inc. 2,511,401
36,054 Roper Industries, Inc. 1,424,494
-----------
3,935,895
-----------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 2.0%
31,077 CDW Corporation 1,789,103
-----------
ENERGY EQUIPMENT & SERVICES - 9.0%
41,905 BJ Services Company 1,536,656
53,570 Cooper Cameron
Corporation*<F3> 2,217,798
55,045 Patterson-UTI Energy, Inc. 1,813,733
68,194 Smith International, Inc. 2,530,679
-----------
8,098,866
-----------
FOOD & STAPLES RETAILING - 2.0%
69,725 United Natural
Foods, Inc.*<F3> 1,840,740
-----------
HEALTH CARE EQUIPMENT & SUPPLIES - 13.8%
124,407 Cytyc Corporation*<F3> 3,512,010
58,906 Gen-Probe, Incorporated*<F3> 2,874,024
43,745 Kyphon Inc.*<F3> 1,786,108
56,298 ResMed, Inc.*<F3> 2,156,776
41,663 Varian Medical
Systems, Inc.*<F3> 2,097,315
-----------
12,426,233
-----------
HEALTH CARE PROVIDERS & SERVICES - 3.1%
35,065 Patterson Companies, Inc.*<F3> 1,171,171
26,630 Pharmaceutical Product
Development, Inc. 1,649,729
-----------
2,820,900
-----------
HOTELS, RESTAURANTS & LEISURE - 3.9%
47,315 The Cheesecake
Factory Incorporated*<F3> 1,769,108
35,579 PF Chang's China
Bistro, Inc.*<F3> 1,765,786
-----------
3,534,894
-----------
HOUSEHOLD DURABLES - 2.0%
18,155 Harman International
Industries, Incorporated 1,776,467
-----------
IT SERVICES - 6.8%
57,615 Alliance Data
Systems Corporation*<F3> 2,051,094
39,085 Cognizant Technology
Solutions Corporation*<F3> 1,967,930
44,906 Global Payments, Inc. 2,093,068
-----------
6,112,092
-----------
INTERNET SOFTWARE & SERVICES - 2.1%
43,525 NAVTEQ*<F3> 1,909,442
-----------
MACHINERY - 4.9%
55,912 Joy Global Inc. 2,236,480
63,320 Pentair, Inc. 2,185,806
-----------
4,422,286
-----------
MEDIA - 1.8%
30,819 Pixar*<F3> 1,624,778
-----------
OFFICE ELECTRONICS - 2.6%
54,278 Zebra Technologies
Corporation - Class A*<F3> 2,325,812
-----------
PHARMACEUTICALS - 4.6%
75,304 Medicis Pharmaceutical
Corporation - Class A 2,413,493
100,490 MGI Pharma, Inc.*<F3> 1,724,409
-----------
4,137,902
-----------
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 2.5%
70,165 Microchip Technology
Incorporated 2,255,805
-----------
SOFTWARE - 2.1%
138,790 Activision, Inc.*<F3> 1,906,974
-----------
SPECIALTY RETAIL - 7.5%
70,448 Dick's Sporting
Goods, Inc.*<F3> 2,341,692
40,450 Tractor Supply Company*<F3> 2,141,423
53,180 Williams-Sonoma, Inc.*<F3> 2,294,717
-----------
6,777,832
-----------
TRADING COMPANIES & DISTRIBUTORS - 1.8%
41,594 Fastenal Company 1,630,069
-----------
Total Common Stocks
(Cost $75,625,683) 88,436,711
-----------
SHORT TERM INVESTMENTS - 1.9%
MONEY MARKET FUNDS - 1.9%
1,731,216 Investment Company
Cash Reserve Portfolio-
AIM Fund $1,731,215
-----------
Total Short-Term
Investments
(Cost $1,731,215) 1,731,215
-----------
Total Investments
(Cost $77,356,898) -
100.0% 90,167,926
-----------
Other Assets in Excess
of Liabilities - 0.0% 9,690
-----------
TOTAL NET
ASSETS - 100.0% $90,177,616
-----------
-----------
*<F3> Non Income Producing
See notes to the financial statements
BAIRD SMALLCAP FUND
DECEMBER 31, 2005
PORTFOLIO MANAGERS' COMMENTARY
Small company shares continued their upward path in 2005, marking the third year
in succession, although at a modest rate for the Baird SmallCap Fund.
Inflation-adjusted U.S. GDP growth of 3.5% in 2005 was stronger than consensus
expectations. Growth actually accelerated during the last six months of the
year in the face of a 50% year-over-year increase in energy cost, higher short
term interest rates, unprecedented hurricane dislocations, and declining housing
affordability. These issues have scarcely impacted consumer spending.
Since the beginning of the market recovery in 2002, investors have not shown a
strong preference for high quality, small cap growth companies. Market sectors
such as basic materials, utilities and, most obviously, energy have been
standout performers during the most recent economic advance. To highlight this
effect, over 50% of the return of the Russell 2000 Growth Index, the Fund's
primary benchmark, during 2005 was a result of energy share appreciation. As
you may remember, the Fund typically has little, if any, exposure in those more
commodity oriented or heavily regulated areas. On the other hand, the Russell
2000 Growth Index, as well as the S&P Small Cap 600 Index, have greater exposure
to those very cyclical parts of the economy, helping to explain the variation
between the Fund's performance and the performance of the benchmarks. We prefer
to stay focused on what we believe to be the true secular growth areas of the
economy. Those beliefs lead us to such sectors as financials, information
technology, health care and consumer discretionary - and to businesses that earn
above average returns on invested capital, grow faster than their peers and can
fund their growth without relying upon external sources. The Fund tends to have
more exposure than the benchmarks in several of those more consistent, and
higher quality, growth areas. History suggests that investors' emphasis will
shift as this cycle matures and profit growth decelerates.
Our investments in quality industrial companies such as Watsco, Skywest
Airlines, Brady Corporation, and Bucyrus International helped the Fund's
performance significantly during 2005. Manufacturing and transportation related
companies in the Fund's portfolio enjoyed very strong earnings growth, which was
reflected in solid price appreciation. We see that pattern continuing and
expect to maintain at least an average weight in the industrial sector in 2006.
The Fund maintained an overweight in the industrial sector compared with the
Russell benchmark for much of 2005, but profit-taking late in the year reduced
the sector to average weight. The Fund ended the year in an underweight
position in industrials versus the S&P benchmark. Energy sector investments in
oil service companies such as Oceaneering International and Gulfmark Offshore
performed well, as you would expect, during the year. We will be opportunistic
in adding to this sector during the new year, as we expect price volatility for
the underlying commodities. Visibility of earnings growth for oil service
companies is very good. During 2005, we did not have as much exposure to the
energy sector as either Russell 2000 Growth Index or the S&P SmallCap 600 Index,
which hurt relative performance.
We were most disappointed in the performance of our holdings of growth companies
in the consumer discretionary sector. Shares in companies in the restaurant and
retail categories were pressured by the fear of a significant decline in
consumer spending following the spike in energy prices and the further rise in
interest rates. The Fund reduced its exposure to this sector during the year,
but issue selection caused underperformance in the sector when compared with the
benchmarks. We expect the shares to perform better in 2006 as interest rates
peak and employment levels remain high.
Fund shareholders were rewarded again in 2005 by the holdings in the financials
sector, which was an equal to overweighted sector for much of the year. Shares
of Boston Private Holdings and Wintrust Financial were solid contributors to
performance. Earnings growth and visibility remains good, providing us the
comfort to be patient investors. These companies suffered from earnings
multiple pressure during much of 2005, and as the Federal Reserve tightening
cycle concludes we would expect to add to the sector.
Holdings within the information technology (IT) sector also outperformed the
growth benchmark during the year. While negative on an absolute basis in 2005,
the combination of an underweighted position versus the primary benchmark for
the year, and contribution from companies such as Plexus and Zoran helped fund
performance. Business spending remains strong in light of high levels of
corporate profits will cause us to keep a sector weighting somewhat below the
Russell 2000 Growth Index and above the S&P SmallCap 600 Index. Additionally,
we have hired two new research analysts covering IT companies in order to
improve our stock selection capabilities in that sector.
Finally, the health care sector, traditionally a more stable performer, was
nothing of the sort for the Fund in 2005. We have historically maintained an
equal to overweight position in this sector compared to the Russell benchmark
and an overweight position compared to the S&P Small Cap 600. Early year gains
relative to the Russell benchmark were erased due to disappointing results from
companies such as Martek Biosciences, Wright Medical and MGI Pharma. Overall
results for the sector were slightly negative on an absolute basis for the year,
reflecting the fact that our stock selection was a negative contributor to Fund
shareholders.
The Fed continued to raise short-term interest rates during the fourth quarter,
as well as the first month of 2006. We believe sustainable domestic growth is
important to the Fed's rate policy; thus, any interest rate hikes should not
cause a significant slowdown. The Fed raising rates to a "neutral" range of
4.50% - 4.75% is most likely and should support the current environment of low
inflation and stable growth. Energy cost increases contributed to the 3.5 %
rise in the consumer price index last year. While energy costs may trend higher
next year, our 3% real GDP growth forecast implies that increases should be more
moderate. Increased globalization, technology and competition have kept core
inflation contained, offsetting higher energy prices.
Our outlook for 2006 calls for continued economic growth, solid corporate
profits growth and an advancing stock market led by a shift back to quality
growth companies. Confident that inflation is contained, the Fed will most
likely stop raising short-term interest rates after one or two more quarter-
point hikes in 2006. Low inflation is absolutely critical to the optimistic
outlook because it will keep the Fed from pursuing a restrictive monetary
policy. If inflation stays muted, then the liquidity backdrop should remain
favorable for financial markets.
Portfolio Management Team:
Greg P. Edwards, CFA
J. Bary Morgan, CFA
Charles F. Severson, CFA
BAIRD SMALLCAP FUND
A December 31, 2005 summary of the Fund's top 10 holdings and equity sector
analysis compared to the Russell 2000 Growth Index and the S&P 600 Index is
shown below.
TOP 10 HOLDINGS*<F4>
Brady Corporation - Class A 3.8%
Scan Source, Inc. 3.3%
Wintrust Financial Corporation 3.2%
Boston Private Financial Holdings, Inc. 3.0%
Insight Enterprises, Inc. 3.0%
Tractor Supply Company 2.9%
Providence Service Corporation 2.9%
Plexus Corporation 2.7%
Marlin Business Services, Inc. 2.7%
Watsco, Inc. 2.6%
NET ASSETS: $47,373,660
PORTFOLIO TURNOVER RATIO: 56.4%
NUMBER OF EQUITY HOLDINGS: 43
PORTFOLIO EXPENSE RATIO:***<F6>
INSTITUTIONAL CLASS: 0.95%
INVESTOR CLASS: 1.20%****<F7>
EQUITY SECTOR ANALYSIS**<F5>
SmallCap Russell 2000 S&P 600
Fund Growth Index Index
-------- ------------ -------
Consumer Discretionary 17.2% 15.0% 15.8%
Consumer Staples 2.5% 2.4% 3.5%
Energy 7.8% 7.2% 8.1%
Financials 11.0% 9.7% 14.7%
Health Care 21.8% 20.2% 12.5%
Industrials 17.4% 15.0% 18.8%
Information Technology 22.2% 25.7% 16.2%
Materials 0.0% 3.6% 5.7%
Telecommunication Services 0.0% 0.9% 0.2%
Utilities 0.0% 0.3% 4.4%
*<F4> The Fund's portfolio composition is subject to change and there is
no assurance that the Fund will continue to hold any particular
security. Percentages shown relate to the Fund's total net assets
as of December 31, 2005.
**<F5> Percentages shown in parentheses relate to the Fund's total equity
investments as of December 31, 2005, and may not add up to 100% due
to rounding.
***<F6> The Advisor has contractually agreed to limit the Fund's total
annual fund operating expenses to 0.95% of average daily net assets
for the Institutional Class shares and 1.20% of average daily net
assets for the Investor Class shares, at least through December 31,
2006.
****<F7> Includes 0.25% 12b-1 fee.
BAIRD SMALLCAP FUND
BAIRD SMALLCAP FUND - INSTITUTIONAL CLASS
VALUE OF A $100,000 INVESTMENT
Baird SmallCap Fund - Russell 2000 S&P SmallCap
Date Institutional Class Shares Growth Index 600 Index
---- -------------------------- ------------ -------------
6/30/2004 $100,000 $100,000 $100,000
12/31/2004 $108,400 $108,163 $111,451
6/30/2005 $108,100 $104,286 $113,448
12/31/2005 $112,000 $112,655 $120,011
GROWTH OF A HYPOTHETICAL INVESTMENT OF $100,000 MADE ON THE FUND'S INCEPTION
DATE (6/30/04), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD SMALLCAP FUND - INVESTOR CLASS
VALUE OF A $10,000 INVESTMENT
Baird SmallCap Fund - Russell 2000 S&P SmallCap
Date Investor Class Shares Growth Index 600 Index
---- --------------------- ------------ ------------
6/30/2004 $10,000 $10,000 $10,000
12/31/2004 $10,830 $10,816 $11,145
6/30/2005 $10,780 $10,429 $11,345
12/31/2005 $11,160 $11,266 $12,001
GROWTH OF A HYPOTHETICAL INVESTMENT OF $10,000 MADE ON THE FUND'S INCEPTION DATE
(6/30/04), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
BAIRD SMALLCAP FUND
AVERAGE ANNUAL TOTAL RETURNS
For the Periods Ended December 31, 2005 ONE YEAR SINCE INCEPTION(1)<F8>
- --------------------------------------- -------- ----------------------
Baird SmallCap Fund - Institutional Class Shares 3.32% 7.83%
Baird SmallCap Fund - Investor Class Shares 3.05% 7.57%
Russell 2000 Growth Index(2)<F9> 4.15% 8.27%
S&P SmallCap 600 Index(3)<F10> 7.68% 12.93%
(1)<F8> For the period from June 30, 2004 (commencement of operations)
through December 31, 2005.
(2)<F9> The Russell 2000 Growth Index measures the performance of those
Russell 2000 Index companies with higher price-to-book and higher
forecasted growth rates. The Russell 2000 Index consists of the
2,000 smallest U.S. domiciled publicly-traded common stocks that are
included in the Russell 3000 Index. These common stocks represent
approximately 8% of the U.S. equity market. These indices do not
reflect any deduction for fees, expenses or taxes. A direct
investment in an index is not possible. The Russell 2000 Growth
Index has been selected to replace the S&P SmallCap 600 as the Fund's
primary benchmark because the Russell 2000 Growth Index more
accurately reflects the performance of the growth-style stocks in
which the Fund invests.
(3)<F10> The S&P SmallCap 600 Index is an unmanaged, market-value weighted
index of 600 small-capitalization common stocks chosen by Standard &
Poor's on the basis of market size, liquidity and industry
characteristics. This index does not reflect any deduction for fees,
expenses or taxes. A direct investment in an index is not possible.
THE RETURNS SHOWN IN THE LINE GRAPH AND TABLE ABOVE REFLECT REINVESTMENT OF
DIVIDENDS AND/OR CAPITAL GAINS DISTRIBUTIONS IN ADDITIONAL SHARES. THE RETURNS
DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
FOR INFORMATION ABOUT THE PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM.
BAIRD SMALLCAP FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2005
Shares Value
------ -----
COMMON STOCKS - 97.1%
AIRLINES - 1.4%
24,040 SkyWest, Inc. $ 645,714
-----------
BIOTECHNOLOGY - 2.0%
34,241 PRA International*<F11> 963,884
-----------
COMMERCIAL BANKS - 10.3%
47,355 Boston Private Financial
Holdings, Inc. 1,440,539
26,586 East West Bancorp, Inc. 970,123
36,058 United Community
Banks, Inc. 961,307
27,320 Wintrust Financial
Corporation 1,499,868
-----------
4,871,837
-----------
COMMERCIAL SERVICES & SUPPLIES - 8.3%
49,547 Brady Corporation -
Class A 1,792,610
22,213 G & K Services, Inc. 871,860
53,194 Marlin Business
Services, Inc.*<F11> 1,270,805
-----------
3,935,275
-----------
COMMUNICATIONS EQUIPMENT - 2.2%
75,746 Tekelec*<F11> 1,052,869
-----------
DIVERSIFIED FINANCIAL SERVICES - 1.3%
28,550 Heartland Payment
Systems, Inc.*<F11> 618,393
-----------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 6.0%
55,999 Plexus Corporation*<F11> 1,273,417
28,779 ScanSource, Inc.*<F11> 1,573,636
-----------
2,847,053
-----------
ENERGY EQUIPMENT & SERVICES - 6.3%
32,407 Dawson Geophysical
Company*<F11> 998,784
29,138 GulfMark Offshore, Inc.*<F11> 863,067
22,579 Oceaneering
International, Inc.*<F11> 1,123,983
-----------
2,985,834
-----------
FOOD & STAPLES RETAILING - 2.5%
45,176 United Natural
Foods, Inc.*<F11> 1,192,646
-----------
HEALTH CARE EQUIPMENT & SUPPLIES - 4.0%
23,674 Kyphon Inc.*<F11> 966,609
45,545 Wright Medical
Group, Inc.*<F11> 929,118
-----------
1,895,727
-----------
HEALTH CARE PROVIDERS & SERVICES - 11.1%
59,017 Allscripts Healthcare
Solutions, Inc.*<F11> 790,828
24,409 American Healthways, Inc.*<F11> 1,104,507
24,575 Computer Programs &
Systems, Inc. 1,018,142
46,987 Providence Service
Corporation*<F11> 1,352,756
31,152 United Surgical Partners
International, Inc.*<F11> 1,001,537
-----------
5,267,770
-----------
HOTELS, RESTAURANTS & LEISURE - 3.9%
20,956 PF Chang's China
Bistro, Inc.*<F11> 1,040,046
16,261 Red Robin Gourmet
Burgers Inc.*<F11> 828,661
-----------
1,868,707
-----------
HOUSEHOLD PRODUCTS - 2.1%
21,860 Central Garden &
Pet Company*<F11> 1,004,248
-----------
INTERNET & CATALOG RETAIL - 3.0%
71,406 Insight Enterprises, Inc.*<F11> 1,400,272
-----------
IT SERVICES - 4.4%
66,296 Covansys Corporation*<F11> 902,289
38,974 SRA International, Inc. -
Class A*<F11> 1,190,266
-----------
2,092,555
-----------
MACHINERY - 2.2%
19,305 Bucyrus International,
Inc. - Class A 1,017,374
-----------
MULTILINE RETAIL - 2.1%
61,432 Fred's, Inc. 999,499
-----------
PHARMACEUTICALS - 3.9%
53,195 MGI Pharma, Inc.*<F11> 912,826
51,721 Salix Pharmaceuticals, Ltd.*<F11> 909,255
-----------
1,822,081
-----------
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 3.9%
23,318 Varian Semiconductor
Equipment
Associates, Inc.*<F11> 1,024,359
50,994 Zoran Corporation*<F11> 826,613
-----------
1,850,972
-----------
SOFTWARE - 6.5%
25,322 Kronos Incorporated*<F11> 1,059,979
50,993 Open Solutions Inc.*<F11> 1,168,760
34,978 THQ Inc.*<F11> 834,225
-----------
3,062,964
-----------
SPECIALTY RETAIL - 7.1%
64,825 AC Moore Arts &
Crafts, Inc.*<F11> 943,204
36,684 Hibbett Sporting
Goods, Inc.*<F11> 1,044,760
26,225 Tractor Supply Company*<F11> 1,388,352
-----------
3,376,316
-----------
TRADING COMPANIES & DISTRIBUTORS - 2.6%
20,591 Watsco, Inc. 1,231,548
-----------
Total Common Stocks
(Cost $42,200,787) 46,003,538
-----------
SHORT TERM INVESTMENTS - 2.5%
MONEY MARKET FUNDS - 2.5%
1,179,431 Investment Company
Cash Reserve Portfolio-
AIM Fund 1,179,431
-----------
Total Short-Term
Investments
(Cost $1,179,431) 1,179,431
-----------
Total Investments
(Cost $43,380,218) -
99.6% 47,182,969
-----------
Other Assets in Excess
of Liabilities - 0.4% 190,691
-----------
TOTAL NET
ASSETS - 100.0% $47,373,660
-----------
-----------
*<F11> Non Income Producing
See notes to the financial statements
BAIRD FUNDS, INC.
ADDITIONAL INFORMATION ON FUND EXPENSES DECEMBER 31, 2005 (UNAUDITED)
EXAMPLE
As a shareholder of a mutual fund, you incur two types of costs: (1) transaction
costs, which may include sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, such as management fees; distribution and/or service (12b-1)
fees; and other fund expenses. Although the Funds do not charge any sales
loads, redemption fees, or other transaction fees, you will be assessed fees for
outgoing wire transfers, returned checks and stop payment orders at prevailing
rates charged by U.S. Bancorp Fund Services, LLC, the Fund's transfer agent. If
you request that a redemption be made by wire transfer, currently the Fund's
transfer agent charges a $15.00 fee.
This Example is intended to help you understand your ongoing costs (in dollars)
of investing in each Fund and to compare these costs with the ongoing costs of
investing in other mutual funds. The Example is based on an investment of
$1,000 invested at the beginning of the period and held for the entire period
(7/1/05 - 12/31/05).
ACTUAL EXPENSES
The third and fourth columns of the table below provide information about
account values based on actual returns and actual expenses. You may use the
information in these columns, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the fourth column entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The fifth and sixth columns of the table below provide information about
hypothetical account values and hypothetical expenses based on the Funds' actual
expense ratios and an assumed rate of return of 5% per year before expenses,
which is not the Funds' actual return. The hypothetical account values and
expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the Funds and other mutual funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other mutual funds. Please note that
the expenses shown in the table are meant to highlight your ongoing costs only
and do not reflect any transactional costs. Therefore, the sixth column of the
table (entitled "Expenses Paid During Period") is useful in comparing ongoing
costs only, and will not help you determine the relative total costs of owning
different mutual funds. In addition, if these transactional costs were included,
your costs could have been higher.
ACTUAL VS. HYPOTHETICAL RETURNS
For the Six Months Ended December 31, 2005
HYPOTHETICAL (5% RETURN
ACTUAL BEFORE EXPENSES)
-------------------------- --------------------------
FUND'S BEGINNING ENDING EXPENSES ENDING EXPENSES
ANNUALIZED ACCOUNT ACCOUNT PAID ACCOUNT PAID
EXPENSE VALUE VALUE DURING VALUE DURING
RATIO(1)<F12> 7/1/05 12/31/05 PERIOD(1)<F12> 12/31/05 PERIOD(1)<F12>
------------- ------ -------- -------------- -------- --------------
BAIRD LARGECAP FUND
Institutional Class 0.75% $1,000.00 $1,045.50 $3.87 $1,021.42 $3.82
Investor Class 1.00% $1,000.00 $1,045.70 $5.16 $1,020.16 $5.09
BAIRD MIDCAP FUND
Institutional Class 0.85% $1,000.00 $1,081.40 $4.46 $1,020.92 $4.33
Investor Class 1.10% $1,000.00 $1,079.30 $5.77 $1,019.66 $5.60
BAIRD SMALLCAP FUND
Institutional Class 0.95% $1,000.00 $1,036.10 $4.88 $1,020.42 $4.84
Investor Class 1.20% $1,000.00 $1,035.20 $5.64 $1,019.66 $5.60
(1)<F12> Expenses are equal to the Fund's annualized expense ratio multiplied
by the average account value over the period, multiplied by 184 days
and divided by 365 to reflect the one-half year period.
BAIRD FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2005
BAIRD LARGECAP BAIRD MIDCAP BAIRD SMALLCAP
FUND FUND FUND
-------------- ------------ --------------
ASSETS:
Investments, at value (cost $22,978,222;
$77,356,898; and $43,380,218, respectively) $29,504,071 $90,167,926 $47,182,969
Dividends receivable 22,849 14,202 3,511
Interest receivable 815 7,291 6,093
Receivable for investments sold 1,404,744 -- --
Receivable for fund shares sold 6,860 87,654 220,899
Other assets 9,769 8,479 29,815
----------- ----------- -----------
Total assets 30,949,108 90,285,552 47,443,287
----------- ----------- -----------
LIABILITIES:
Payable to Advisor and Distributor 9,731 46,240 19,482
Payable for fund shares repurchased 1,116,624 1,579 7,500
Accrued expenses and other liabilities 46,602 60,117 42,645
----------- ----------- -----------
Total liabilities 1,172,957 107,936 69,627
----------- ----------- -----------
NET ASSETS $29,776,151 $90,177,616 $47,373,660
----------- ----------- -----------
----------- ----------- -----------
NET ASSETS CONSIST OF:
Capital stock $29,834,468 $76,266,993 $44,396,139
Accumulated undistributed net investment income 35 -- --
Accumulated net realized gain (loss) on investments sold (6,584,201) 1,099,595 (825,230)
Net unrealized appreciation on investments 6,525,849 12,811,028 3,802,751
----------- ----------- -----------
NET ASSETS $29,776,151 $90,177,616 $47,373,660
----------- ----------- -----------
----------- ----------- -----------
INSTITUTIONAL CLASS SHARES
Net assets $27,375,626 $85,670,669 $45,010,093
Shares outstanding
($0.01 par value, unlimited shares authorized) 3,287,395 7,702,045 4,018,386
Net asset value, offering and redemption price per share $ 8.33 $ 11.12 $ 11.20
----------- ----------- -----------
----------- ----------- -----------
INVESTOR CLASS SHARES
Net assets $ 2,400,525 $ 4,506,947 $ 2,363,567
Shares outstanding
($0.01 par value, unlimited shares authorized) 289,729 409,927 211,828
Net asset value, offering and redemption price per share $ 8.29 $ 10.99 $ 11.16
----------- ----------- -----------
----------- ----------- -----------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2005
BAIRD LARGECAP BAIRD MIDCAP BAIRD SMALLCAP
FUND FUND FUND
-------------- ------------ --------------
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld
of $2,968, $0 and $0, respectively) $ 685,188 $ 555,481 $ 74,943
Interest 54,416 82,411 35,629
---------- ---------- ----------
Total investment income 739,604 637,892 110,572
---------- ---------- ----------
EXPENSES:
Investment advisory fees 398,856 742,939 249,325
Administration fees 35,606 56,955 14,206
Shareholder servicing fees 24,279 29,466 30,327
Fund accounting fees 32,163 39,305 28,015
Professional fees 27,678 41,805 12,450
Federal and state registration 31,339 32,746 29,668
Directors fees 6,145 10,293 2,855
Custody fees 4,174 7,703 12,746
Reports to shareholders 4,186 3,650 2,310
Distribution fees - Investor Class Shares 6,049 10,613 1,646
Miscellaneous 4,817 6,910 1,091
---------- ---------- ----------
Total expenses 575,292 982,385 384,639
Expense reimbursement by Advisor (109,024) (129,774) (104,335)
---------- ---------- ----------
Total expenses 466,268 852,611 280,304
---------- ---------- ----------
NET INVESTMENT INCOME (LOSS) 273,336 (214,719) (169,732)
---------- ---------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments 2,075,582 4,534,559 (622,142)
Change in unrealized appreciation/depreciation on investments (360,051) 1,330,768 2,209,185
---------- ---------- ----------
Net realized and unrealized gain on investments 1,715,531 5,865,327 1,587,043
---------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $1,988,867 $5,650,608 $1,417,311
---------- ---------- ----------
---------- ---------- ----------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD LARGECAP FUND
-------------------------------------
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
OPERATIONS:
Net investment income $ 273,336 $ 443,344
Net realized gain (loss) on investments 2,075,582 (696,191)
Change in unrealized appreciation/depreciation on investments (360,051) 3,517,047
----------- -----------
Net increase in net assets resulting from operations 1,988,867 3,264,200
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 4,077,942 6,437,380
Shares issued to holders in reinvestment of dividends 269,481 439,027
Cost of shares redeemed (42,940,244) (3,421,800)
----------- -----------
Net increase (decrease) in net assets resulting
from capital share transactions (38,592,821) 3,454,607
----------- -----------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (258,497) (431,568)
----------- -----------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net investment income (15,591) (10,989)
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (36,878,042) 6,276,250
NET ASSETS:
Beginning of year 66,654,193 60,377,943
----------- -----------
End of year (including undistributed net investment income
of $35 and $787, respectively) $29,776,151 $66,654,193
----------- -----------
----------- -----------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD MIDCAP FUND
-------------------------------------
Year Ended Year Ended
December 31, 2005 December 31, 2004
----------------- -----------------
OPERATIONS:
Net investment loss $ (214,719) $ (258,644)
Net realized gain on investments 4,534,559 1,764,507
Change in unrealized appreciation on investments 1,330,768 6,685,264
------------ -----------
Net increase in net assets resulting from operations 5,650,608 8,191,127
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 22,919,718 56,415,797
Shares issued to holders in reinvestment of dividends 2,763,152 149,585
Cost of shares redeemed (28,445,712) (3,773,365)
------------ -----------
Net increase (decrease) in net assets resulting
from capital share transactions (2,762,842) 52,792,017
------------ -----------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net realized gains (2,976,399) (143,452)
------------ -----------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net realized gains (155,477) (6,831)
------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (244,110) 60,832,861
NET ASSETS:
Beginning of year 90,421,726 29,588,865
------------ -----------
End of year $ 90,177,616 $90,421,726
------------ -----------
------------ -----------
See notes to the financial statements
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD SMALLCAP FUND
---------------------------------------
June 30, 2004(1)<F13>
Year Ended through
December 31, 2005 December 31, 2004
----------------- -----------------
OPERATIONS:
Net investment loss $ (169,732) $ (50,298)
Net realized loss on investments (622,142) (203,088)
Change in unrealized appreciation on investments 2,209,185 1,593,566
----------- -----------
Net increase in net assets resulting from operations 1,417,311 1,340,180
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 33,342,662 17,042,209
Cost of shares redeemed (4,785,759) (982,943)
----------- -----------
Net increase in net assets resulting
from capital share transactions 28,556,903 16,059,266
----------- -----------
TOTAL INCREASE IN NET ASSETS 29,974,214 17,399,446
NET ASSETS:
Beginning of period 17,399,446 --
----------- -----------
End of period $47,373,660 $17,399,446
----------- -----------
----------- -----------
(1)<F13> Commencement of operations.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD LARGECAP FUND - INSTITUTIONAL CLASS
-------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 8.13 $ 7.78 $ 6.41 $ 8.63 $ 9.58
----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income 0.04(1) 0.06(1) 0.02 0.02 0.01
<F14> <F14>
Net realized and unrealized
gains (losses) on investments 0.24 0.35 1.37 (2.22) (0.95)
----------- ----------- ----------- ----------- -----------
Total from investment operations 0.28 0.41 1.39 (2.20) (0.94)
----------- ----------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income (0.08) (0.06) (0.02) (0.02) (0.01)
Distributions from net realized gains -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total distributions (0.08) (0.06) (0.02) (0.02) (0.01)
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $8.33 $8.13 $7.78 $6.41 $8.63
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total return 3.39% 5.21% 21.75% (25.53)% (9.84)%
Supplemental data and ratios:
Net assets, end of period $27,375,626 $64,754,140 $59,743,783 $48,900,767 $51,446,666
Ratio of expenses to average net assets 0.75% 0.75% 0.75% 0.75% 0.75%
Ratio of expenses to average
net assets (before waivers) 0.93% 0.93% 0.95% 0.95% 1.06%
Ratio of net investment income
to average net assets 0.46% 0.72% 0.34% 0.23% 0.12%
Ratio of net investment income (loss)
to average net assets (before waivers) 0.28% 0.54% 0.14% 0.03% (0.19)%
Portfolio turnover rate(2)<F15> 28.6% 23.2% 24.8% 16.2% 9.0%
(1)<F14> Calculated using average shares outstanding during the period.
(2)<F15> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD LARGECAP FUND - INVESTOR CLASS
-------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 8.09 $ 7.75 $ 6.40 $ 8.61 $ 9.57
----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (loss) 0.02(1) 0.04(1) 0.01 (0.00)(2) (0.01)
<F16> <F16> <F17>
Net realized and unrealized
gains (losses) on investments 0.23 0.35 1.35 (2.21) (0.95)
----------- ----------- ----------- ----------- -----------
Total from investment operations 0.25 0.39 1.36 (2.21) (0.96)
----------- ----------- ----------- ----------- -----------
Less distributions:
Dividends from net investment income (0.05) (0.05) (0.01) (0.00) --
Distributions from net realized gains -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total distributions (0.05) (0.05) (0.01) (0.00) --
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 8.29 $ 8.09 $ 7.75 $ 6.40 $ 8.61
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total return 3.15% 5.00% 21.20% (25.65)% (10.03)%
Supplemental data and ratios:
Net assets, end of period $2,400,525 $1,900,053 $634,160 $647,018 $615,533
Ratio of expenses to average net assets 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of expenses to average
net assets (before waivers) 1.18% 1.18% 1.20% 1.20% 1.31%
Ratio of net investment income (loss)
to average net assets 0.21% 0.47% 0.09% (0.02)% (0.13)%
Ratio of net investment income (loss)
to average net assets (before waivers) 0.03% 0.29% (0.11)% (0.22)% (0.44)%
Portfolio turnover rate(3)<F18> 28.6% 23.2% 24.8% 16.2% 9.0%
(1)<F16> Calculated using average shares outstanding during the period.
(2)<F17> Amount is less than $0.01.
(3)<F18> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD MIDCAP FUND - INSTITUTIONAL CLASS
-------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.91 $ 9.72 $ 7.66 $ 9.11 $ 9.70
----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (0.02)(1) (0.04)(1) (0.07) (0.07)(1) (0.06)(1)
<F19> <F19> <F19> <F19>
Net realized and unrealized
gains (losses) on investments 0.63 1.25 2.13 (1.38) (0.53)
----------- ----------- ----------- ----------- -----------
Total from investment operations 0.61 1.21 2.06 (1.45) (0.59)
----------- ----------- ----------- ----------- -----------
Less distributions:
Distributions from net realized gains (0.40) (0.02) -- -- --
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 11.12 $ 10.91 $ 9.72 $ 7.66 $ 9.11
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total return 5.56% 12.44% 26.89% (15.92)% (6.08)%
Supplemental data and ratios:
Net assets, end of period $85,670,669 $86,476,869 $28,629,656 $20,864,264 $13,049,574
Ratio of expenses to average net assets 0.85% 0.85% 1.20% 1.25% 1.25%
Ratio of expenses to average
net assets (before waivers) 0.98% 1.05% 1.20% 1.39% 2.06%
Ratio of net investment loss to average net assets (0.21)% (0.43)% (0.81)% (0.84)% (0.67)%
Ratio of net investment loss
to average net assets (before waivers) (0.34)% (0.63)% (0.81)% (0.98)% (1.48)%
Portfolio turnover rate(2)<F20> 77.4% 77.9% 81.8% 55.4% 73.6%
(1)<F19> Calculated using average shares outstanding during the period.
(2)<F20> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD MIDCAP FUND - INVESTOR CLASS
-------------------------------------------------------------------------
Year Ended December 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Per Share Data:
Net asset value, beginning of period $ 10.82 $ 9.65 $ 7.63 $ 9.09 $ 9.70
----------- ----------- ----------- ----------- -----------
Income from investment operations:
Net investment income (0.05)(1) (0.07)(1) (0.09) (0.09)(1) (0.08)(1)
<F21> <F21> <F21> <F21>
Net realized and unrealized
gains (losses) on investments 0.62 1.26 2.11 (1.37) (0.53)
----------- ----------- ----------- ----------- -----------
Total from investment operations 0.57 1.19 2.02 (1.46) (0.61)
----------- ----------- ----------- ----------- -----------
Less distributions:
Distributions from net realized gains (0.40) (0.02) -- -- --
----------- ----------- ----------- ----------- -----------
Net asset value, end of period $ 10.99 $ 10.82 $ 9.65 $ 7.63 $ 9.09
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Total return 5.24% 12.32% 26.47% (16.06)% (6.29)%
Supplemental data and ratios:
Net assets, end of period $4,506,947 $3,944,857 $959,209 $801,703 $1,050,356
Ratio of expenses to average net assets 1.10% 1.10% 1.45% 1.50% 1.50%
Ratio of expenses to average
net assets (before waivers) 1.23% 1.30% 1.45% 1.64% 2.31%
Ratio of net investment loss
to average net assets (0.46)% (0.68)% (1.06)% (1.09)% (0.92)%
Ratio of net investment loss
to average net assets (before waivers) (0.59)% (0.88)% (1.06)% (1.23)% (1.73)%
Portfolio turnover rate(2)<F22> 77.4% 77.9% 81.8% 55.4% 73.6%
(1)<F21> Calculated using average shares outstanding during the period.
(2)<F22> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD SMALLCAP FUND -
INSTITUTIONAL CLASS
-------------------------------------
Year Ended June 30, 2004(1)<F23>
December 31, through
2005 December 31, 2004
------------ -----------------
Per Share Data:
Net asset value, beginning of period $ 10.84 $ 10.00
----------- -----------
Income from investment operations:
Net investment loss(2)<F24> (0.06) (0.03)
Net realized and unrealized gains (losses) on investments 0.42 0.87
----------- -----------
Total from investment operations 0.36 0.84
----------- -----------
Net asset value, end of period $ 11.20 $ 10.84
----------- -----------
----------- -----------
Total return 3.32% 8.40%(3)<F25>
Supplemental data and ratios:
Net assets, end of period $45,010,093 $17,331,262
Ratio of expenses to average net assets 0.95% 0.95%(4)<F26>
Ratio of expenses to average net assets (before waivers) 1.31% 1.89%
Ratio of net investment loss to average net assets (0.57)% (0.65)%(4)<F26>
Ratio of net investment loss to average net assets (before waivers) (0.93)% (1.59)%
Portfolio turnover rate(5)<F27> 56.4% 34.7%(3)<F25>
(1)<F23> Commencement of operations.
(2)<F24> Calculated using average shares outstanding during the period.
(3)<F25> Not annualized.
(4)<F26> Annualized.
(5)<F27> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD SMALLCAP FUND -
INVESTOR CLASS
-------------------------------------
Year Ended June 30, 2004(1)<F28>
December 31, through
2005 December 31, 2004
------------ -----------------
Per Share Data:
Net asset value, beginning of period $ 10.83 $ 10.00
----------- -----------
Income from investment operations:
Net investment loss(2)<F29> (0.09) (0.05)
Net realized and unrealized gains (losses) on investments 0.42 0.88
----------- -----------
Total from investment operations 0.33 0.83
----------- -----------
Net asset value, end of period $ 11.16 $ 10.83
----------- -----------
----------- -----------
Total return 3.05% 8.30%(3)<F30>
Supplemental data and ratios:
Net assets, end of period $ 2,363,567 $ 68,184
Ratio of expenses to average net assets 1.20%(4)<F31> 1.20%(4)<F31>
Ratio of expenses to average net assets (before waivers) 1.56% 2.14%
Ratio of net investment loss to average net assets (0.82)%(4)<F31> (0.90)%(4)<F31>
Ratio of net investment loss to average net assets (before waivers) (1.18)% (1.84)%
Portfolio turnover rate(5)<F32> 56.36% 34.7%(3)<F30>
(1)<F28> Commencement of operations.
(2)<F29> Calculated using average shares outstanding during the period.
(3)<F30> Not annualized.
(4)<F31> Annualized.
(5)<F32> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements
BAIRD FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2005
1. ORGANIZATION
Baird Funds, Inc. (the "Corporation") was incorporated on June 9, 2000 as a
Wisconsin corporation and is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
The accompanying financial statements include the Baird LargeCap Fund, the Baird
MidCap Fund and the Baird SmallCap Fund (each a "Fund" and collectively the
"Funds"), three of the eight portfolios comprising the Corporation. Pursuant to
the 1940 Act, the Funds are "diversified" series of the Corporation. The
investment advisor to the Funds is Robert W. Baird & Co. Incorporated ("Baird"
or the "Advisor").
The Baird LargeCap Fund commenced operations with the sale of both Institutional
and Investor Class Shares on September 29, 2000. The Baird MidCap Fund commenced
operations with the sale of both Institutional and Investor Class Shares on
December 29, 2000. The Baird SmallCap Fund commenced operations with the sale of
both Institutional and Investor Class Shares on June 30, 2004. The Institutional
Class Shares are not subject to a distribution and service (12b-1) fee, while
the Investor Class Shares are subject to a distribution and service (12b-1) fee
up to 0.25%.
The investment objective of the Baird LargeCap Fund is long-term growth of
capital through investments in equity securities of large-capitalization
companies.
The investment objective of the Baird MidCap Fund is long-term growth of capital
through investments in equity securities of mid-capitalization companies.
The investment objective of the Baird SmallCap Fund is long-term growth of
capital through investments in equity securities of small-capitalization
companies.
On December 31, 2005, one shareholder related to the Advisor held approximately
70% of the Baird LargeCap Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. These
policies are in conformity with accounting principles generally accepted in the
United States of America.
a) Investment Valuation - Common stocks that are listed on a securities
exchange are valued at the last quoted sales price. Securities traded on
the Nasdaq Stock Market are valued at the Nasdaq Official Closing Price.
Price information on listed stocks is taken from the exchange where the
security is primarily traded. If such securities were not traded on the
valuation date they are valued at the average of the current bid and asked
price. Because market quotations for most debt securities are not readily
available, debt securities are stated at fair value as furnished by an
independent pricing service, which uses valuation methods such as matrix
pricing and other analytical pricing models, as well as market
transactions and dealer quotations. Debt securities purchased with a
remaining maturity of 60 days or less are valued at acqusition cost plus or
minus any amortized discount or premium. Investments in mutual funds are
valued at their stated net asset value. Other assets and securities for
which no quotations are readily available are valued at fair value as
determined in good faith by a valuation committee of the Advisor pursuant
to authority delegated, and in accordance with procedures approved, by the
Corporation's Board of Directors. In determining fair value, the valuation
committee takes into account all relevant factors and available
information. Consequently, the price of the security used by a Fund to
calculate its NAV may differ from quoted or published prices for the same
security. Fair value pricing involves subjective judgments and there is no
single standard for determining a security's fair value. As a result,
different mutual funds could reasonably arrive at a different fair value
for the same security. It is possible that the fair value determined for a
security is materially different from the value that could be realized upon
the sale of that security or from the values that other mutual funds may
determine.
b) Foreign Securities - Investing in securities of foreign companies and
foreign governments involves special risks and consideration not typically
associated with investing in U.S. companies and the U.S. government. These
risks include revaluation of currencies and future adverse political and
economic developments. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices
more volatile than those of securities of comparable U.S. companies and the
U.S. government.
c) Federal Income Taxes - The Funds intend to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of their taxable income to their
shareholders in a manner which results in no tax cost to the Funds.
Therefore, no federal income or excise tax provision is recorded.
d) Distributions to Shareholders - Dividends from net investment income are
declared and paid annually. Distributions of net realized gains, if any,
are declared and paid at least annually.
e) Allocation of Income and Expenses - Each Fund is charged for those expenses
directly attributable to it. Expenses directly attributable to a class of
shares, such as Rule 12b-1 distribution fees, are charged to that class of
shares. Income, expenses, and realized and unrealized gains and losses are
allocated to the classes based on their respective net assets. Expenses
that are not directly attributable to a Fund are allocated among the Funds
in the series in proportion to their assets.
f) Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
g) Other - Investment and shareholder transactions are recorded on trade date.
The Funds determine the gain or loss realized from investment transactions
by comparing the original cost of the security lot sold with the net sales
proceeds. Dividend income is recognized on the ex-dividend date and
interest income is recognized on an accrual basis. Accounting principles
generally accepted in the United States require that permanent financial
reporting and tax differences be reclassified in the capital accounts.
h) Guarantees and Indemnifications - In the normal course of business, the
Funds enter into contracts with service providers that contain general
indemnification clauses. The Funds' maximum exposure under these
arrangements is unknown and this would involve future claims against the
Funds that have not yet occurred. Based on experience, the Funds would
expect the risk of loss to be remote.
3. CAPITAL SHARE TRANSACTIONS
The following table summarizes the capital share transactions of each Fund for
the past two fiscal periods:
BAIRD LARGECAP FUND
Year Ended Year Ended
December 31, 2005 December 31, 2005
-------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
----------- -------- ----------- --------
Shares sold $ 3,287,419 410,040 Shares sold $ 790,523 98,881
Shares issued through Shares issued through
reinvestment of dividends 253,910 30,227 reinvestment of dividends 15,571 1,863
Shares redeemed (42,566,187) (5,113,671) Shares redeemed (374,057) (45,879)
------------ ---------- ---------- -------
Net Decrease $(39,024,858) (4,673,404) Net Increase $432,037 54,865
------------ ----------
------------ ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 7,960,799 Beginning of period 234,864
---------- -------
End of period 3,287,395 End of period 289,729
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2004 December 31, 2004
------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
----------- -------- ----------- --------
Shares sold $ 5,204,938 657,907 Shares sold $1,232,442 156,739
Shares issued through Shares issued through
reinvestment of dividends 428,099 52,721 reinvestment of dividends 10,928 1,354
Shares redeemed (3,382,487) (430,488) Shares redeemed (39,313) (5,082)
------------ ---------- ---------- -------
Net Increase $ 2,250,550 280,140 Net Increase $1,204,057 153,011
---------- -------
---------- -------
Shares Outstanding: Shares Outstanding:
Beginning of period 7,680,659 Beginning of period 81,853
---------- -------
End of period 7,960,799 End of period 234,864
---------- -------
---------- -------
BAIRD MIDCAP FUND
Year Ended Year Ended
December 31, 2005 December 31, 2005
-------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
----------- -------- ----------- --------
Shares sold $ 21,848,259 2,032,237 Shares sold $1,071,459 99,399
Shares issued through Shares issued through
reinvestment of dividends 2,612,352 234,082 reinvestment of dividends 150,800 13,672
Shares redeemed (27,724,642) (2,488,411) Shares redeemed (721,070) (67,838)
------------ ---------- ---------- -------
Net Decrease $ (3,264,031) (222,092) Net Decrease $ 501,189 45,233
------------ ----------
------------ ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 7,924,137 Beginning of period 364,694
---------- -------
End of period 7,702,045 End of period 409,927
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2004 December 31, 2004
-------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
----------- -------- ----------- --------
Shares sold $ 53,356,727 5,302,856 Shares sold $3,059,070 299,099
Shares issued through Shares issued through
reinvestment of dividends 142,982 13,214 reinvestment of dividends 6,603 615
Shares redeemed (3,419,077) (337,955) Shares redeemed (354,288) (34,372)
------------ ---------- ---------- -------
Net Increase $ 50,080,632 4,978,115 Net Increase $2,711,385 265,342
------------ ----------
------------ ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 2,946,022 Beginning of period 99,352
---------- -------
End of period 7,924,137 End of period 364,694
---------- -------
---------- -------
BAIRD SMALLCAP FUND
Year Ended Year Ended
December 31, 2005 December 31, 2005
-------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
----------- -------- ----------- --------
Shares sold $30,846,152 2,842,497 Shares sold $2,496,510 225,110
Shares redeemed (4,571,120) (422,581) Shares redeemed (214,639) (19,578)
----------- --------- ---------- -------
Net Increase $26,275,032 2,419,916 Net Increase $2,281,871 205,532
----------- ----------
----------- ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 1,598,470 Beginning of period 6,296
--------- -------
End of period 4,018,386 End of period 211,828
--------- -------
--------- -------
June 30, 2004(1)<F33> June 30, 2004(1)<F33>
through through
December 31, 2004 December 31, 2004
-------------------------- --------------------------
INSTITUTIONAL CLASS SHARES $ Shares INVESTOR CLASS SHARES $ Shares
----------- -------- ----------- --------
Shares sold $16,977,724 1,699,415 Shares sold $ 64,485 6,296
Shares redeemed (982,943) (100,945) Shares redeemed -- --
----------- --------- ---------- -------
Net Increase $15,994,781 1,598,470 Net Increase $ 64,485 6,296
----------- ----------
----------- ----------
Shares Outstanding: Shares Outstanding:
Beginning of period -- Beginning of period --
--------- -------
End of period 1,598,470 End of period 6,296
--------- -------
--------- -------
(1)<F33> Commencement of operations.
4. INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION
During the year ended December 31, 2005, purchases and sales of investment
securities (excluding short-term investments) were as follows:
Baird Baird Baird
LargeCap Fund MidCap Fund SmallCap Fund
------------- ----------- -------------
Purchases: $16,779,701 $74,465,351 $43,554,721
Sales: $52,270,044 $80,671,023 $16,085,251
At December 31, 2005, accumulated earnings/losses on a tax basis were as
follows:
LARGECAP MIDCAP SMALLCAP
FUND FUND FUND
-------- ------ --------
Cost of Investments $23,018,742 $77,466,370 $43,511,561
----------- ----------- -----------
----------- ----------- -----------
Gross unrealized appreciation $ 6,813,854 $15,186,002 $ 5,745,436
Gross unrealized depreciation (328,525) (2,484,446) (2,074,028)
----------- ----------- -----------
Net unrealized appreciation/(depreciation) $ 6,485,329 $12,701,556 $ 3,671,408
----------- ----------- -----------
----------- ----------- -----------
Undistributed ordinary income $ 35 $ 355,507 $ --
Undistributed long-term capital gain -- 853,560 --
----------- ----------- -----------
Total distributable earnings $ 35 $ 1,209,067 $ --
----------- ----------- -----------
----------- ----------- -----------
Other accumulated gains (losses) $(6,543,681) $ -- $ (693,887)
----------- ----------- -----------
Total accumulated earnings/(losses) $ (58,317) $13,910,623 $ 2,977,521
----------- ----------- -----------
----------- ----------- -----------
Undistributed income or net realized gains for financial statement purposes may
differ from amounts recognized for federal income tax purposes due to
differences in the recognition and characterization of income, expense and
capital gain items.
Under the current tax law, capital losses realized after October 31 may be
deferred and treated as occurring on the first day of the following fiscal year.
For the year ended December 31, 2005, the Baird SmallCap Fund elected to defer
capital losses occurring between November 1, 2005 and December 31, 2005 in the
amount of $147,920.
At December 31, 2005, the Baird LargeCap Fund had accumulated net realized
capital loss carryovers of $1,167,011 that expire in 2012, $3,094,411 that
expire in 2011 and $2,282,259 that expire in 2010. At December 31, 2005, the
Baird SmallCap Fund had accumulated net realized capital loss carryovers of
$190,878 expiring in 2012 and $355,089 that expire in 2013. To the extent the
Funds realize future net capital gains, taxable distributions to shareholders
will be offset by any unused capital loss carryovers. During the year ended
December 31, 2005, the Baird LargeCap Fund utilized $2,058,234 in capital loss
carryovers from previous years.
During the year ended December 31, 2005, the Funds paid the following dividends:
ORDINARY INCOME DIVIDENDS NET LONG-TERM CAPITAL GAINS
------------------------- ---------------------------
Baird LargeCap Fund $274,088 --
Baird MidCap Fund 674,962 $2,456,914
Baird SmallCap Fund -- --
During the period ended December 31, 2004, the Funds paid the following
dividends:
ORDINARY INCOME DIVIDENDS NET LONG-TERM CAPITAL GAINS
------------------------- ---------------------------
Baird LargeCap Fund $442,557 --
Baird MidCap Fund -- $150,283
Baird SmallCap Fund -- --
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Funds have entered into an Investment Advisory Agreement with Baird for the
provision of investment advisory services. Pursuant to the Investment Advisory
Agreement, the Advisor is entitled to receive a fee, calculated daily and
payable monthly, at the annual rate of 0.65% for the Baird LargeCap Fund, 0.75%
for the Baird MidCap Fund and 0.85% for the Baird SmallCap Fund as applied to
the respective Fund's average daily net assets. Certain officers of the Advisor
are also officers of the Funds.
For each of the fiscal years ended December 31, 2005 and 2006, the Advisor has
contractually agreed to waive its investment advisory fee and/or reimburse the
Funds' operating expenses (exclusive of brokerage, interest, taxes, and
extraordinary expenses) to the extent necessary to ensure that each Fund's
operating expenses do not exceed the following percentages of average daily net
assets:
INSTITUTIONAL CLASS SHARES INVESTOR CLASS SHARES
-------------------------- ---------------------
Baird LargeCap Fund 0.75% 1.00%
Baird MidCap Fund 0.85% 1.10%
Baird SmallCap Fund 0.95% 1.20%
To the extent that the Advisor reimburses or absorbs fees and expenses, it may
seek payment of such amounts for three years after the year in which expenses
were reimbursed or absorbed. A Fund will make no such payment, however, if its
total annual operating expenses exceed the expense limits in effect at the time
the expenses were reimbursed or at the time these payments are proposed.
Fiscal Period Ended December 31,
--------------------------------
2005 2004 2003
---- ---- ----
REIMBURSED / ABSORBED EXPENSES SUBJECT
TO RECOVERY BY ADVISOR UNTIL: 2008 2007 2006
BAIRD LARGECAP FUND $109,024 $114,127 $108,138
BAIRD MIDCAP FUND $129,774 $116,179 $ 1,122
BAIRD SMALLCAP FUND $104,335 $ 72,320 --
U.S. Bancorp Fund Services, LLC serves as transfer agent, administrator, and
accounting services agent for the Funds. U.S. Bank, N.A. serves as custodian
for the Funds.
Robert W. Baird & Co. Incorporated (the "Distributor") is the sole distributor
of the Funds pursuant to a distribution agreement.
No commissions were earned by the Distributor for services rendered as a
registered broker-dealer in securities transactions for the Baird LargeCap Fund,
Baird MidCap Fund and Baird SmallCap Fund for the year ended December 31, 2005.
6. DISTRIBUTION AND SHAREHOLDER SERVICE PLAN
The Funds have adopted a distribution and shareholder service plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. The Plan allows the Funds to
compensate the Distributor for the costs incurred in distributing the Funds'
Investor Class Shares, including amounts paid to brokers or dealers, at an
annual rate not to exceed 0.25% of the average daily net assets of the Funds'
Investor Class Shares. The Baird LargeCap Fund, Baird MidCap Fund and Baird
SmallCap Fund incurred $6,049, $10,613 and $1,646, respectively, in fees
pursuant to the Plan during the year ended December 31, 2005.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders Baird Funds, Inc:
We have audited the accompanying statements of assets and liabilities of Baird
LargeCap Fund, Baird MidCap Fund and Baird SmallCap Fund (three of the
portfolios constituting Baird Funds, Inc., hereafter referred to as the
"Funds"), including the schedules of investments as of December 31, 2005, and
the related statements of operations and changes in net assets, and financial
highlights for the year then ended. These financial statements and financial
highlights are the responsibility of the Funds' management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The statements of changes in net assets and the financial
highlights of the Funds for the years or periods ended December 31, 2004 and
prior were audited by other auditors. Those auditors expressed an unqualified
opinion on those financial statements and financial highlights in their report
dated February 22, 2005.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Funds were not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Funds' internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of December 31, 2005 by correspondence with
the Custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned funds of Baird Funds, Inc. as of December 31, 2005, the
results of their operations, changes in their net assets and their financial
highlights for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/Grant Thornton LLP
Chicago, Illinois
February 15, 2006
BAIRD FUNDS, INC.
DIRECTORS & OFFICERS AS OF DECEMBER 31, 2005
Number of
Portfolios Other
Position(s) Term of Office Principal in Complex Directorships
Held with and Length of Occupation(s) Overseen Held
Name, Address, and Age the Funds Time Served During Past 5 Years by Director by Director
- ---------------------- ----------- -------------- ------------------- ----------- -------------
G. Frederick Kasten, Jr.* Director Indefinite; Retired; Chairman, the Advisor (January 8 Director of
<F34> And Since September 2000-December 2005); Chairman & CEO, the Regal-Beloit
777 East Wisconsin Avenue Chairman 2000 Advisor (January 1998-January 2000); Corporation,
Milwaukee, WI 53202 President, Chairman and CEO, the Advisor a manufacturing
Age: 66 (June 1983-January 1998); President, the company
Advisor (January 1979-January 1983)
John W. Feldt Independent Indefinite; Senior Vice President-Finance, University 8 Director of
University of Director Since September of Wisconsin Foundation since 1985; Vice Thompson
Wisconsin Foundation 2000 President-Finance, University of Wisconsin Plumb Funds,
1848 University Avenue Foundation (1980-1985); Associate Director, Inc., a mutual
Madison, WI 53705 University of Wisconsin Foundation fund complex
Age: 63 (1967-1980) of which Mr.
Feldt oversees
2 portfolios
George C. Kaiser Independent Indefinite; CEO, George Kaiser & Co., a business 8 None
759 N. Milwaukee Street Director Since September consulting company, since 1999; Chairman
Milwaukee, WI 53202 2000 and CEO, Hanger Tight Company, a
Age: 72 manufacturing company (1988-1999);
Chairman and CEO, Interstore Transfer
Systems, Ltd., a manufacturing company
(1992-1999); Chairman, International
Retail Services Group, Ltd. (1995-1999);
Executive Vice President, Arandell Schmidt
Co., a catalog printer company (1984-1987);
various positions Arthur Andersen & Co.
(1957-1964, 1967-1984), most recently serving
as Partner (1969-1984); Secretary of Administration,
State of Wisconsin (1965-1967)
Frederick P. Stratton, Jr. Independent Indefinite; Retired; Chairman Emeritus, Briggs & 8 Director of
777 East Wisconsin Avenue Director Since May Stratton Corporation, a manufacturing Midwest Air
Suite 1400 2004 company, since 2003; Chairman of the Group, Inc., an
Milwaukee, WI 53202 Board, Briggs & Stratton Corporation airline company;
Age: 66 (2001-2002); Chairman and CEO, Briggs & Weyco Group,
Stratton Corporation (1986-2001) Inc., a men's
footwear
distributor;
Wisconsin
Energy
Corporation and
its subsidiaries
Wisconsin
Electric
Company and
Wisconsin Gas
Company
Mary Ellen Stanek President Indefinite; Managing Director, the Advisor, and Chief N/A N/A
777 East Wisconsin Avenue Since September Investment Officer, Baird Advisors, a
Milwaukee, WI 53202 2000 department of the Advisor, since March
Age: 49 2000; President and CEO, Firstar Investment
Research & Management Company, LLC ("FIRMCO")
(November 1998-February 2000); President,
Firstar Funds, Inc. (December 1998-March 2000);
President and Chief Operating Officer, FIRMCO
(March 1994-November 1998)
J. Bary Morgan Senior Vice Indefinite; Chief Investment Officer, Baird Investment N/A N/A
777 East Wisconsin Avenue President Since February Management, a department of the Advisor,
Milwaukee, WI 53202 2003 since January 2004; Managing Director, the
Age: 40 Advisor, since January 2001; Director, Baird
Investment Management (January 2001-January 2004);
Senior Vice President, the Advisor (January
2000-January 2001); First Vice President, the
Advisor (January 1996-January 2000)
Todd S. Nichol Vice Indefinite; Chief Compliance Officer, the Advisor N/A N/A
777 East Wisconsin Avenue President Since August since October 2004; Assistant Compliance
Milwaukee, WI 53202 and Chief 2004 Director, the Advisor since August 2002;
Age: 43 Compliance Senior Vice President, the Advisor since
Officer January 2005; First Vice President, the
Advisor (January 2004-January 2005):
Vice President, the Advisor (August 2002-
January 2004); Vice President-Risk Management,
BNY Clearing Services, LLC, a division of
The Bank of New York (August 1995-August 2002)
Russell P. Schwei Vice Indefinite; Operations Director, the Advisor since N/A N/A
777 East Wisconsin Avenue President Since September July 1992; Managing Director, the Advisor
Milwaukee, WI 53202 2000 since January 1997; Chief Financial
Age: 46 Officer and Managing Director, the Advisor
(February 1999-December 1999)
Leonard M. Rush Treasurer Indefinite; Chief Financial Officer, the Advisor since N/A N/A
777 East Wisconsin Avenue Since September January 2000
Milwaukee, WI 53202 2000
Age: 59
Charles M. Weber Secretary Indefinite; Senior Vice President and Associate N/A N/A
777 East Wisconsin Avenue Since August General Counsel, the Advisor since July
Milwaukee, WI 53202 2005 2005; Partner, Quarles & Brady LLP, a law
Age: 42 firm (October 1998-June 2005)
*<F34> Mr. Kasten is an "interested person" of the Corporation (as defined in
the 1940 Act) because he serves as the Chairman of the Advisor.
Additional information about the Funds' directors is available in the Statement
of Additional Information which may be obtained without charge, upon request, by
calling 1-866-44BAIRD.
BAIRD FUNDS, INC.
DISCLOSURE REGARDING THE BOARD OF DIRECTORS' APPROVAL OF THE INVESTMENT ADVISORY
AGREEMENT FOR BAIRD EQUITY FUNDS
The Board of Directors (the "Board") of Baird Funds, Inc. (the "Corporation")
met on August 15, 2005 to consider the annual renewal of the Investment Advisory
Agreement with Robert W. Baird & Co. Incorporated ("Baird" or the "Advisor") for
the management of the Baird LargeCap, MidCap and SmallCap Funds (the "Funds").
The Board reviewed and discussed numerous documents that had been provided prior
to the meeting, including the Investment Advisory Agreement, memoranda prepared
by outside legal counsel and the Secretary of the Funds discussing in detail the
Board's fiduciary obligations and the factors it should assess in considering
the renewal of the Investment Advisory Agreement, information about the Advisor
(including its Form ADV, Annual Report and statement of financial condition),
comparative information about the Funds' performance, management fees and
expense ratios for the periods ended June 30, 2005, and other pertinent
information. The Directors who are not "interested persons" of the Corporation
or the Advisor ("Independent Directors"), within the meaning of the Investment
Company Act of 1940 (the "1940 Act"), met separately in executive session with
counsel to consider the agreement. The Board also received information
periodically throughout the year that was relevant to its investment advisory
agreement renewal process, including performance, management fee and other
expense information. Based on its evaluation of information provided by the
Advisor, in conjunction with the Funds' other service providers, the Board,
including all of the Independent Directors, approved the annual continuation of
the Investment Advisory Agreement for the Funds for an additional one-year
period.
In considering the Investment Advisory Agreement and reaching its conclusions,
the Board reviewed and analyzed various factors that it determined were
relevant, including the factors below.
NATURE, EXTENT AND QUALITY OF SERVICES PROVIDED TO THE FUNDS
- ------------------------------------------------------------
The Board analyzed the nature, extent and quality of the services provided by
the Advisor to the Funds. The Board reviewed and considered the Advisor's
significant role in establishing the Funds and the construction of their
investment objectives, principal strategies, investment limitations and fee
structures. The Board noted the Advisor's overall reputation and positive name
recognition, the depth of the Advisor's personnel, resources and commitment to
the Funds, and the experience, credentials and continuity of the portfolio
management teams employed to manage the Funds' investments. The Board
considered the Advisor's disciplined investment decision-making process used for
the Funds. The Board also considered other services that the Advisor rendered
to the Funds in its capacity as their investment advisor, such as providing some
of its key personnel available to serve as officers of the Funds, selecting
broker-dealers for execution of portfolio transactions, ensuring adherence to
the Fund's investment policies and restrictions, providing support services to
the Board and the Audit Committee of the Board and overseeing the Funds' other
service providers. The Board further noted that the Advisor, in its capacity as
a registered broker-dealer, also serves as distributor and principal underwriter
of shares of the Funds and spends time and effort marketing the Funds. The
Board also considered the strength of the Advisor's compliance department,
including the Funds' chief compliance officer, and the fact that the Advisor has
not experienced any significant legal, compliance or regulatory difficulties
since the Funds were launched. The Board concluded that the nature, extent and
quality of the services provided by the Advisor to the Fund were appropriate and
that each Fund was likely to continue to benefit from services provided by the
Advisor under the Investment Advisory Agreement.
INVESTMENT PERFORMANCE OF THE FUNDS
- -----------------------------------
In considering the investment performance of each Fund, the Board reviewed
information as of June 30, 2005 regarding the Fund's performance in comparison
to various benchmark indices and their peer groups as determined by Lipper.
With respect to the Baird LargeCap Fund, the Board observed that the Fund had
outperformed its primary benchmark, the Russell 1000 Growth Index, for the one-
year and since inception periods ended June 30, 2005, while recognizing that the
Fund had underperformed that index for the three-year period ended June 30, 2005
and the S&P 500 Index for the one-year, three-year and since inception periods
then ended. The Board further noted that, for the period from the Fund's
inception through June 30, 2005, the Fund had performed in the top quartile of
the Lipper Universe of Large Cap Growth Funds, and that for the one- and three-
year periods then ended the Fund had performed slightly below the Lipper Large
Cap Growth Fund average.
The Board noted that the Baird MidCap Fund had outperformed the Russell MidCap
Growth Index, its primary benchmark, for the period from the Fund's inception
through June 30, 2005, while acknowledging that it had underperformed that
benchmark for the one-year and three year periods ending June 30, 2005. The
Board further noted that, for the period from the Fund's inception through June
30, 2005, the Fund had performed in the top quartile of the Lipper Universe of
Mid Cap Growth Funds, and that for the one- and three-year periods then ended
the Fund had performed below the Lipper Mid Cap Growth Fund average.
With respect to the Baird SmallCap Fund, the Board observed that the Fund had
significantly outperformed its primary benchmark index, the Russell 2000 Growth
Index, for the one-year period ended June 30, 2005. The Fund commenced
operations on June 30, 2004.
The Board also considered the Advisor's quarterly portfolio commentaries and
reviews explaining the Funds' performance, the Advisor's consistent and
disciplined investment decision process and the investment strategies it employs
for the Funds. After considering all of the information, the Board concluded
that, although past performance is not a guarantee of future results, each Fund
and its shareholders were likely to benefit from the Advisor's continued
management.
COSTS OF SERVICES PROVIDED AND PROFITS REALIZED BY THE ADVISOR
- --------------------------------------------------------------
The Board examined the fee and expense information for each of the LargeCap,
MidCap and SmallCap Funds, including a comparison of such information to other
similarly situated mutual funds as determined by Lipper. The Board noted that,
as of June 30, 2005, each Fund's investment management (or advisory) fee was
either below or close to the average and median for the universe of all mutual
funds in its Lipper category. The Board also reviewed and considered management
fees charged by the Advisor to other investment advisory clients and found that
the investment management fee paid by the Funds was less than what the Advisor
charges on the first $5 million of a separately managed account. The Board
recognized the extent of the significant additional services provided to each
Fund that the Advisor did not provide to its other clients, such as certain
administrative services, oversight of the Fund's other service providers,
director support, risk management, regulatory compliance and various other
services.
The Board also examined the total expense ratio of each Fund relative to all
other mutual funds in its Lipper category based on information available as of
June 30, 2005. The Board noted that each Fund's total expense ratio (both for
its investor class and institutional class shares), after fee waivers and
expense reimbursements by the Advisor, was lower than the average and median
expense ratios for all funds in its Lipper category, and compared favorably to
the average and median expense ratios for institutional class shares of other
similarly sized funds in its Lipper category.
The Board considered the fees realized, and the costs incurred, by the Advisor
in providing investment management services to the Funds and the profitability
to the Advisor of having a relationship with the Funds. The Board noted that
the Adviser had waived significant fees and/or reimbursed expenses for the Funds
since their respective inception dates and that this was likely to continue in
the future in order to maintain the competitiveness of the Funds' expense
ratios. The Advisor informed the Board that the profits realized by the Advisor
(as a percentage of revenue) from its relationship with the Fund were less than
those realized by the Advisor on its investment advisory business as a whole.
The Board concluded that the profits realized by the Advisor from its
relationship with the Funds were appropriate. The Board also reviewed and
considered the general financial condition of the Advisor and determined it to
be sound.
In light of all of the information that it received and considered, the Board
concluded that the management fee and total expense ratio of each Fund were
reasonable with respect to the services provided by the Advisor and the
performance of the Fund.
OTHER BENEFITS TO THE ADVISOR
- -----------------------------
The Board noted that the Advisor realizes ancillary benefits from its
association with the Funds in the form of research products and services
received from unaffiliated broker-dealers who execute portfolio trades for the
Funds. The Board noted that such products and services are limited in number
and have been used for legitimate purposes relating to the Funds. The Board
believed that the Funds generally benefit from their association with the
Advisor and the use of the "Baird" name. The Board concluded that the other
benefits realized by the Advisor from its relationship with the Funds were
appropriate.
ECONOMIES OF SCALE AND FEE LEVELS REFLECTING THOSE ECONOMIES
- ------------------------------------------------------------
The Board noted that the Funds' advisory fee structure do not contain any
breakpoint reductions as the Funds grow in size. However, the Board recognized
that the Advisor has been waiving fees and/or reimbursing expenses for the Funds
since their inception and anticipates that the Advisor will continue to do so
for the foreseeable future. The Board also recognized that the advisory fee
rates paid by the Funds were designed to be lower than the fees otherwise
charged by the Advisor to its separately managed account clients and to be
comparable to the second or third breakpoint advisory fee levels paid by other
comparable mutual funds.
After consideration of the above factors, the Board, including a majority of the
Independent Directors, approved the renewal of the Investment Advisory Agreement
with the Funds as being in the best interests of the Funds and their respective
shareholders.
ADDITIONAL INFORMATION
PROXY VOTING
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by calling toll free, 1-866-44BAIRD, or by accessing the Funds'
website at www.bairdfunds.com; and by accessing the SEC's website at
www.sec.gov.
Information regarding how each Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available
without charge, upon request, by calling toll free, 1-866-44BAIRD, or by
accessing the Funds' website at www.bairdfunds.com; and by accessing the SEC's
website at www.sec.gov.
PORTFOLIO HOLDINGS DISCLOSURE
The Funds file a complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Funds' Forms N-Q
are available on the SEC website at www.sec.gov and may be reviewed and copied
at the SEC's Public Reference Room in Washington, D.C. Information on the
operation of the Public Reference Room may be obtained by calling
1-800-732-0330. The Funds' Forms N-Q may also be obtained by calling toll-free
1-866-44BAIRD or by accessing the Fund's website at www.bairdfunds.com.
ADDITIONAL TAX INFORMATION
The Baird LargeCap Fund designates 100% of dividends declared from net
investment income as qualified dividend income under the Jobs Growth and Tax
Relief Reconciliation Act of 2003. The Baird MidCap Fund designates 53.3% as
qualified dividend income. Additionally, 100% and 53.4% of the dividends paid
by the Baird LargeCap Fund and Baird MidCap Fund qualify for the dividend
received deduction.
CHANGE IN INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
On October 10, 2005, the Audit Committee of the Corporation's Board of Directors
and the Board accepted the resignation of PricewaterhouseCoopers LLP as auditors
for the Funds.
The reports of PricewaterhouseCoopers LLP on the Funds' financial statements for
the past two years contained no adverse opinion or a disclaimer of opinion, and
were not qualifed or modified as to uncertainty, audit scope or accounting
principle. In addition, during the Corporation's two most recent fiscal years
and through October 10, 2005, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principle or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers
LLP, would have caused them to make a reference thereto with their reports on
the Funds' financial statements for such years.
On November 22, 2005, the Audit Committee recommended, and the Board approved,
the appointment of Grant Thornton LLP, an independent registered public
accounting firm, to audit the Funds' 2005 financial statements, subject to
completion of the terms of its engagement. Grant Thornton LLP was formally
engaged as auditors of the Funds on December 21, 2005.
BAIRD FUNDS, INC.
c/o U.S. Bancorp Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-866-44BAIRD
BOARD OF DIRECTORS
G. Frederick Kasten, Jr. (Chairman)
John W. Feldt
George C. Kaiser
Frederick P. Stratton, Jr.
INVESTMENT ADVISOR AND DISTRIBUTOR
Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
ADMINISTRATOR AND TRANSFER AGENT
U.S. Bancorp Fund Services, LLC
P.O. Box 701
615 East Michigan Street
Milwaukee, WI 53202
CUSTODIAN
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Grant Thornton LLP
175 West Jackson Boulevard, 20th Floor
Chicago, Illinois 60604
ITEM 2. CODE OF ETHICS.
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As of the end of the period covered by this report, the Registrant has adopted a
code of ethics that applies to the Registrant's principal executive officer and
principal financial officer. The Registrant has not made any amendments to its
code of ethics during the period covered by this report. The Registrant has not
granted any waivers from any provisions of the code of ethics during the period
covered by this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
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The Registrant's board of directors has determined that John W. Feldt and
Frederick P. Stratton, Jr., members of the audit committee, each qualify as an
"audit committee financial expert" as such term is defined in paragraph (b) of
Item 3 of Form N-CSR. Mr. Feldt and Mr. Stratton are each "independent" as such
term is defined in paragraph (a)(2) of Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
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Fees Billed by Grant Thornton LLP and PricewaterhouseCoopers LLP. The aggregate
fees billed for professional services by Grant Thornton LLP ("GT") during fiscal
2005 and PricewaterhouseCoopers LLP during fiscal 2004 were as follows:
FYE FYE
--- ---
Type of Fees 12/31/05 12/31/04
Audit Fees $100,000 $93,370
Audit-Related Fees -- --
Tax Fees 24,000 32,230
All Other Fees -- --
In the above table, "audit fees" are fees billed for professional services for
the audit of the Registrant's annual financial statements or for services that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements. "Tax fees" are fees billed for professional
services rendered for tax compliance, tax advice and tax planning.
The audit committee has adopted pre-approval policies and procedures that
require the audit committee to pre-approve all audit and non-audit services
rendered to the Registrant, as well as all non-audit services provided to the
Registrant's investment adviser and any entity affiliated with the Registrant's
investment adviser with respect to any engagement that relates directly to the
operations and financial reporting of the Registrant. In accordance with its
pre-approval policies and procedures, the audit committee pre-approved all audit
and tax services provided by GT during fiscal 2005. During the past two fiscal
years, the Registrant did not receive any non-audit services from PWC or GT
pursuant to any waivers of the pre-approval requirement under paragraph
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X. All of GT's hours spent on
auditing the Registrant's financial statements were attributed to work performed
by full-time permanent employees of GT.
During the last two fiscal years, GT has served as the auditor to Robert W.
Baird & Co. Incorporated ("RWB"), the Registrant's investment adviser, and has
rendered non-audit services to an affiliate of RWB. The non-audit services
consisted of tax services provided to investment partnerships affiliated with
RWB, which partnerships do not provide ongoing services to the Registrant. GT
charged the following amounts for such non-audit services to the RWB-affiliated
partnerships: $128,000 in 2004 and $96,000 in 2005. The Audit Committee has
concluded that the provision of these audit services to RWB and non-audit
services to RWB-affiliated partnerships is compatible with GT's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
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Not applicable because the Registrant is not a "listed issuer" within the
meaning of Rule 10A-3 under the Securities Exchange Act of 1934.
ITEM 6. SCHEDULE OF INVESTMENTS.
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The Schedules of Investments are included as part of the reports to shareholders
filed under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
- -------------------------------------------------------------------------
MANAGEMENT INVESTMENT COMPANIES.
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Not applicable because the Registrant is not a closed-end management investment
company.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
- -------------------------------------------------------------------------
Not applicable because the Registrant is not a closed-end management investment
company.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
- ---------------------------------------------------------------------------
COMPANY AND AFFILIATED PURCHASES.
- ---------------------------------
Not applicable because the Registrant is not a closed-end management investment
company.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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There have been no material changes to the procedures by which shareholders may
recommend nominees to the Registrant's board of directors.
ITEM 11. CONTROLS AND PROCEDURES.
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(a) The Registrant's management, with the participation of its principal
executive and principal financial officers, has evaluated the effectiveness
of the Registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940), as of a date within 90
days prior to the filing date of this Form N-CSR. Based on such
evaluation, the Registrant's principal executive and principal financial
officers have concluded that the design and operation of the Registrant's
disclosure controls and procedures are effective in providing reasonable
assurance that the information required to be disclosed on Form N-CSR is
recorded, processed, summarized and reported within the applicable time
periods.
(b) There were no significant changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act) that
occurred during the second fiscal quarter of the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
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(a) (1) Code of ethics. Incorporated by reference to the Registrant's Form N-
CSR filed on March 9, 2004.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act sent or given during the period covered by the report by or on
behalf of the registrant to 10 or more persons. Not applicable because the
Registrant is not a closed-end management investment company.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Baird Funds, Inc.
By: /s/Mary Ellen Stanek
----------------------------
Mary Ellen Stanek, President
Date: March 7, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/Mary Ellen Stanek
----------------------------
Mary Ellen Stanek, President
Date: March 7, 2006
By: /s/Leonard Rush
-----------------------
Leonard Rush, Treasurer
Date: March 7, 2006