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
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, 2006
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Date of reporting period: DECEMBER 31, 2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
- --------------------------------
(BAIRD LOGO)
ANNUAL REPORT - BAIRD FUNDS
December 31, 2006
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
2006 BOND MARKET OVERVIEW 2
BAIRD INTERMEDIATE BOND FUND 6
BAIRD AGGREGATE BOND FUND 22
BAIRD INTERMEDIATE MUNICIPAL BOND FUND 37
BAIRD CORE PLUS BOND FUND 45
BAIRD SHORT-TERM BOND FUND 54
ADDITIONAL INFORMATION ON FUND EXPENSES 65
STATEMENTS OF ASSETS AND LIABILITIES 67
STATEMENTS OF OPERATIONS 68
STATEMENTS OF CHANGES IN NET ASSETS 69
FINANCIAL HIGHLIGHTS 74
NOTES TO THE FINANCIAL STATEMENTS 83
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 96
DIRECTORS AND OFFICERS 97
DISCLOSURE REGARDING THE BOARD OF DIRECTORS' APPROVAL
OF THE INVESTMENT ADVISORY AGREEMENT FOR BAIRD BOND FUNDS 99
ADDITIONAL INFORMATION 103
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 LOGO)
BAIRD FUNDS, INC.
1-866-442-2473
www.bairdfunds.com
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February 27, 2007
Dear Shareholders,
Thank you for investing in the Baird Funds. We are pleased to report that the
Funds reached a new milestone in 2006 with their combined net assets exceeding
$1 billion. We appreciate the opportunity to help our investors share in the
growth presented by the financial markets in 2006.
In this Annual Report we review the bond market in 2006 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. We thank you for
your support and look forward to helping you achieve your investment goals.
Thank you again for choosing Baird Funds.
Sincerely,
/s/Mary Ellen Stanek
Mary Ellen Stanek, CFA
President
Baird Funds
2006 BOND MARKET OVERVIEW
2006 SUMMARY
After two years and 17 consecutive rate hikes totaling 425 basis points, the
Fed's tightening cycle came to a pause in 2006. Economic growth moderated and
inflation remained subdued, providing a fertile environment for strong equity
returns. M&A activity hit record levels and overall market volatility reached
historic lows. The already-flat yield curve inverted slightly on the short end
and investment grade bonds delivered solid, positive returns. Relatively tight
yield spreads on non-Treasury sectors tightened further enabling spread sectors
to outperform Treasuries by a significant margin.
YIELDS RISE SLIGHTLY, INVERSION ON SHORT END
Treasury yields rose steadily during the first half of 2006 as the Federal Open
Market Committee (FOMC) raised its target for the Fed funds rate in four "data-
dependent" 25 basis point moves from 4.25% to 5.25%. The FOMC held its target
rate steady at 5.25% during the second half of the year and the bond market
rallied as economic data (primarily housing) turned softer. The bond market
delivered solid, positive returns in 2006 (thanks to a strong second half), but
interest rates finished the year 25-50 basis points higher. Most of the
increase came on the short end of the yield curve, resulting in a 1- to 5-year
inversion of 30 basis points. The yield curve overall remained very flat during
2006 with no difference between 2-year and 30-year Treasury yields at year-end,
compared to a positive difference of 14 basis points at December 31, 2005 (see
chart and table below).
TREASURY YIELDS
Source: Bloomberg
MATURITY DEC. 31, 2005 DEC. 31, 2006 1 YR. CHANGE
-------- ------------- ------------- ------------
1 4.43% 4.99% 0.56%
2 4.40% 4.81% 0.41%
3 4.36% 4.73% 0.37%
5 4.35% 4.69% 0.34%
7 4.36% 4.69% 0.33%
10 4.39% 4.70% 0.31%
15 4.58% 4.89% 0.31%
20 4.61% 4.90% 0.29%
25 4.58% 4.86% 0.28%
30 4.54% 4.81% 0.27%
GOLDILOCKS ECONOMY
While the pace of economic growth slowed during 2006, real or inflation-adjusted
Gross Domestic Product (GDP) continued to grow at an annual rate of 3.5% through
the 4th quarter despite a softening in home prices and a sharp decline in the
amount of money consumers were able to extract from their homes and spend (see
the following Mortgage Equity Withdrawal chart). Modest inflation accompanied
moderate growth with the Consumer Price Index (CPI) gaining 2.5% in 2006. Oil
prices, a key component of CPI, ended the year unchanged at $61 per barrel after
peaking at $77 per barrel in August (see the following Crude Oil chart). Core
inflation (CPI excluding food and energy prices) increased over the year to 2.6%
but was still modest given a very low year-end unemployment rate of 4.5% and a
3.3% increase in the Employment Cost Index during 2006. Goldilocks conditions
(moderate growth with modest inflation) proved to be just right for good overall
investment returns in 2006.
MORTGAGE EQUITY WITHDRAWAL
as of 9/30/06
Mar-80 41
Jun-80 23
Sep-80 51
Dec-80 50
Mar-81 22
Jun-81 35
Sep-81 18
Dec-81 15
Mar-82 20
Jun-82 6
Sep-82 2
Dec-82 23
Mar-83 34
Jun-83 34
Sep-83 44
Dec-83 45
Mar-84 62
Jun-84 40
Sep-84 35
Dec-84 52
Mar-85 100
Jun-85 46
Sep-85 117
Dec-85 77
Mar-86 69
Jun-86 69
Sep-86 122
Dec-86 125
Mar-87 118
Jun-87 131
Sep-87 87
Dec-87 90
Mar-88 84
Jun-88 113
Sep-88 98
Dec-88 101
Mar-89 52
Jun-89 89
Sep-89 126
Dec-89 164
Mar-90 93
Jun-90 102
Sep-90 86
Dec-90 84
Mar-91 102
Jun-91 91
Sep-91 -35
Dec-91 101
Mar-92 101
Jun-92 -32
Sep-92 75
Dec-92 41
Mar-93 -6
Jun-93 59
Sep-93 42
Dec-93 28
Mar-94 29
Jun-94 24
Sep-94 41
Dec-94 86
Mar-95 63
Jun-95 80
Sep-95 71
Dec-95 42
Mar-96 107
Jun-96 82
Sep-96 59
Dec-96 108
Mar-97 102
Jun-97 77
Sep-97 169
Dec-97 54
Mar-98 175
Jun-98 150
Sep-98 108
Dec-98 262
Mar-99 203
Jun-99 177
Sep-99 262
Dec-99 201
Mar-00 166
Jun-00 238
Sep-00 194
Dec-00 198
3/31/2001 225
6/30/2001 293
9/30/2001 222
12/31/2001 249
3/31/2002 334
6/30/2002 324
9/30/2002 404
12/31/2002 502
3/31/2003 475
6/30/2003 433
9/30/2003 411
12/31/2003 374
3/31/2004 646
6/30/2004 477
9/30/2004 761
12/31/2004 647
3/31/2005 550
6/30/2005 719
9/30/2005 869
12/31/2005 807
3/31/2006 713
6/30/2006 542
9/30/2006 380
Source: ISI
CRUDE OIL (US$/BARREL)
as of 12/31/06
1/2/2004 $32.52
1/9/2004 $34.31
1/16/2004 $35.07
1/23/2004 $35.04
1/30/2004 $33.05
2/6/2004 $32.48
2/13/2004 $34.56
2/20/2004 $35.60
2/27/2004 $36.16
3/5/2004 $37.26
3/12/2004 $36.19
3/19/2004 $38.08
3/26/2004 $35.73
4/2/2004 $34.39
4/9/2004 $37.14
4/16/2004 $37.74
4/23/2004 $37.06
4/30/2004 $37.38
5/7/2004 $39.93
5/14/2004 $41.38
5/21/2004 $39.93
5/28/2004 $39.88
6/4/2004 $38.49
6/11/2004 $38.45
6/18/2004 $38.75
6/25/2004 $37.42
7/2/2004 $38.39
7/9/2004 $39.96
7/16/2004 $41.25
7/23/2004 $41.76
7/30/2004 $43.80
8/6/2004 $43.95
8/13/2004 $46.58
8/20/2004 $47.86
8/27/2004 $43.18
9/3/2004 $43.99
9/10/2004 $42.81
9/17/2004 $45.59
9/24/2004 $48.83
10/1/2004 $50.12
10/8/2004 $53.31
10/15/2004 $54.93
10/22/2004 $56.17
10/29/2004 $51.76
11/5/2004 $49.61
11/12/2004 $47.32
11/19/2004 $48.44
11/26/2004 $49.26
12/3/2004 $42.54
12/10/2004 $40.71
12/17/2004 $46.28
12/24/2004 $44.03
12/31/2004 $43.45
1/7/2005 $45.43
1/14/2005 $48.38
1/21/2005 $48.33
1/28/2005 $47.18
2/4/2005 $46.48
2/11/2005 $47.16
2/18/2005 $48.35
2/25/2005 $50.92
3/4/2005 $53.78
3/11/2005 $54.43
3/18/2005 $56.72
3/25/2005 $51.29
4/1/2005 $57.27
4/8/2005 $53.32
4/15/2005 $50.49
4/22/2005 $54.39
4/29/2005 $49.72
5/6/2005 $50.96
5/13/2005 $48.67
5/20/2005 $46.80
5/27/2005 $51.85
6/3/2005 $55.03
6/10/2005 $53.54
6/17/2005 $58.47
6/24/2005 $59.64
7/1/2005 $58.75
7/8/2005 $59.63
7/15/2005 $58.09
7/22/2005 $56.65
7/29/2005 $60.57
8/5/2005 $62.31
8/12/2005 $66.86
8/19/2005 $65.35
8/26/2005 $66.13
9/2/2005 $67.57
9/9/2005 $64.08
9/16/2005 $63.00
9/23/2005 $64.09
9/30/2005 $66.24
10/7/2005 $61.84
10/14/2005 $62.63
10/21/2005 $61.23
10/28/2005 $61.22
11/4/2005 $60.58
11/11/2005 $57.53
11/18/2005 $56.14
11/25/2005 $58.46
12/2/2005 $59.32
12/9/2005 $59.39
12/16/2005 $58.06
12/23/2005 $58.23
12/30/2005 $61.04
1/6/2006 $64.21
1/13/2006 $63.92
1/20/2006 $68.35
1/27/2006 $67.76
2/3/2006 $65.37
2/10/2006 $61.84
2/17/2006 $59.88
2/24/2006 $62.26
3/3/2006 $63.67
3/10/2006 $59.96
3/17/2006 $62.77
3/24/2006 $63.95
3/31/2006 $66.63
4/7/2006 $67.39
4/14/2006 $69.32
4/21/2006 $73.67
4/28/2006 $71.88
5/5/2006 $70.19
5/12/2006 $72.04
5/19/2006 $68.53
5/26/2006 $71.37
6/2/2006 $72.33
6/9/2006 $71.63
6/16/2006 $69.88
6/23/2006 $70.69
6/30/2006 $73.93
7/7/2006 $74.09
7/14/2006 $77.03
7/21/2006 $74.06
7/28/2006 $73.24
8/4/2006 $74.76
8/11/2006 $74.35
8/18/2006 $71.14
8/25/2006 $72.13
9/1/2006 $69.19
9/8/2006 $66.25
9/15/2006 $63.33
9/22/2006 $60.08
9/29/2006 $62.91
10/6/2006 $59.76
10/13/2006 $58.57
10/20/2006 $56.82
10/27/2006 $60.75
11/3/2006 $59.14
11/10/2006 $59.59
11/17/2006 $55.81
11/24/2006 $58.44
12/1/2006 $63.43
12/8/2006 $62.03
12/15/2006 $63.43
12/22/2006 $61.86
12/29/2006 $61.05
Source: Bloomberg
M&A SURGE, VOLATILITY DECLINES
The value of announced mergers and acquisitions surged in 2006 to a record $3.8
trillion in market value (see chart below left). Awash in cash and searching
for higher returns, private equity and hedge fund managers played a major role
in driving deals. Transactions involving private equity totaled $750 billion, a
170% increase from 2005. In addition to aiding deal flow, liquidity also
contributed to lower market volatility. Equity investors in particular enjoyed
strong returns and smooth sailing in 2006 as stock market volatility declined to
its lowest level in over 10 years (see VIX chart below right).
GLOBAL M&A ANNOUNCED DEALS
Year US $ Billions No. of Transactions
- ---- ------------- -------------------
1996 $1116.7 23,853
1997 $1640.0 25,898
1998 $2493.1 29,376
1999 $3265.4 32,183
2000 $3400.0 38,716
2001 $1687.0 30,174
2002 $1208.6 26,482
2003 $1360.9 28,830
2004 $1888.0 31,484
2005 $2744.2 33,563
2006 $3803.4 37,285
Source: Thomson Financial
CBOE S&P 500 VOLATILITY INDEX (VIX)
1/31/90 25.36
2/28/90 21.99
3/30/90 19.73
4/30/90 19.52
5/31/90 17.37
6/29/90 15.5
7/31/90 21.11
8/31/90 29.9
9/28/90 29.11
10/31/90 30.04
11/30/90 22.16
12/31/90 26.38
1/31/91 20.91
2/28/91 21.23
3/29/91 16.88
4/30/91 18.24
5/31/91 15.93
6/28/91 19.55
7/31/91 15.18
8/30/91 14.46
9/30/91 15.85
10/31/91 15.48
11/29/91 20.26
12/31/91 19.31
1/31/92 17.4
2/28/92 16.68
3/31/92 16.18
4/30/92 15.53
5/29/92 13.86
6/30/92 13.35
7/31/92 13.17
8/31/92 13.58
9/30/92 14.28
10/30/92 16.15
11/30/92 13.01
12/31/92 12.57
1/29/93 12.42
2/26/93 13.16
3/31/93 12.53
4/30/93 12.42
5/31/93 13.47
6/30/93 11.26
7/30/93 11.73
8/31/93 11.85
9/30/93 12.99
10/29/93 11.46
11/30/93 13.76
12/31/93 11.66
1/31/94 10.63
2/28/94 14.87
3/31/94 20.45
4/29/94 13.77
5/31/94 13.03
6/30/94 14.97
7/29/94 11.13
8/31/94 11.97
9/30/94 14.28
10/31/94 14.56
11/30/94 15.95
12/30/94 13.2
1/31/95 11.96
2/28/95 11.75
3/31/95 13.37
4/28/95 11.75
5/31/95 12.85
6/30/95 11.38
7/31/95 13.49
8/31/95 11.52
9/29/95 12.74
10/31/95 13.83
11/30/95 11.58
12/29/95 12.52
1/31/96 12.53
2/29/96 17.04
3/29/96 18.88
4/30/96 15.83
5/31/96 16.07
6/28/96 13.68
7/31/96 19.46
8/30/96 17.01
9/30/96 16.95
10/31/96 18.11
11/29/96 17.14
12/31/96 20.92
1/31/97 20.82
2/28/97 21.1
3/31/97 22.14
4/30/97 20.06
5/30/97 19.19
6/30/97 21.53
7/31/97 21.48
8/29/97 24.76
9/30/97 22.91
10/31/97 35.09
11/28/97 27.43
12/31/97 24.01
1/30/98 21.47
2/27/98 18.55
3/31/98 24.22
4/30/98 21.18
5/29/98 21.32
6/30/98 19.71
7/31/98 24.8
8/31/98 44.28
9/30/98 40.95
10/30/98 28.05
11/30/98 26.01
12/31/98 24.42
1/29/99 26.25
2/26/99 27.88
3/31/99 23.26
4/30/99 25.07
5/31/99 25.39
6/30/99 21.09
7/30/99 24.64
8/31/99 24.45
9/30/99 25.41
10/29/99 22.2
11/30/99 24.18
12/31/99 24.64
1/31/2000 24.95
2/29/2000 23.37
3/31/2000 24.11
4/28/2000 26.2
5/31/2000 23.65
6/30/2000 19.54
7/31/2000 20.74
8/31/2000 16.84
9/29/2000 20.57
10/31/2000 23.63
11/30/2000 29.65
12/29/2000 26.85
1/31/2001 22.02
2/28/2001 28.35
3/30/2001 28.64
4/30/2001 25.48
5/31/2001 22.64
6/29/2001 19.06
7/31/2001 21.62
8/31/2001 24.92
9/28/2001 31.93
10/31/2001 33.56
11/30/2001 23.84
12/31/2001 23.8
1/31/2002 21.09
2/28/2002 21.59
3/29/2002 17.4
4/30/2002 21.91
5/31/2002 19.98
6/28/2002 25.4
7/31/2002 32.03
8/30/2002 32.64
9/30/2002 39.69
10/31/2002 31.14
11/29/2002 27.5
12/31/2002 28.62
1/31/2003 31.17
2/28/2003 29.63
3/31/2003 29.15
4/30/2003 21.21
5/30/2003 19.47
6/30/2003 19.52
7/31/2003 19.49
8/29/2003 18.63
9/30/2003 22.72
10/31/2003 16.1
11/28/2003 16.32
12/31/2003 18.31
1/30/2004 16.63
2/27/2004 14.55
3/31/2004 16.74
4/30/2004 17.19
5/31/2004 15.5
6/30/2004 14.34
7/30/2004 15.32
8/31/2004 15.29
9/30/2004 13.34
10/29/2004 16.27
11/30/2004 13.24
12/31/2004 13.29
1/31/2005 12.82
2/28/2005 12.08
3/31/2005 14.02
4/29/2005 15.31
5/31/2005 13.29
6/30/2005 12.04
7/29/2005 11.57
8/31/2005 12.6
9/30/2005 11.92
10/31/2005 15.32
11/30/2005 12.06
12/30/2005 12.07
1/31/2006 12.95
2/28/2006 12.34
3/31/2006 11.39
4/28/2006 11.59
5/31/2006 16.44
6/30/2006 13.08
7/31/2006 14.95
8/31/2006 12.31
9/29/2006 11.98
10/31/2006 11.1
11/30/2006 10.91
12/29/2006 11.56
Source: Bloomberg
CDS SWELL, CREDIT SPREADS TIGHTEN
Credit default swaps (CDS) continued to grow rapidly with notional par amounts
exceeding $20 trillion (nearly 4 times the market value of the Lehman Brothers
Credit Index) at the end of 2006 (see chart below left). Hedge funds, which
have also been growing rapidly in size and number, account for roughly 30% of
CDS activity and have been a key contributor to the expansion of the CDS market
in recent years. While some are concerned that the additional liquidity this
largely unregulated market brings to the bond market as a whole could be
shallow, unreliable or, at some point, even detrimental, the growth of CDS
clearly contributed to tighter credit spreads and lower spread volatility in
2006. The option-adjusted spread of the Lehman Brothers Investment Grade Credit
Index tightened to 80 basis points at year end (from 83 bps in 2005) while the
range of this spread during the entire year was just 11 basis points, the
narrowest since 1996 (see chart below right). As in the equity markets, low
volatility rewarded the assumption of additional risk in the bond market as well
in 2006.
CREDIT DEFAULT SWAPS
Notional Principal ($ billions)
1996 $180.0
1998 $350.0
1999 $586.0
2000 $893.0
2001 $1,189.0
2002 $1,952.0
2003 $3,548.0
2004 $5,021.0
2006 $20,207.0
Source: British Banker Association & Lehman Brothers
U.S. INVESTMENT GRADE CREDIT INDEX
Option-Adjusted Spread Range
1991 95.18 153.79 107.20
1992 85.00 101.55 87.58
1993 72.91 85.54 72.91
1994 66.10 79.04 78.31
1995 61.25 76.13 64.91
1996 53.91 63.75 56.23
1997 51.14 71.17 67.22
1998 68.65 145.20 117.84
1999 101.65 125.11 110.84
2000 114.81 190.54 189.87
2001 143.02 190.61 164.03
2002 149.22 241.13 168.74
2003 88.66 166.11 88.80
2004 73.40 95.18 75.02
2005 69.99 98.75 83.39
2006 77.69 89.11 80.64
Source: Lehman Brothers
SOLID RETURNS, TIPS FALTER
Despite the modest increase in yields, all sectors of the bond market posted
solid positive returns in 2006 (see following table). Low volatility and the
compression of yield spreads combined to boost returns of spread sectors which
easily surpassed the 3.08% return on Treasuries. Mortgage-backed securities
(MBS), which by nature have high intrinsic optionality, thrived in the low-
volatility environment and led all other investment grade sectors with a return
of 5.22% for the year. Low volatility also helped asset-backed securities (ABS)
generate a respectable 4.70% return in 2006. Government agencies (posting a
return of 4.39%) and corporates (posting a return of 4.30%) benefited in 2006
from tighter spreads while moderate new supply and steady investor demand helped
municipal bonds return 4.84% for the year. High yield bonds again correlated
more closely with stocks and delivered a stunning 11.85% return for the year
while modest CPI gains caused Treasury Inflation-Protected Securities (TIPS) to
falter with a disappointing 2006 return of just 0.41%.
TOTAL RETURNS OF SELECTED LEHMAN BROTHERS (LB) INDICES AND SUBSECTORS
Index/Sector 2006
------------ ----
LB Aggregate Index 4.33%
LB Gov't/Credit Index 3.78%
LB Int. Gov't/Credit Index 4.08%
LB 1-3 yr. Gov't/Credit Index 4.25%
US Treasury Sector 3.08%
Government Agency Sector 4.39%
Corporate Sector 4.30%
Mortgage Backed Securities Sector 5.22%
Asset Backed Securities Sector 4.70%
High Yield Sector 11.85%
Municipal Sector 4.84%
US TIPS Sector 0.41%
2007 OUTLOOK
We expect the moderate growth/modest inflation Goldilocks economy to persist in
2007 and would not be surprised if the Fed stays on the sidelines longer than
many expect. Hence, the yield curve could remain flat longer than normal with
interest rates near current levels. Tight spreads in corporates and agencies
limit the added-value prospects for these sectors, and forecasts of manageable
new supply suggest that spreads could remain tight. We believe some upward
pressure on spreads could occur in the high yield market where LBO activity is
creating more supply. Market volatility will likely increase somewhat from the
lows of 2006, but we still see good relative value in certain MBS and ABS
structures.
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, 2006
The Baird Intermediate Bond Fund seeks an annual total rate of 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 Fund delivered solid positive returns and outperformed its benchmark index
in 2006. Helping the Fund's strong relative performance were the following
factors:
o The Fund's exposure to high-quality mortgage-backed and asset-backed
securities which performed well relative to other sectors;
o The Fund's overweighting of BBB-rated corporate bonds relative to the
benchmark; and
o Strong performance of specific individual corporate issues, particularly
those in the auto and finance sectors.
The Fund's exposure to a small number of issues which were negatively affected
by leveraged buy-outs detracted slightly from relative performance in 2006. The
Fund maintained its duration-neutral strategy, holding a broadly diversified
portfolio of over 280 securities at year end.
The Fund ended 2006 with a yield advantage versus its benchmark index. This
yield advantage, combined with exposure to specific sectors which we believe
have superior total return potential (mortgage-backed and asset-backed
securities), enhance the Fund's prospects of continuing to add value over its
benchmark in the coming year.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F1>
U.S. Treasury 9%
U.S. Gov't \rAgency 23%
AAA 20%
AA 4%
A 17%
BBB 25%
Below BBB 2%
SECTOR WEIGHTINGS*<F1>
Asset-Backed 8%
Financials 20%
Industrials 18%
Utilities 8%
Mortgage-Backed 16%
International 2%
Municipal 1%
U.S. Gov't Agency 16%
U.S. Treasuries 9%
Cash 2%
NET ASSETS: $328,042,613
SEC 30-DAY YIELD:**<F2>
Institutional Class: 5.12%
Investor Class: 4.88%
AVERAGE EFFECTIVE DURATION: 3.60 years
AVERAGE EFFECTIVE MATURITY: 4.89 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
Investor Class: 0.55%***<F3>
PORTFOLIO TURNOVER RATIO: 44.8%
TOTAL NUMBER OF HOLDINGS: 283
*<F1> Percentages shown are based on the Fund's total net assets.
**<F2> SEC yields are based on SEC guidelines and are calculated for the 30
days ended December 31, 2006.
***<F3> Includes 0.25% 12b-1 fee.
BAIRD INTERMEDIATE BOND FUND
BAIRD INTERMEDIATE BOND FUND - INSTITUTIONAL CLASS
VALUE OF A $250,000 INVESTMENT
Baird Intermediate Lehman Brothers Intermediate
Bond Fund - Government/Credit
Institutional Class Shares 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
6/30/2006 $344,358 $341,944
12/31/2006 $360,344 $352,567
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 Lehman Brothers Intermediate
Bond Fund - Government/Credit
Investor Class Shares 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
6/30/2006 $13,592 $13,526
12/31/2006 $14,212 $14,103
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, 2006 ONE YEAR FIVE YEARS INCEPTION(1)<F4>
- --------------------------------------- -------- ---------- ----------------
Baird Intermediate Bond Fund - Institutional Class Shares 4.70% 4.84% 6.02%
Baird Intermediate Bond Fund - Investor Class Shares 4.47% 4.59% 5.78%
Lehman Brothers Intermediate Government/Credit Bond Index(2)<F5> 4.08% 4.53% 5.65%
(1)<F4> For the period from September 29, 2000 (commencement of operations)
through December 31, 2006.
(2)<F5> 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 10 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 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. MUTUAL FUND
PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER
THAN THAT STATED.
BAIRD INTERMEDIATE BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2006
Principal
Amount Value
--------- -----
LONG-TERM INVESTMENTS - 96.6%
ASSET BACKED SECURITIES - 7.5%
$ 3,000,000 American Express Credit
Account Master Trust,
Series 2004-5, Class A,
5.42%, 04/15/2012 $ 3,000,686
616,319 Amresco Residential
Securities Mortgage
Loan Trust,
Series 1998-1, Class A6,
6.51%, 08/25/2027 618,379
1,150,000 Bayview Financial
Acquisition Trust,
Series 2005-B, Class 1A2,
4.70%, 04/28/2039 1,138,987
256,379 Chase Funding
Mortgage Loan,
Series 2004-1, Class 1A3,
2.98%, 04/25/2026 254,221
19,280 CitiFinancial Mortgage
Securities, Inc.,
Series 2004-1, Class AF2,
2.65%, 04/25/2034 18,841
37,599 Contimortgage Home
Equity Trust,
Series 1999-1, Class A7,
6.47%, 12/25/2013 37,523
Countrywide Asset-Backed
Certificates:
2,215,000 Series 2006-S3, Class A2,
6.09%, 06/25/2021 2,234,868
2,200,000 Series 2005-12, Class 1A2,
4.85%, 02/25/2036 2,181,148
375,000 Series 2006-13, Class 1AF3,
5.94%, 01/25/2037 377,337
75,000 Series 2006-9, Class 1AF3,
5.86%, 10/25/2046 75,351
1,500,000 Credit Based Asset
Servicing and Securities,
Series 2005-CB1,
Class AF4,
4.62%, 01/25/2035 1,489,067
225,000 Daimler Chrysler Master
Owner Trust,
Series 2004-A, Class A,
5.38%, 01/15/2009 225,007
Delta Funding Home
Equity Loan Trust:
308,216 Series 1997-2, Class A6,
7.04%, 06/25/2027 307,165
348,446 Series 1999-1, Class A6F,
6.34%, 12/15/2028 347,754
790,806 Series 1999-2, Class A7F,
7.03%, 08/15/2030 788,922
Discover Card
Master Trust I:
150,000 Series 2003-4, Class A1,
5.46%, 05/15/2011 150,365
2,000,000 Series 2005-2, Class A,
5.38%, 04/17/2012 2,004,412
56,253 Equivantage Home
Equity Loan Trust,
Series 1996-3, Class A3,
7.70%, 09/25/2027 56,063
GMAC Mortgage
Corporation Loan Trust:
1,757,323 Series 2004-GH1, Class A2,
4.39%, 12/25/2025 1,739,993
1,461,432 Series 2004-J4, Class A2,
5.50%, 09/25/2034 1,455,120
Green Tree Financial
Corporation:
1,648,159 Series 1998-3, Class A5,
6.22%, 03/01/2030 1,660,654
597,653 Series 1998-4, Class A5,
6.18%, 04/01/2030 583,216
148,739 Series 1999-3, Class A5,
6.16%, 02/01/2031 148,798
184,780 IMC Home
Equity Loan Trust,
Series 1998-1, Class A6,
6.52%, 06/20/2029 185,668
244,735 IMPAC Secured Asset
Corporation,
Series 2004-2, Class A3,
5.00%, 08/25/2034 243,496
2,675,000 MBNA Credit Card
Master Note Trust,
Series 2003-A3, Class A3,
2.93%, 08/15/2010 2,679,599
233,282 New Century Home
Equity Loan Trust,
Series 2003-5, Class AI3,
3.56%, 11/25/2033 232,270
267,042 Oakwood Mortgage
Investors, Inc.,
Series 1999-B, Class A3,
6.45%, 11/15/2017 251,217
24,795 Residential Asset
Mortgage Products, Inc.,
Series 2003-RS7, Class AI6,
5.34%, 08/25/2033 24,589
1,458 Salomon Brothers
Mortgage Securities VII,
Series 1997-LB6, Class A6,
6.82%, 12/25/2027 1,456
------------
24,512,172
------------
FINANCIAL - 19.8%
Allfirst Financial, Inc.
Subordinated Notes:
1,550,000 7.20%, 07/01/2007 1,560,796
725,000 6.88%, 06/01/2009 747,342
550,000 American General Finance
Corporation Notes,
4.00%, 03/15/2011 522,172
589,000 American General Finance
Corporation Senior Notes,
8.45%, 10/15/2009 635,143
25,000 American General Finance,
4.63%, 09/01/2010 24,397
630,000 AmSouth Bancorporation
Subordinated Debentures,
6.75%, 11/01/2025 681,678
691,000 AmSouth Bank NA
Subordinated Notes,
6.45%, 02/01/2008 697,572
500,000 AMVESCAP PLC Notes,
5.38%, 02/27/2013 F<F9> 494,819
50,000 AMVESCAP, Inc.
Senior Notes,
5.90%, 01/15/2007 F<F9> 50,005
1,335,000 Anthem, Inc.,
6.80%, 08/01/2012 1,416,001
725,000 Banco Santander Chile SA,
7.00%, 07/18/2007 F<F9> 727,182
310,000 Bank of America Corporation
Subordinated Notes,
10.20%, 07/15/2015 404,208
400,000 Bank of Oklahoma
Subordinated Notes,
7.13%, 08/15/2007 403,692
Bank One Corporation
Subordinated Notes:
180,000 6.00%, 02/17/2009 182,248
1,043,000 10.00%, 08/15/2010 1,190,599
1,520,000 BankAmerica Institutional,
8.07%, 12/31/2026
(Acquired 01/04/2006,
06/01/2006 and
10/11/2006; Cost
$500,456, $682,331 and
$417,508 respectively)*<F8> 1,582,715
480,000 Bankers Trust Corporation
Subordinated Notes,
7.38%, 05/01/2008 491,552
1,500,000 Banponce Trust I, Series A,
8.33%, 02/01/2027 1,564,341
1,000,000 BOI Capital Funding No. 2,
5.57%, 02/01/2049
(Acquired 01/20/2006;
Cost $1,000,000)*<F8> F<F9> 976,615
2,035,000 Citigroup Capital II,
7.75%, 12/01/2036 2,104,231
300,000 CIT Group Company
of Canada,
5.20%, 06/01/2015 F<F9> 290,575
25,000 CIT Group, Inc.
Senior Notes,
7.75%, 04/02/2012 27,563
200,000 CIT Group, Inc. Bonds,
5.40%, 01/30/2016 196,504
1,336,000 Comerica Incorporated
Subordinated Notes,
7.25%, 08/01/2007 1,350,625
850,000 Compass Bank
Subordinated Notes,
8.10%, 08/15/2009 903,643
260,000 Corestates Capital Trust I,
8.00%, 12/15/2026
(Acquired 11/29/2005;
Cost $276,398)*<F8> 270,748
650,000 Countrywide Financial
Corporation Subordinated
Notes,
6.25%, 05/15/2016 662,501
1,000,000 Countrywide Home
Loans, Inc.,
5.50%, 02/01/2007 1,000,045
885,000 Dime Capital Trust,
9.33%, 05/06/2027 935,774
462,728 First National Bank
of Chicago
Pass Thru Certificates,
8.08%, 01/05/2018 521,041
1,100,000 First National Bank of
Omaha Subordinated Notes,
7.32%, 12/01/2010 1,106,117
1,900,000 First Union Capital,
7.94%, 01/15/2027 1,978,481
775,000 FMR Corporation Notes,
4.75%, 03/01/2013
(Acquired 02/26/2003;
Cost $777,379)*<F8> 751,409
800,000 General Electric Capital
Corporation Notes,
6.00%, 06/15/2012 828,137
1,000,000 Genworth Financial Inc.
Notes, 5.75%, 06/15/2014 1,018,926
1,975,000 Glencore Funding LLC,
6.00%, 04/15/2014
(Acquired 03/31/2004,
02/02/2005, 04/26/2006
and 12/04/2006; 1,925,289
Cost $794,280, $146,738,
$282,792 and $720,432
respectively)*<F8>
500,000 The Goldman Sachs
Group, Inc. Bonds,
5.15%, 01/15/2014 492,552
25,000 The Goldman Sachs
Group, Inc. Notes,
4.75%, 07/15/2013 24,132
1,000,000 Great West Life &
Annuity Insurance,
7.15%, 05/16/2046
(Acquired 05/16/2006;
Cost $1,000,000)*<F8> 1,059,686
1,195,000 Health Care Service
Corporation Notes,
7.75%, 06/15/2011
(Acquired 06/20/2001,
01/26/2005 and
10/19/2006;
Cost $497,765, $373,500
and $397,317 respectively)*<F8> 1,297,300
400,000 Highmark, Inc. Notes,
6.80%, 08/15/2013
(Acquired 08/14/2003;
Cost $399,088)*<F8> 419,522
25,000 HSBC Finance
Corporation Notes,
5.00%, 06/30/2015 24,309
1,050,000 Istar Financial Inc.,
5.95%, 10/15/2013
(Acquired 09/13/2006;
Cost $1,047,428)*<F8> 1,055,289
500,000 J.P. Morgan Chase &
Company Subordinated
Notes, 6.63%, 03/15/2012 527,395
1,600,000 Lehman Brothers
Holdings Senior Notes,
8.80%, 03/01/2015 1,933,923
846,000 Lehman Brothers
Holdings, Inc. Notes,
8.50%, 08/01/2015 1,009,521
600,000 Marsh & McLennan
Companies, Inc.,
5.38%, 07/15/2014 577,340
600,000 MBNA Corporation Notes,
6.13%, 03/01/2013 623,009
1,395,000 Mellon Capital II, Series B,
8.00%, 01/15/2027 1,452,273
750,000 Merrill Lynch & Co., Inc.
Senior Unsubordinated
Notes, 5.00%, 02/03/2014 733,974
125,000 Met Life Global Funding
Senior Notes,
4.50%, 05/05/2010
(Acquired 08/04/2005;
Cost $123,925)*<F8> 122,630
1,000,000 Morgan Stanley Dean
Witter Debentures,
10.00%, 06/15/2008 1,064,388
25,000 Morgan Stanley
Subordinated Notes,
4.75%, 04/01/2014 23,903
1,230,000 National Australia Bank
Ltd. Subordinated Notes,
Series A, 8.60%,
05/19/2010 F<F9> 1,356,312
534,000 National City Bank of
Kentucky Subordinated
Notes, 6.30%, 02/15/2011 553,112
500,000 Nationwide Life
Global Fund Notes,
5.35%, 02/15/2007
(Acquired 02/08/2002;
Cost $499,520)*<F8> 500,001
1,100,000 Navigators Group Inc.
Senior Unsecured Notes,
7.00%, 05/01/2016 1,124,763
760,000 NB Capital Trust IV,
8.25%, 04/15/2027 793,246
1,000,000 North Fork Capital Trust II,
8.00%, 12/15/2027 1,055,818
800,000 Phoenix Companies,
6.68%, 02/16/2008 806,906
1,319,000 PNC Funding Corporation,
7.50%, 11/01/2009 1,392,914
1,000,000 Premium Asset Senior
Notes, 4.13%, 03/12/2009
(Acquired 12/20/2006;
Cost $935,000)*<F8> 940,000
25,000 Protective Life Corporation
Senior Notes,
4.30%, 06/01/2013 23,465
500,000 Providian Capital I,
9.53%, 02/01/2027
(Acquired 06/30/2006;
Cost $531,235)*<F8> 524,933
1,200,000 Rabobank Nederland
Senior Notes,
2.70%, 03/15/2007
(Acquired 02/03/2004;
Cost $1,199,760)*<F8> F<F9> 1,192,694
700,000 Residential Capital
Corporation,
6.38%, 06/30/2010 708,147
805,000 SAFECO Corporation
Notes, 6.88%, 07/15/2007 811,904
546,000 SAFECO Corporation
Senior Notes,
7.25%, 09/01/2012 590,165
Santander Central
Hispano Insurances: F<F9>
325,000 7.63%, 09/14/2010 351,120
550,000 6.38%, 02/15/2011 569,685
SLM Corporation Notes:
1,516,000 4.50%, 07/26/2010 1,475,615
25,000 5.38%, 05/15/2014 24,802
St. Paul Travelers, Inc.,
1,000,000 6.25%, 06/20/2016 1,049,958
1,046,000 Toll Road Inv. Part II,
0.00%, 02/15/2011
(Acquired 09/28/2004;
Cost $782,046)*<F8>^<F7> 841,642
1,255,000 Transamerica Finance
Corporation Debentures,
0.00%, 03/01/2010^<F7> 1,047,344
925,000 UFJ Bank Ltd/New York,
Subordinated Notes,
7.40%, 06/15/2011 999,336
350,000 UFJ Finance Aruba AEC,
6.75%, 07/15/2013 F<F9> 373,509
870,000 Union Planters Corporation
Subordinated Notes,
6.50%, 03/15/2018
(Acquired 05/08/2002,
02/12/2003, 05/08/2003
and 09/22/2005;
Cost $200,363, 881,431
$73,378, $400,227 and
$234,877 respectively)*<F8>
500,000 Washington Mutual Bank
Subordinated Notes,
6.88%, 06/15/2011 527,180
500,000 Washington Mutual
Capital I,
8.38%, 06/01/2027 524,590
Westdeutsche Landesbank
Subordinated Notes: F<F9>
25,000 6.05%, 01/15/2009 25,317
1,495,000 4.80%, 07/15/2015 1,433,895
------------
65,165,636
------------
INDUSTRIAL - 18.1%
450,000 Alcan, Inc. Notes,
5.00%, 06/01/2015 F<F9> 428,010
1,008,000 Ameritech Capital Funding,
6.45%, 01/15/2018 1,011,168
225,000 Auburn Hills Trust
Debentures,
12.38%, 05/01/2020 332,199
300,000 Bellsouth Corporation,
4.75%, 11/15/2012 289,506
650,000 British Telecom PLC Notes,
8.38%, 12/15/2010 F<F9> 725,406
Bunge Ltd. Finance
Corporation Notes:
800,000 5.35%, 04/15/2014 768,887
1,085,000 5.10%, 07/15/2015 1,010,423
375,000 Caesars Entertainment
Senior Notes,
7.50%, 09/01/2009 389,128
1,000,000 Clear Channel
Communications Senior
Unsubordinated Notes,
5.50%, 12/15/2016 809,469
125,000 Comcast Cable
Communication Holdings,
8.38%, 03/15/2013 142,383
525,000 Comcast Corporation,
6.50%, 01/15/2017 547,849
50,000 Comcast Corporation
Senior Subordinated Notes,
10.63%, 07/15/2012 60,381
50,000 Computer Sciences
Corporation Notes,
6.25%, 03/15/2009 50,556
Continental Airlines, Inc.
Pass Thru Certificates:
451 7.42%, 04/01/2007 430
46,541 6.54%, 03/15/2008 46,599
1,180,000 Cooper Cameron
Corporation Senior Notes,
2.65%, 04/15/2007 1,170,409
960,000 Cooper Industries, Inc.
Notes, 5.25%, 07/01/2007 957,055
1,281,000 COX Communications,
Inc., 7.13%, 10/01/2012 1,365,632
1,000,000 D.R. Horton Inc.
Unsubordinated Notes,
6.50%, 04/15/2016 1,006,097
1,125,000 Deutsche Telekom
International Finance BV,
8.50%, 06/15/2010 F<F9> 1,218,187
300,000 Dollar General Corporation,
8.63%, 06/15/2010 318,750
2,050,000 Ensco International, Inc.
Notes, 6.75%, 11/15/2007 2,074,676
500,000 Fiserv, Inc. Notes,
4.00%, 04/15/2008 490,258
623,000 Ford Capital BV Debentures,
9.50%, 06/01/2010 F<F9> 619,885
300,000 Ford Motor Company
Debentures,
9.22%, 09/15/2021 263,250
500,000 General Electric Company
Notes, 5.00%, 02/01/2013 494,450
General Motors Acceptance
Corporation Notes:
1,025,000 7.75%, 01/19/2010 1,072,832
200,000 6.75%, 12/01/2014 205,427
550,000 General Motors Nova
Scotia Finance Company,
6.85%, 10/15/2008 F<F9> 547,250
Halliburton Company Notes:
475,000 5.63%, 12/01/2008 476,345
675,000 5.50%, 10/15/2010 673,801
700,000 Hanson Australia Funding,
5.25%, 03/15/2013 F<F9> 682,695
650,000 Hanson PLC Notes,
6.13%, 08/15/2016 F<F9> 661,612
975,000 Hutchison Whampoa
International Limited,
6.25%, 01/24/2014
(Acquired 11/19/2003
and 02/08/2005;
Cost $749,228 and
$244,602 respectively)*<F8> F<F9> 1,011,012
1,000,000 Ingersoll-Rand
Company Debentures,
6.39%, 11/15/2027 F<F9> 1,069,692
530,000 International Paper
Company Notes,
7.63%, 01/15/2007 530,228
1,100,000 Johnson Controls Inc.
Senior Notes,
5.50%, 01/15/2016 1,078,541
675,000 Laboratory Corporation
of America Holdings,
5.50%, 02/01/2013 650,623
550,000 Lafarge SA Notes,
6.50%, 07/15/2016 F<F9> 574,266
500,000 Limited Brands, Inc.,
5.25%, 11/01/2014 475,060
1,210,000 Marathon Oil
Corporation Debentures,
9.13%, 01/15/2013 1,439,046
500,000 Marathon Oil
Corporation Notes,
5.38%, 06/01/2007 499,816
350,000 Marathon Oil Corporation,
6.00%, 07/01/2012 F<F9> 359,197
1,550,000 Masco Corporation,
6.13%, 10/03/2016 1,560,559
650,000 New York Telephone
Company Debentures,
8.63%, 11/15/2010 709,026
1,650,000 Nextel Communications
Senior Notes,
6.88%, 10/31/2013 1,667,044
700,000 PCCW Capital II Ltd.,
6.00%, 07/15/2013
(Acquired 07/10/2003;
Cost $696,731)*<F8> F<F9> 705,312
600,000 Pearson Dollar Finance PLC,
5.70%, 06/01/2014
(Acquired 09/28/2005;
Cost $618,138)*<F8> F<F9> 594,332
1,545,000 Plum Creek Timberlands,
5.88%, 11/15/2015 1,518,228
1,500,000 Premcor Refining Group
Inc. Senior Notes,
9.50%, 02/01/2013 1,620,116
Qwest Capital Funding, Inc.:
350,000 7.00%, 08/03/2009 356,125
100,000 7.25%, 02/15/2011 102,125
1,000,000 Reed Elsevier Capital Notes,
4.63%, 06/15/2012 955,112
500,000 SBC Communications,
Inc. Notes,
5.63%, 06/15/2016 497,704
650,000 Sealed Air Corporation
Senior Notes,
5.38%, 04/15/2008
(Acquired 04/09/2003;
Cost $646,490)*<F8> 646,874
224,954 Southwest Airlines Company
Pass Thru Certificates,
Series 1996-A1,
7.67%, 01/02/2014 228,890
500,000 Sprint Nextel Corporation,
6.00%, 12/01/2016 487,314
1,100,000 Sunoco, Inc. Senior Notes,
5.75%, 01/15/2017 1,076,122
TCI Communications,
Inc. Debentures:
325,000 7.88%, 08/01/2013 361,385
583,000 8.75%, 08/01/2015 689,564
Telecom Italia Capital: F<F9>
1,360,000 4.95%, 09/30/2014 1,259,961
25,000 5.25%, 10/01/2015 23,353
1,425,000 Telefonica
Emisiones, S.A.U.,
6.42%, 06/20/2016 F<F9> 1,470,056
681,000 Tele-Communications,
Inc. Debentures,
9.80%, 02/01/2012 803,033
1,070,000 Telus Corporation Notes,
7.50%, 06/01/2007 F<F9> 1,077,919
1,075,000 Time Warner Companies
Inc. Debentures,
9.13%, 01/15/2013 1,252,364
250,000 Time Warner Companies,
Inc., 6.88%, 06/15/2018 265,824
1,470,000 Transocean, Inc.,
6.63%, 04/15/2011 F<F9> 1,527,187
275,000 Tribune Company,
5.25%, 08/15/2015 233,004
Tyco International
Group S.A.: F<F9>
1,425,000 6.38%, 10/15/2011 1,491,250
650,000 6.00%, 11/15/2013 672,538
1,000,000 Univision Communications,
Inc., 3.50%, 10/15/2007 978,450
197,337 Union Pacific Corporation
Pass Thru Certificates,
Series 1994-A6,
8.66%, 07/02/2011 211,618
United AirLines, Inc.
Pass Thru Certificates:
245,275 7.76%, 10/01/2005
(Acquired 12/08/2000;
Cost $245,275)@<F6>^<F7> 215,842
791,035 6.20%, 09/01/2008
(Acquired 08/10/2001,
10/31/2005 and
03/09/2006;
Cost $325,423, $375,535
and $230,569 respectively) 795,979
287,902 10.02%, 03/22/2014
(Acquired 01/03/2001;
Cost $322,008)@<F6>^<F7> 146,830
1,500,000 Vale Overseas Limited,
6.25%, 01/23/2017 F<F9> 1,506,819
1,050,000 Viacom, Inc.,
7.70%, 07/30/2010 1,121,538
Waste Management, Inc.:
1,175,000 6.88%, 05/15/2009 1,214,657
25,000 5.00%, 03/15/2014 24,031
160,000 Weyerhaeuser
Company Notes,
5.95%, 11/01/2008 161,279
500,000 Willamette Industries,
Inc. Notes,
6.60%, 06/05/2012 517,113
------------
59,344,963
------------
UTILITIES - 7.7%
1,715,000 Cilcorp Inc. Senior Notes,
8.70%, 10/15/2009 1,836,985
50,000 Commonwealth Edison,
5.95%, 08/15/2016 50,550
1,000,000 Dominion Resources
Inc., Series C,
5.15%, 07/15/2015 968,613
1,400,000 Duke Capital LLC Notes,
5.67%, 08/15/2014 1,396,212
600,000 Energy Transfer Partners,
5.65%, 08/01/2012 597,475
300,000 Exelon Corporation Senior
Notes, 6.75%, 05/01/2011 313,355
2,500,000 Kinder Morgan Finance,
5.70%, 01/05/2016 F<F9> 2,293,798
416,757 Kiowa Power Partners LLC,
4.81%, 12/30/2013
(Acquired 11/19/2004;
Cost $428,709)*<F8> 401,691
300,000 Korea Electric Power
Corporation,
6.75%, 08/01/2027 F<F9> 334,157
MidAmerican Energy
Holdings Company
Senior Notes:
800,000 4.63%, 10/01/2007 794,799
1,500,000 7.52%, 09/15/2008 1,550,071
1,400,000 National Grid PLC Senior
Unsecured Notes,
6.30%, 08/01/2016 F<F9> 1,449,959
25,000 National Rural Utilities,
4.38%, 10/01/2010 24,261
100,000 Nisource Finance
Corporation,
7.88%, 11/15/2010 107,886
1,500,000 ONEOK, Inc. Senior
Notes, 7.13%, 04/15/2011 1,583,210
400,000 Oneok Partners LP Notes,
5.90%, 04/01/2012 404,548
1,417,000 Panhandle Eastern
Pipeline Senior Notes,
4.80%, 08/15/2008 1,395,970
1,475,000 PPL Energy Supply LLC
Bonds, Series A,
5.70%, 10/15/2015 1,449,126
388,000 PPL Energy Supply, LLC
Senior Notes,
6.40%, 11/01/2011 401,682
900,000 Progress Energy, Inc.
Senior Notes,
6.85%, 04/15/2012 956,850
175,000 PSE&G Energy Holdings
LLC Senior Notes,
8.50%, 06/15/2011 188,125
PSE&G Power LLC:
275,000 7.75%, 04/15/2011 297,137
425,000 5.00%, 04/01/2014 405,384
841,037 RGS (I&M) Funding
Corporation Debentures,
9.82%, 12/07/2022 1,011,288
500,000 System Energy Resources
1st Mortgage,
4.88%, 10/01/2007 496,931
800,000 Transcontinental Gas Pipe
Line Corporation Senior
Notes, Series B,
8.88%, 07/15/2012 904,000
350,000 Tristate Gen & Trans Assn,
6.04%, 01/31/2018
(Acquired 10/14/2003;
Cost $350,000)*<F8> 353,583
Vectren Utility Holdings:
900,000 6.63%, 12/01/2011 938,877
525,000 5.25%, 08/01/2013 509,159
900,000 Verizon Communications
Debentures,
6.84%, 04/15/2018 956,797
25,000 Verizon Communications
Senior Unsecured Notes,
5.55%, 02/15/2016 24,914
600,000 The Williams Companies,
Inc. Notes,
8.13%, 03/15/2012 649,500
325,000 Yosemite Securities Trust I,
8.25%, 11/15/2004
(Acquired 04/26/2001;
Cost $340,415)*<F8>@<F6>^<F7> 261,625
------------
25,308,518
------------
MORTGAGE BACKED SECURITIES - 16.0%
Bank of America
Alternative Loan Trust:
426,120 Series 2003-11, Class 4A1,
4.75%, 01/25/2019 412,004
1,744,558 Series 2004-2, Class 5A1,
5.50%, 03/25/2019 1,739,246
1,615,640 Series 2004-11, Class 4A1,
5.50%, 12/25/2019 1,607,561
1,173,469 Bank of America Funding
Corporation,
Series 2003-3, Class 1A41,
5.50%, 10/25/2033 1,149,308
Citicorp Mortgage
Securities, Inc.:
1,548,815 Series 2004-5, Class 1A25,
5.50%, 10/25/2014 1,545,955
1,556,855 Series 2004-4, Class A5,
5.50%, 06/25/2034 1,531,198
Countrywide Alternative
Loan Trust:
589,728 Series 2005-5R, Class A2,
4.75%, 12/25/2018 581,460
1,816,624 Series 2005-50CB,
Class 4A1, 5.00%,
11/25/2020 1,794,920
73,944 Series 2004-18CB,
5.13%, 09/25/2034 73,498
50,000 Series 2005-10CB,
Class 1A6, 5.50%,
05/25/2035 49,417
2,217,826 Countrywide Home
Loans, Inc.,
Series 2003-18, Class A3,
5.25%, 07/25/2033 2,195,705
Federal Gold Loan
Mortgage (FGLMC)
Pass Thru Certificate:
2,160,624 6.00%, 06/01/2021 2,189,702
66,324 6.00%, 07/01/2028 67,127
Federal Home Loan
Mortgage Corporation
(FHLMC):
1,761,738 Series 3033, Class LU,
5.50%, 03/15/2013 1,769,620
1,350,000 Series 2592, Class PD,
5.00%, 07/15/2014 1,342,059
1,382,743 Series 2695, Class UA,
5.50%, 09/15/2014 1,386,192
701,466 Series R001, Class AE,
4.38%, 04/15/2015 684,005
2,156,913 Series R003, Class VA,
5.50%, 08/15/2016 2,160,795
1,994,162 Series 3122, Class VA,
6.00%, 01/15/2017 2,026,861
690,839 Series R009, Class AJ,
5.75%, 12/15/2018 691,390
60,668 Series 1395, Class G,
6.00%, 10/15/2022 60,551
724,412 Series 2970, Class DA,
5.50%, 01/15/2023 724,397
Federal National Mortgage
Association (FNMA):
1,561,333 Series 2006-B2, Class AB,
5.50%, 05/25/2014 1,559,688
1,500,000 Series 2003-24, Class PC,
5.00%, 11/25/2015 1,484,853
50,000 Series 2003-35, Class TD,
5.00%, 12/25/2016 49,449
250,659 Series 1991-137, Class H,
7.00%, 10/25/2021 260,378
200,608 Series 1992-136, Class PK,
6.00%, 08/25/2022 203,304
106,049 Series 1993-32, Class H,
6.00%, 03/25/2023 106,142
560,056 Series 2002-95, Class MD,
5.00%, 07/25/2026 556,814
549,916 Series 2002-77, Class QP,
5.00%, 09/25/2026 546,667
19,341 Series 2003-25, Class PC,
4.50%, 02/25/2027 19,271
3,247,790 Series 2004-W6, Class 1A6,
5.50%, 07/25/2034 3,220,879
Government National
Mortgage Association
(GNMA):
553,013 Series 2003-12, Class ON,
4.00%, 02/16/2028 549,190
543,355 Series 1999-4, Class ZB,
6.00%, 02/20/2029 549,774
J.P. Morgan Alternative
Loan Trust:
1,778,410 Series 2006-A1, Class 2A1,
5.80%, 03/25/2036 1,790,785
3,000,000 Series 2006-S2, Class A2,
5.81%, 05/25/2036 2,996,884
1,017,357 Lehman Mortgage Trust,
Series 2006-4, Class 3A1,
5.00%, 08/25/2021 1,002,167
657,180 Master Alternative Loans
Trust, Series 2004-3,
Class 1A1, 5.00%,
03/25/2019 643,011
646,008 Salomon Brothers
Mortgage Securities VII,
Series 2003-UP2, Class A2,
4.00%, 06/25/2033 621,181
Washington Mutual:
3,820,092 Series 2004-CB3, Class 3A,
5.50%, 10/25/2019 3,809,785
868,599 Series 2004-CB4, Class 21A,
5.50%, 12/25/2019 866,223
Washington Mutual, Inc.
Pass-Thru Certificates:
2,868,718 Series 2004-CB1, Class 5A,
5.00%, 06/25/2019 2,804,172
1,686,126 Series 2004-CB3, Class 4A,
6.00%, 10/25/2019 1,702,511
1,300,462 Series 2004-CB4,
Class 22A,
6.00%, 12/25/2019 1,314,919
------------
52,441,018
------------
INTERNATIONAL (U.S. $ DENOMINATED) - 1.6%
275,000 Corp Andina
De Fomento Notes,
7.38%, 01/18/2011 F<F9> 294,002
1,000,000 Export Import Bank Korea,
5.13%, 02/14/2011 F<F9> 993,049
Korea Development
Bank Notes: F<F9>
450,000 4.25%, 11/13/2007 445,136
350,000 4.63%, 09/16/2010 342,205
1,050,000 Korea Development
Bank Notes,
3.88%, 03/02/2009 F<F9> 1,019,303
350,000 National Bank of Hungary
Yankee Debentures,
8.88%, 11/01/2013 F<F9> 417,979
1,700,000 PEMEX Project Funding
Master Trust,
9.13%, 10/13/2010 F<F9> 1,906,550
------------
5,418,224
------------
TAXABLE MUNICIPAL BONDS - 0.5%
Tobacco Settlement
Financing Corporation:
275,000 Series 2001-A, Class A,
5.92%, 06/01/2012 274,114
1,262,188 Series 2001-A, Class A,
6.36%, 05/15/2025 1,263,362
------------
1,537,476
------------
U.S. GOVERNMENT AGENCY ISSUES - 16.0%
Federal National Mortgage
Association (FNMA):
13,285,000 7.25%, 01/15/2010 14,133,832
36,775,000 6.00%, 05/15/2011 38,291,343
------------
52,425,175
------------
U.S. TREASURY OBLIGATIONS - 9.4%
U.S. Treasury Bonds,
22,350,000 9.13%, 05/15/2018 30,739,989
------------
Total Long-Term
Investments
(Cost $317,510,070) 316,893,171
------------
COLLATERAL POOL INVESTMENT
FOR SECURITIES ON LOAN - 26.7%
(Cost $87,414,866)
(Please Refer to Note 6) 87,414,866
------------
Shares
------
SHORT-TERM INVESTMENTS - 2.1%
MONEY MARKET FUNDS - 2.1%
7,008,756 Short-Term Investment
Company Liquid Assets
Portfolio - AIM Fund 7,008,756
------------
Total Short-Term
Investments
(Cost $7,008,756) 7,008,756
------------
Total Investments
(Cost $411,933,692) -
125.4% 411,316,793
------------
Liabilities in Excess of
Other Assets - (25.4)% (83,274,180)
------------
TOTAL NET
ASSETS - 100.0% $328,042,613
------------
------------
@<F6> Security in Default
^<F7> Non Income Producing
*<F8> Unregistered Security
F<F9> Foreign Security
The accompanying notes are an integral part of these financial statements.
BAIRD AGGREGATE BOND FUND
DECEMBER 31, 2006
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 delivered solid positive returns and outperformed its benchmark index
in 2006. Helping the Fund's strong relative performance were the following
factors:
o The Fund's significant exposure to asset-backed securities;
o The Fund's overweighting of BBB-rated corporate bonds relative to the
benchmark; and
o Strong performance of specific individual corporate issues, particularly
those in the auto and finance sectors.
The Fund's underweighting of mortgage pass-through securities relative to the
benchmark and exposure to a small number of issues which were negatively
affected by leveraged buy-outs detracted slightly from relative performance in
2006. The Fund maintained its duration-neutral strategy, holding a broadly
diversified portfolio of over 300 securities at year end.
The Fund ended 2006 with a yield advantage versus its benchmark index. This
yield advantage, combined with exposure to specific sectors which we believe
have superior total return potential (asset-backed securities and collateralized
mortgage-backed obligations), enhance the Fund's prospects of continuing to add
value over its benchmark in the coming year.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F10>
U.S. Treasury 10%
U.S. Gov't Agency 28%
AAA 27%
AA 3%
A 11%
BBB 20%
Below BBB 1%
SECTOR WEIGHTINGS*<F10>
Asset-Backed 9%
Commercial Mortgage-Backed 3%
Financials 14%
Industrials 12%
Utilities 6%
Mortgage-Backed 36%
International 1%
Municipal 1%
U.S. Gov't Agency 4%
U.S. Treasuries 10%
Cash 4%
NET ASSETS: $336,756,477
SEC 30-DAY YIELD:**<F11>
Institutional Class: 5.29%
Investor Class: 5.04%
AVERAGE EFFECTIVE DURATION: 4.46 years
AVERAGE EFFECTIVE MATURITY: 7.21 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
Investor Class: 0.55%***<F12>
PORTFOLIO TURNOVER RATIO: 52.4%
TOTAL NUMBER OF HOLDINGS: 304
*<F10> Percentages shown are based on the Fund's total net assets.
**<F11> SEC yields are based on SEC guidelines and are calculated for the 30
days ended December 31, 2006.
***<F12> Includes 0.25% 12b-1 fee.
BAIRD AGGREGATE BOND FUND
BAIRD AGGREGATE BOND FUND - INSTITUTIONAL CLASS
VALUE OF A $250,000 INVESTMENT
Baird Aggregate Bond Fund - Lehman Brothers
Institutional Class Shares Aggregate 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
6/30/2006 $358,649 $344,050
12/31/2006 $377,922 $361,572
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
Investor Class Shares Aggregate 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
6/30/2006 $14,177 $13,762
12/31/2006 $14,904 $14,463
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, 2006 ONE YEAR FIVE YEARS INCEPTION(1)<F13>
- --------------------------------------- -------- ---------- -----------------
Baird Aggregate Bond Fund - Institutional Class Shares 4.88% 5.69% 6.83%
Baird Aggregate Bond Fund - Investor Class Shares 4.61% 5.46% 6.59%
Lehman Brothers Aggregate Bond Index(2)<F14> 4.33% 5.06% 6.08%
(1)<F13> For the period from September 29, 2000 (commencement of operations)
through December 31, 2006.
(2)<F14> 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 SHOWN IN THE 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. MUTUAL FUND
PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER
THAN THAT STATED.
BAIRD AGGREGATE BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2006
Principal
Amount Value
-------- -----
LONG-TERM INVESTMENTS - 95.9%
ASSET BACKED SECURITIES - 9.2%
$ 2,700,000 American Express Credit
Account Master Trust,
Series 2005-5, Class A,
5.37%, 02/15/2013 $ 2,701,028
2,000,000 Bayview Financial
Acquisition Trust,
Series 2006-A, Class 1A2,
5.48%, 02/28/2041 1,991,497
50,839 Citifinancial Mortgage
Securities, Inc.,
Series 2003-2, Class AF3,
3.04%, 05/25/2033 49,926
Contimortgage Home
Equity Trust:
50,869 Series 1999-1, Class A7,
6.47%, 12/25/2013 50,766
6,937 Series 1997-2, Class A9,
7.09%, 04/15/2028 6,895
69,776 Series 1999-3, Class A8,
5.88%, 05/25/2029 69,916
Countrywide Asset-Backed
Certificates:
2,000,000 Series 2005-17, Class 1AF2,
5.36%, 03/25/2030 1,991,595
834,393 Series 2004-12, Class AF3,
4.02%, 12/25/2030 828,450
1,500,000 Series 2004-15, Class AF6,
4.61%, 04/25/2035 1,446,654
1,300,000 Series 2005-1, Class AF6,
5.03%, 06/25/2035 1,283,238
1,500,000 Series 2005-10, Class AF2,
4.49%, 02/25/2036 1,485,916
3,000,000 Series 2005-10, Class AF6,
4.92%, 02/25/2036 2,922,735
Credit Based Asset Servicing
and Securities:
1,000,000 Series 2005-CB1, Class
AF4, 4.62%, 01/25/2035 992,712
2,000,000 Series 2005-CB8, Class
AF2, 5.30%, 12/25/2035 1,989,727
875,000 Daimler Chrysler Master
Owner Trust,
Series 2004-A, Class A,
5.38%, 01/15/2009 875,029
407,006 Equivantage Home
Equity Loan Trust,
Series 1996-3, Class A3,
7.70%, 09/25/2027 405,632
GE Capital Mortgage
Services, Inc.:
5,622 Series 1997-H3, Class A6,
6.72%, 10/25/2027 5,604
11,440 Series 1997-HE4, Class
A7, 6.74%, 12/25/2027 11,401
107,645 Series 1999-HE1, Class
A7, 6.27%, 04/25/2029 107,893
647,435 GMAC Mortgage
Corporation Loan Trust,
Series 2004-GH1, Class
A2, 4.39%, 12/25/2025 641,050
Green Tree Financial
Corporation:
248,905 Series 1993-3, Class A7,
6.40%, 10/15/2018 252,486
206,867 Series 1993-4, Class A5,
7.05%, 01/15/2019 210,067
4,289 Series 1995-4, Class A5,
6.95%, 06/15/2025 4,303
5,418 Series 1997-1, Class A5,
6.86%, 03/15/2028 5,589
212,532 Series 1997-6, Class A8,
7.07%, 01/15/2029 218,215
601,518 Series 1998-3, Class A5,
6.22%, 03/01/2030 606,078
986,127 Series 1998-4, Class A5,
6.18%, 04/01/2030 962,306
2,000,000 GSAA Home Equity Trust,
Series 2005-1, Class AF2,
4.32%, 11/25/2034 1,961,163
255,483 Household Automobile
Trust, Series 2003-1,
2.22%, 11/17/2009 252,964
600,113 IMC Home Equity Loan
Trust, Series 1997-5,
Class A10, 6.88%,
11/20/2028 598,500
120,867 Impac CMB Trust,
Series 2004-4, Class 2A2,
5.25%, 09/25/2034 119,720
97,201 New Century Home
Equity Loan Trust,
Series 2003-5, Class AI3,
3.56%, 11/25/2033 96,779
133,521 Oakwood Mortgage
Investors, Inc.,
Series 1999-B, Class A3,
6.45%, 11/15/2017 125,608
RAAC Series:
376,438 Series 2004-SP1, Class
AI2, 4.38%, 01/25/2022 372,580
1,200,000 Series 2004-SP1, Class
AI4, 5.29%, 08/25/2027 1,184,507
Residential Asset
Mortgage Products, Inc.:
1,616,645 Series 2003-RS7, Class
AI6, 5.34%, 08/25/2033 1,603,179
1,000,000 Series 2005-RS1, Class
AI6, 4.71%, 11/25/2034 966,892
Residential Asset
Securities Corporation:
151,409 Series 2004-KS2, Class
AI3, 3.02%, 05/25/2029 150,563
232,113 Series 2003-KS5, Class
AI6, 3.62%, 07/25/2033 221,599
300,000 Series 2004-KS2, Class
AI6, 4.30%, 03/25/2034 286,883
2,157 Salomon Brothers
Mortgage Securities VII,
Series 1997-LB6, Class
A6, 6.82%, 12/25/2027 2,153
Structured Asset Securities
Corporation:
826,049 Series 2004-11XS, Class
1A3A, 4.76%, 06/25/2034 819,046
32,567 Series 2004-16XS, Class
A2, 4.91%, 08/25/2034 32,412
------------
30,911,256
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 2.8%
2,400,000 First Union National Bank
Commercial Mortgage
Securities Inc.,
Series 2001-C4, Class A2,
6.22%, 12/12/2033 2,493,239
1,200,000 GE Capital Commercial
Mortgage Corporation,
Series 2002-3A, Class AR,
4.00%, 12/10/2037 1,187,698
3,500,000 GMAC Commercial
Mortgage Securities, Inc.,
Series 2003-C1, Class A2,
4.08%, 05/10/2036 3,281,802
800,000 Government National
Mortgage Association
(GNMA):
Series 2004-78, Class C,
4.66%, 04/16/2029 774,061
1,800,000 Wachovia Bank
Commercial Mortgage
Trust, Series 2003-C3,
Class A2, 4.87%,
02/15/2035 1,763,049
------------
9,499,849
------------
FINANCIAL - 13.9%
600,000 American General Finance
Corporation Senior Notes,
8.45%, 10/15/2009 647,005
200,000 AmSouth Bancorporation
Subordinated Debentures,
6.75%, 11/01/2025 216,406
275,000 AMVESCAP PLC Notes,
5.38%, 02/27/2013 F<F18> 272,150
300,000 BAC Capital Trust VI,
5.63%, 03/08/2035 283,987
1,015,000 Bank of America
Corporation
Subordinated Notes,
10.20%, 07/15/2015 1,323,456
1,000,000 BankBoston Capital Trust
II, 7.75%, 12/15/2026 1,039,882
400,000 Bank of Oklahoma
Subordinated Notes,
7.13%, 08/15/2007 403,692
909,000 Bank One Corporation
Subordinated Notes,
10.00%, 08/15/2010 1,037,636
330,000 Bankers Trust Corporation
Subordinated Notes,
7.25%, 10/15/2011 354,026
1,175,000 Banponce Trust I,
8.33%, 02/01/2027 1,225,401
325,000 CIT Group Company
of Canada,
5.20%, 06/01/2015 F<F18> 314,789
300,000 CIT Group, Inc. Senior
Notes, 7.75%, 04/02/2012 330,752
500,000 CIT Group, Inc. Bonds,
5.40%, 01/30/2016 491,259
1,581,000 Citigroup Capital II,
7.75%, 12/01/2036 1,634,786
1,181,000 Compass Bank
Subordinated Notes,
8.10%, 08/15/2009 1,255,532
875,000 Countrywide Financial
Corporation Subordinated
Notes, 6.25%, 05/15/2016 891,828
1,070,000 Dime Capital Trust,
9.33%, 05/06/2027 1,131,388
800,000 Executive Risk Capital
Trust, 8.68%, 02/01/2027 835,939
1,135,000 First Empire Capital Trust
I, 8.23%, 02/01/2027 1,183,405
625,000 First Empire Capital Trust
II, 8.28%, 06/01/2027 655,713
670,955 First National Bank
of Chicago Pass Thru
Certificates,
8.08%, 01/05/2018 755,509
1,800,000 First National Bank of
Omaha Subordinated
Notes, 7.32%, 12/01/2010 1,810,010
1,660,000 First Union Capital,
7.94%, 01/15/2027 1,728,568
250,000 FMR Corporation Notes,
4.75%, 03/01/2013
(Acquired 02/26/2003;
Cost $250,768)*<F17> 242,390
1,575,000 Glencore Funding LLC,
6.00%, 04/15/2014
(Acquired 03/31/2004,
02/02/2005, 10/31/2005
and 12/04/2006; 1,535,357
Cost $496,425, $122,281,
$231,168 and $695,590
respectively)*<F17>
850,000 Goldman Sachs Capital I,
6.35%, 02/15/2034 860,412
1,000,000 Great West Life &
Annuity Insurance,
7.15%, 05/16/2046
(Acquired 05/16/2006;
Cost $1,000,000)*<F17> 1,059,686
500,000 Health Care Service
Corporation Notes,
7.75%, 06/15/2011
(Acquired 06/20/2001
and 01/26/2005; Cost
$150,908 and $345,000
respectively)*<F17> 542,804
275,000 Highmark, Inc. Notes,
6.80%, 08/15/2013
(Acquired 08/14/2003;
Cost $274,373)*<F17> 288,421
900,000 J.P. Morgan Chase &
Company Notes,
5.88%, 03/15/2035 879,318
1,150,000 Jefferies Group Inc.,
6.25%, 01/15/2036 1,115,559
565,000 Liberty Mutual Insurance
Notes, 7.70%, 10/15/2097
(Acquired 03/26/2003;
Cost $361,510)*<F17> 578,184
300,000 Marsh & McLennan
Companies, Inc.,
5.38%, 07/15/2014 288,670
475,000 Morgan Stanley
Subordinated Notes,
4.75%, 04/01/2014 454,160
1,100,000 Navigators Group Inc.
Senior Unsecured Notes,
7.00%, 05/01/2016 1,124,763
819,000 NB Capital Trust IV,
8.25%, 04/15/2027 854,827
1,500,000 North Fork Capital Trust
II, 8.00%, 12/15/2027 1,583,727
600,000 Phoenix Companies,
6.68%, 02/16/2008 605,179
1,875,000 PNC Financial Services,
Series C, 8.88%,
03/15/2027 1,968,448
1,000,000 Premium Asset Senior
Notes, 4.13%, 03/12/2009
(Acquired 12/20/2006,
Cost $935,000)*<F17> 940,000
700,000 Republic New York
Corporation Debentures,
9.13%, 05/15/2021 903,657
1,775,000 Residential Capital
Corporation,
6.88%, 06/30/2015 1,840,118
350,000 Santander Central
Hispano Insurances,
7.63%, 09/14/2010 F<F18> 378,129
500,000 SLM Corporation Notes,
5.63%, 08/01/2033 479,203
500,000 State Street Institutional
Cap B, 8.04%, 03/15/2027
(Acquired 09/06/2006;
Cost $524,155)*<F17> 521,877
1,000,000 St. Paul Travelers,
6.75%, 06/20/2036 1,105,326
1,000,000 Symetra Financial
Corporation Senior Notes,
6.13%, 04/01/2016
(Acquired 03/23/2006;
Cost $995,570)*<F17> 1,011,484
435,000 UFJ Bank Ltd/New York,
Subordinated Notes,
7.40%, 06/15/2011 469,958
225,000 UFJ Finance Aruba AEC,
6.75%, 07/15/2013 F<F18> 240,113
280,000 Washington Mutual
Capital I,
8.38%, 06/01/2027 293,770
1,534,000 Westdeutsche Landesbank
Subordinated Notes,
4.80%, 07/15/2015 F<F18> 1,471,301
750,000 Willis Group NA,
5.63%, 07/15/2015 717,917
2,420,000 Zurich Capital Trust I
8.38%, 06/01/2037
(Acquired 04/07/2006,
08/10/2006, 09/28/2006
10/04/2006 and
10/05/2006;
Cost $1,065,910,
$421,740, $527,660,
$289,658 and $258,046
respectively)*<F17> 2,536,567
------------
46,714,444
------------
INDUSTRIAL - 12.3%
500,000 Alcan, Inc.,
5.75%, 06/01/2035 F<F18> 470,082
Ameritech Capital
Funding Debentures:
933,437 9.10%, 06/01/2016 1,071,393
1,000,000 6.45%, 01/15/2018 1,003,143
1,000,000 Anadarko Petroleum
Corporation,
6.45%, 09/15/2036 1,010,496
AOL Time Warner, Inc.:
1,100,000 7.63%, 04/15/2031 1,228,877
175,000 7.70%, 05/01/2032 197,451
875,000 AT&T Wireless Services,
Inc. Senior Notes,
8.75%, 03/01/2031 1,137,119
441,000 Auburn Hills Trust
Debentures,
12.38%, 05/01/2020 651,110
450,000 British Telecom PLC,
8.88%, 12/15/2030 F<F18> 615,543
600,000 Bunge Ltd. Finance
Corporation Notes:
5.35%, 04/15/2014 576,665
275,000 Caesars Entertainment
Senior Notes,
7.50%, 09/01/2009 285,361
800,000 Clear Channel
Communications Senior
Unsubordinated Notes,
5.50%, 12/15/2016 647,575
600,000 Comcast Corporation
Senior Subordinated Notes,
10.63%, 07/15/2012 724,577
120,000 ConAgra Foods, Inc.
Subordinated Notes,
9.75%, 03/01/2021 155,591
580,000 ConAgra Foods, Inc.
Senior Unsecured Notes,
5.82%, 06/15/2017
(Acquired 12/21/2006;
Cost $580,000)*<F17> 573,699
Continental Airlines, Inc.
Pass Thru Certificates:
33,072 6.80%, 07/02/2007 32,907
36,360 6.54%, 03/15/2008 36,406
129,922 8.31%, 04/02/2011 130,571
443,065 6.90%, 01/02/2018 457,160
1,775,000 COX Communications
Inc., 7.13%, 10/01/2012 1,892,269
1,000,000 D.R. Horton Inc.
Unsubordinated Notes,
6.50%, 04/15/2016 1,006,097
250,000 Deutsche Telekom
International Finance BV,
8.25%, 06/15/2030 F<F18> 307,335
152,128 FedEx Corporation
Pass Thru Certificates,
6.85%, 07/15/2020 162,754
475,000 Ford Capital BV
Debentures,
9.50%, 06/01/2010 F<F18> 472,625
403,000 Ford Motor Company
Debentures,
9.22%, 09/15/2021 353,633
General Motors Acceptance
Corporation Notes:
100,000 7.25%, 03/02/2011 103,993
150,000 6.75%, 12/01/2014 154,070
1,400,000 Greenpoint Capital Trust I,
9.10%, 06/01/2027 1,477,683
650,000 Health Management
Association Senior
Unsecured Notes,
6.13%, 04/15/2016 615,384
625,000 Hutchison Whampoa
International Limited,
6.25%, 01/24/2014
(Acquired 06/02/2004
and 02/08/2005;
Cost $333,834 and
$298,958 respectively)*<F17> F<F18> 648,084
2,000,000 International Paper
Company Notes,
6.65%, 12/15/2037 2,033,016
850,000 Johnson Controls Inc.
Senior Notes,
6.00%, 01/15/2036 822,777
650,000 Knight-Ridder, Inc.,
5.75%, 09/01/2017 603,894
400,000 Laboratory Corporation
of America,
5.63%, 12/15/2015 393,239
900,000 Lafarge SA Notes,
7.13%, 07/15/2036 F<F18> 977,815
1,000,000 Masco Corporation,
6.13%, 10/03/2016 1,006,812
471,250 The May Department
Stores Companies
Debentures,
9.75%, 02/15/2021 503,389
320,000 Pactiv Corporation,
7.95%, 12/15/2025 356,509
400,000 PCCW Capital II Ltd.,
6.00%, 07/15/2013
(Acquired 07/10/2003;
Cost $398,132)*<F17> F<F18> 403,036
745,000 Plum Creek Timberlands,
5.88%, 11/15/2015 732,091
2,000,000 Premcor Refining Group,
7.50%, 06/15/2015 2,091,550
Qwest Capital
Funding, Inc.:
300,000 7.00%, 08/03/2009 305,250
200,000 7.25%, 02/15/2011 204,250
250,000 Sealed Air Corporation
Senior Notes,
5.38%, 04/15/2008
(Acquired 04/09/2003;
Cost $248,650)*<F17> 248,798
358,000 Sprint Capital Corporation,
8.75%, 03/15/2032 430,893
1,063,616 System Energy Resources,
5.13%, 01/15/2014
(Acquired 06/27/2006;
Cost $1,012,700)*<F17> 1,038,557
680,000 TCI Communications,
Inc. Debentures,
7.88%, 08/01/2013 756,129
Telecom Italia Capital: F<F18>
1,000,000 4.95%, 09/30/2014 926,442
500,000 7.20%, 07/18/2036 522,359
1,000,000 Teva Pharmaceutical
Finance LLC,
5.55%, 02/01/2016 977,825
Tyco International
Group S.A.: F<F18>
875,000 6.38%, 10/15/2011 915,680
300,000 6.00%, 11/15/2013 310,402
United AirLines, Inc.
Pass Thru Certificates:
269,803 7.76%, 12/31/2049
(Acquired 09/28/2004;
Cost $22,658)@<F15>^<F16> 237,427
870,138 6.20%, 09/01/2008 875,576
506,038 U.S. Airways Pass Thru
Certificate, Series 1998-1,
6.85%, 07/30/2019 512,364
1,487,000 Univision Communications,
Inc., 3.50%, 10/15/2007 1,454,955
Vale Overseas Limited: F<F18>
350,000 8.25%, 01/17/2034 414,590
1,400,000 6.88%, 11/21/2036 1,435,904
675,000 Viacom, Inc.,
7.70%, 07/30/2010 720,989
1,000,000 Wal-Mart Stores,
5.25%, 09/01/2035 918,299
------------
41,330,470
------------
UTILITIES - 5.7%
475,000 Beaver Valley Funding
Corporation Debentures,
9.00%, 06/01/2017 533,420
1,000,000 Commonwealth Edison
Notes, 7.63%, 01/15/2007 1,000,413
500,000 Dominion Resources Inc.,
7.20%, 09/15/2014 548,655
1,000,000 Duke Capital LLC Notes,
5.67%, 08/15/2014 997,294
750,000 Energy Transfer Partners,
5.65%, 08/01/2012 746,844
300,000 Exelon Corporation Senior
Notes, 6.75%, 05/01/2011 313,355
600,000 Kinder Morgan Energy
Partners Senior Notes,
6.30%, 02/01/2009 607,964
900,000 Kinder Morgan Finance
5.70%, 01/05/2016 F<F18> 825,767
250,054 Kiowa Power Partners
LLC, 4.81%, 12/30/2013
(Acquired 11/19/2004;
Cost $257,225)*<F17> 241,015
750,000 MidAmerican Energy
Holdings Company
Senior Notes,
7.63%, 10/15/2007 761,769
1,325,000 National Grid PLC Notes,
6.30%, 08/01/2016 F<F18> 1,372,283
1,550,000 Nisource Finance
Corporation,
7.88%, 11/15/2010 1,672,236
425,000 ONEOK, Inc. Senior
Notes, 7.13%, 04/15/2011 448,576
850,000 Pacific Gas & Electric
Company 1st Mortgage,
6.05%, 03/01/2034 857,289
1,000,000 Plains All American
Pipeline Senior Notes,
5.63%, 12/15/2013 983,956
300,000 PPL Energy Supply, LLC
Senior Notes,
6.40%, 11/01/2011 310,579
175,000 PSE&G Energy Holdings
LLC Senior Notes,
8.50%, 06/15/2011 188,125
PSE&G Power LLC:
250,000 7.75%, 04/15/2011 270,125
350,000 5.00%, 04/01/2014 333,846
1,632,601 RGS (I&M) Funding
Corporation Debentures,
9.82%, 12/07/2022 1,963,088
1,000,000 System Energy Resources
1st Mortgage,
4.88%, 10/01/2007 993,862
700,000 Transcontinental Gas Pipe
Line Corporation Senior
Notes, 8.88%, 07/15/2012 791,000
200,000 Tristate Gen & Trans Assn,
Series 2003, 6.04%,
01/31/2018 (Acquired
10/14/2003;
Cost $200,000)*<F17> 202,048
500,000 Vectren Utility Holdings,
6.63%, 12/01/2011 521,598
1,200,000 Verizon Communications
Debentures,
6.84%, 04/15/2018 1,275,730
550,000 The Williams Companies,
Inc. Notes,
8.13%, 03/15/2012 595,375
------------
19,356,212
------------
MORTGAGE BACKED SECURITIES - 35.8%
Bank of America
Alternative Loan Trust:
706,443 Series 2003-4, Class 2A1,
5.00%, 06/25/2018 695,086
983,353 Series 2003-11, Class 4A1,
4.75%, 01/25/2019 950,779
738,935 Series 2004-6, Class 4A1,
5.00%, 07/25/2019 726,347
755,136 Series 2004-11, Class 4A1,
5.50%, 12/25/2019 751,360
1,257,684 Series 2005-2, Class 4A1,
5.50%, 03/25/2020 1,254,073
1,299,328 Series 2005-2, Class 1CB2,
5.50%, 03/25/2035 1,288,237
1,497,918 Series 2005-9, Class 1
CB3, 5.50%,
10/25/2035 1,493,183
896,406 Series 2005-11, Class
1CB4, 5.50%, 12/25/2035 894,724
2,847,750 Series 2006-5, Class CB7,
6.00%, 06/25/2036 2,850,579
1,175,291 Chase Mortgage Finance
Corporation,
Series 2003-S13, Class A11,
5.50%, 11/25/2033 1,173,618
811,370 Citicorp Mortgage
Securities, Inc.,
Series 2004-3, Class A2,
5.25%, 05/25/2034 802,032
2,158,109 Citigroup Mortgage
Loan Trust, Inc.,
Series 2005-9, Class 2A2,
5.50%, 10/25/2035 2,153,016
Countrywide Alternative
Loan Trust:
3,000,000 Series 2006-43CB, Class
2A1, 6.000%, 01/15/2021 3,024,844
2,400,854 Series 2006-J5, Class 3A1,
6.12%, 07/25/2021 2,423,175
1,500,000 Series 2005-10CB, Class
1A6, 5.50%, 05/25/2035 1,482,512
1,001,253 Countrywide Home
Loans, Inc.,
Series 2003-39, Class A5,
5.00%, 05/25/2012 991,073
1,651,650 CS First Boston Mortgage
Securities Corp.,
Series 2004-4, Class 2A5,
5.50%, 06/25/2015 1,643,776
2,602,978 Deutsche Securities Inc.
Mortgage, Series 2006-
AR5, Class 21A,
6.00%, 10/25/2021 2,627,085
Federal Gold Loan
Mortgage Corporation
(FGLMC):
239,775 6.00%, 05/01/2017 243,233
2,217,366 6.00%, 06/01/2020 2,249,958
1,035,339 5.00%, 06/01/2023 1,008,171
2,232,064 6.50%, 06/01/2029 2,288,616
2,000,000 6.00%, 12/01/2036 2,014,792
Federal Home Loan
Mortgage Corporation
(FHLMC):
301,310 6.50%, 07/01/2014 308,229
926,709 5.50%, 11/01/2022 923,059
809,254 5.50%, 07/01/2023 805,851
886,990 Series 3124, Class VP,
6.00%, 06/15/2014 903,169
556,938 Series 2695, Class UA,
5.50%, 09/15/2014 558,327
795,322 Series 2857, Class VA,
5.00%, 09/15/2015 784,239
2,357,816 Series R007, Class AC,
5.88%, 05/15/2016 2,363,215
2,478,156 Series R003, Class VA,
5.50%, 08/15/2016 2,482,616
1,875,219 Series 3097, Class MC,
6.00%, 11/15/2016 1,907,650
88,284 Series 2533, Class PC,
5.00%, 10/15/2017 88,053
2,939,742 Series R009, Class AJ,
5.75%, 12/15/2018 2,942,084
278,645 Series 206, Class E,
0.00%, 07/15/2019^<F16> 274,925
136,491 Series 141, Class D,
5.00%, 05/15/2021 135,563
114,298 Series 1074, Class I,
6.75%, 05/15/2021 114,081
701,124 Series 1081, Class K,
7.00%, 05/15/2021 699,996
119,805 Series 163, Class F,
7.83%, 07/15/2021 119,161
248,954 Series 188, Class H,
7.00%, 09/15/2021 247,600
114,342 Series 1286, Class A,
6.00%, 05/15/2022 114,123
70,989 Series 2141, Class N,
5.55%, 11/15/2027 70,848
1,075,000 Series 2664, Class LG,
5.50%, 07/15/2028 1,076,173
Federal National Mortgage
Association (FNMA):
1,607,632 5.50%, 07/01/2015 1,612,413
568,132 5.50%, 12/01/2016 569,764
519,168 5.00%, 10/01/2017 511,999
580,754 5.00%, 11/01/2017 572,735
904,736 5.00%, 12/01/2017 892,243
2,708,108 5.00%, 02/01/2018 2,670,713
497,479 5.00%, 06/01/2018 490,509
648,220 5.00%, 10/01/2018 638,681
946,397 5.50%, 01/01/2023 942,070
2,867,744 5.50%, 07/01/2023 2,854,008
161,456 5.00%, 10/01/2023 157,299
2,781,477 6.00%, 03/01/2026 2,811,603
270,371 5.50%, 01/01/2032 267,934
775,462 6.00%, 03/01/2033 782,539
910,615 5.50%, 07/01/2033 901,332
585,535 5.00%, 11/01/2033 566,405
2,052,424 5.50%, 11/01/2033 2,031,502
1,080,165 6.00%, 11/01/2034 1,088,261
998,261 5.50%, 02/01/2035 987,559
1,336,462 5.50%, 02/01/2035 1,322,134
807,626 5.50%, 03/01/2035 798,401
2,355,401 5.00%, 11/01/2035 2,274,709
8,235,373 5.50%, 04/01/2036 8,141,313
2,927,499 Series 2006-B2, Class AB,
5.50%, 05/25/2014 2,924,414
1,000,000 Series 2003-27, Class OJ,
5.00%, 07/25/2015 990,549
1,150,000 Series 2002-94, Class MC,
5.00%, 08/25/2015 1,139,681
500,000 Series 2003-24, Class PC,
5.00%, 11/25/2015 494,951
2,200,000 Series 2002-74, Class TD,
5.00%, 12/25/2015 2,174,674
867,272 Series 2003-18, Class GB,
5.00%, 03/25/2016 860,242
116,280 Series 2002-56, Class MC,
5.50%, 09/25/2017 116,338
535,454 Series 1989-37, Class G,
8.00%, 07/25/2019 569,311
108,293 Series 1989-94, Class G,
7.50%, 12/25/2019 113,735
26,217 Series 1990-58, Class J,
7.00%, 05/25/2020 27,200
289,357 Series 1990-76, Class G,
7.00%, 07/25/2020 292,945
116,534 Series 1990-105, Class J,
6.50%, 09/25/2020 119,631
44,234 Series 1990-108, Class G,
7.00%, 09/25/2020 45,270
45,558 Series 1991-1, Class G,
7.00%, 01/25/2021 45,905
95,129 Series 1991-86, Class Z,
6.50%, 07/25/2021 96,420
379,257 Series 2003-28, Class KA,
4.25%, 03/25/2022 366,558
44,397 Series G92-30, Class Z,
7.00%, 06/25/2022 45,844
125,583 Series 1993-58, Class H,
5.50%, 04/25/2023 125,734
996,966 Series 2003-17, Class QR,
4.50%, 11/25/2025 988,597
911,470 Series 2003-31, Class KG,
4.50%, 12/25/2028 904,656
741,965 Series 1998-66, Class C,
6.00%, 12/25/2028 750,970
119,280 Series 2003-44, Class AB,
3.75%, 05/25/2033 112,503
3,106,582 Series 2004-W6, Class
1A6, 5.50%, 07/25/2034 3,080,841
2,500,000 Series 2004-W10, Class
A24, 5.00%, 08/25/2034 2,470,043
First Horizon Alternative
Mortgage Securities:
1,524,746 Series 2005-FA7, Class
2A1, 5.00%, 09/25/2020 1,506,209
2,385,598 Series 2006-FA6, Class
3A1, 5.75%, 11/25/2021 2,380,198
635,077 Government National
Mortgage Association
(GNMA),
6.00%, 11/20/2033 642,963
1,778,410 J.P. Morgan Alternative
Loan Trust,
Series 2006-A1, Class 2A1,
5.80%, 03/25/2036 1,790,785
1,104,750 Master Alternative Loans
Trust, Series 2003-5, Class
6A1, 6.00%, 08/25/2033 1,092,891
941,680 Residential Accredit
Loans, Inc.,
Series 2004-QS6, Class
A1, 5.00%, 05/25/2019 925,403
800,000 Residential Funding
Mortgage Security I,
Series 2003-S11, Class A2,
4.00%, 06/25/2018 750,444
791,360 Salomon Brothers
Mortgage Securities VII,
Series 2003-UP2, Class A2,
4.00%, 06/25/2033 760,947
Washington Mutual, Inc.
Pass-Thru Certificates:
2,919,047 Series 2004-CB1, Class 5A,
5.00%, 06/25/2019 2,853,368
2,073,935 Series 2004-CB3, Class 4A,
6.00%, 10/25/2019 2,094,088
1,259,469 Series 2004-CB4, Class
21A, 5.50%, 12/25/2019 1,256,023
------------
120,745,688
------------
INTERNATIONAL (U.S. $ DENOMINATED) - 1.3%
50,000 Corp Andina
De Fomento Notes,
7.38%, 01/18/2011 F<F18> 53,455
Korea Electric Power
Corporation: F<F18>
100,000 7.75%, 04/01/2013 112,757
2,165,000 6.75%, 08/01/2027 2,411,498
510,000 National Bank of Hungary
Yankee Debentures,
8.88%, 11/01/2013 F<F18> 609,056
675,000 PEMEX Project Funding
Master Trust, F<F18>
9.13%, 10/13/2010 757,012
United Mexican
States Notes: F<F18>
150,000 9.88%, 02/01/2010 169,725
400,000 7.50%, 04/08/2033 472,000
------------
4,585,503
------------
TAXABLE MUNICIPAL BONDS - 0.9%
1,000,000 Cuyahoga County Ohio
Industrial Development
Revenue,
9.13%, 10/01/2023 1,199,780
1,000,000 Tobacco Settlement
Authority Iowa,
6.50%, 06/01/2023 994,680
Tobacco Settlement
Financing Corporation:
140,000 Series 2001-A, Class A,
5.92%, 06/01/2012 139,549
584,672 Series 2001-A, Class A,
6.36%, 05/15/2025 585,216
------------
2,919,225
------------
U.S. GOVERNMENT AGENCY ISSUES - 4.0%
Federal National Mortgage
Association (FNMA):
10,625,000 6.00%, 05/15/2011 11,063,100
2,447,076 5.50%, 09/01/2034 2,420,842
------------
13,483,942
------------
U.S. TREASURY OBLIGATIONS - 10.0%
U.S. Treasury Bonds
2,300,000 9.13%, 05/15/2018 3,163,399
26,425,000 6.25%, 08/15/2023 30,415,598
------------
33,578,997
------------
Total Long-Term
Investments
(Cost $323,072,961) 323,125,586
------------
COLLATERAL POOL INVESTMENT
FOR SECURITIES ON LOAN - 13.4%
(Cost $45,053,190)
(Please Refer to Note 6) 45,053,190
------------
Shares
------
SHORT-TERM INVESTMENTS - 5.2%
MONEY MARKET FUNDS - 5.2%
12,867,627 Short-Term Investment
Company Liquid Assets
Portfolio - AIM Fund 12,867,627
4,639,830 Short-Term Investment
Trust Prime Portfolio -
AIM Fund 4,639,830
------------
Total Short-Term
Investments
(Cost $17,507,457) 17,507,457
------------
Total Investments
(Cost $385,633,608) -
114.5% 385,686,233
------------
Liabilities in Excess of
Other Assets - (14.5)% (48,929,756)
------------
TOTAL NET
ASSETS - 100.0% $336,756,477
------------
------------
@<F15> Security in Default
^<F16> Non Income Producing
*<F17> Unregistered Security
F<F18> Foreign Security
The accompanying notes are an integral part of these financial statements.
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
DECEMBER 31, 2006
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
strives to achieve an annual rate of return, before Fund expenses, greater than
the annual rate of the total return of the Lehman Brothers 7-Year General
Obligation Bond Index. The Lehman Brothers 7-Year General Obligation Bond Index
is an unmanaged, market value weighted index consisting 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.
The Fund generated solid positive investment returns in 2006, but fell short of
its benchmark index. The Fund's minimal exposure to shorter maturities helped
the Fund's relative performance while its limited exposure to issues longer than
ten years in maturity detracted from relative performance. The Fund's focus on
high quality issues also detracted from performance somewhat as low quality
issues outperformed high quality issues in 2006. With yield spreads on lower
quality issues relatively tight by historical standards, we continue to
emphasize high quality, intermediate holdings for the Fund.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*
AAA 97%
AA 2%
BBB 1%
SECTOR WEIGHTINGS*
Pre-refunded ETM 60%
Insured 34%
General Obligation 2%
Cash 3%
Revenue 1%
NET ASSETS: $65,477,507
SEC 30-DAY YIELD:**<F20>
Institutional Class: 3.77%
Investor Class: 3.51%
AVERAGE EFFECTIVE DURATION: 4.97 years
AVERAGE EFFECTIVE MATURITY: 5.94 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
Investor Class: 0.55%***<F21>
PORTFOLIO TURNOVER RATIO: 25.1%
TOTAL NUMBER OF HOLDINGS: 60
*<F19> Percentages shown are based on the Fund's total net assets.
**<F20> SEC yields are based on SEC guidelines and are calculated for the 30
days ended December 31, 2006.
***<F21> Includes 0.25% 12b-1 fee.
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
BAIRD INTERMEDIATE MUNICIPAL BOND FUND -
INSTITUTIONAL CLASS
VALUE OF A $250,000 INVESTMENT
Baird Intermediate
Municipal Bond Fund - Lehman Brothers 7-Year
Institutional Class Shares General Obligation Index
-------------------------- ------------------------
3/30/2001 $250,000 $250,000
6/30/2001 $255,511 $251,525
12/31/2001 $262,544 $255,876
6/30/2002 $275,570 $269,335
12/31/2002 $290,693 $281,429
6/30/2003 $302,139 $292,827
12/31/2003 $304,973 $297,131
6/30/2004 $300,175 $295,081
12/31/2004 $313,163 $309,923
6/30/2005 $317,383 $315,099
12/31/2005 $317,314 $315,540
6/30/2006 $316,841 $313,078
12/31/2006 $329,019 $325,411
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
Municipal Bond Fund - Lehman Brothers 7-Year
Investor Class Shares General Obligation Index
--------------------- ------------------------
3/30/2001 $10,000 $10,000
6/30/2001 $10,217 $10,061
12/31/2001 $10,474 $10,235
6/30/2002 $10,980 $10,773
12/31/2002 $11,569 $11,257
6/30/2003 $12,007 $11,713
12/31/2003 $12,111 $11,885
6/30/2004 $11,911 $11,803
12/31/2004 $12,402 $12,397
6/30/2005 $12,560 $12,604
12/31/2005 $12,542 $12,622
6/30/2006 $12,520 $12,523
12/31/2006 $12,974 $13,016
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
SINCE
For the Periods Ended December 31, 2006 ONE YEAR FIVE YEARS INCEPTION(1)<F22>
- --------------------------------------- -------- ---------- -----------------
Baird Intermediate Municipal Bond Fund - Institutional Class Shares 3.69% 4.62% 4.89%
Baird Intermediate Municipal Bond Fund - Investor Class Shares 3.44% 4.38% 4.63%
Lehman Brothers 7-Year General Obligation Bond Index(2)<F23> 4.06% 4.95% 4.71%
(1)<F22> For the period from March 30, 2001 (commencement of operations)
through December 31, 2006.
(2)<F23> 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 RETURNS SHOWN IN THE 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. MUTUAL FUND
PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER
THAN THAT STATED.
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2006
Principal
Amount Value
--------- -----
MUNICIPAL BONDS - 97.0%
ALABAMA - 0.7%
$ 460,000 Mobile Alabama, 6.20%,
02/15/2007 (ETM) $ 461,288
-----------
ARIZONA - 2.5%
1,415,000 Arizona Health Facilities
Authority Hospital
Revenue, 6.38%,
12/01/2037 (Pre-refunded
to 12/01/2012) 1,622,326
-----------
ARKANSAS - 0.9%
595,000 Springdale Arkansas Sales
& Use Tax Revenue,
4.00%, 07/01/2016
(Pre-refunded to
07/01/2010) 594,958
-----------
CALIFORNIA - 1.5%
500,000 Golden State Tobacco
Securitization Corporation,
6.25%, 06/01/2033 558,800
350,000 Santa Rosa California
Hospital Revenue, 10.30%,
03/01/2011 (ETM) 399,038
-----------
957,838
-----------
COLORADO - 3.9%
2,000,000 Adams County Colorado
Single Family Mortgage
Revenue, 8.88%,
08/01/2012 (ETM) 2,495,280
90,000 Colorado Springs Colorado
Utilities Revenue, 5.80%,
11/15/2010 (ETM) 93,591
-----------
2,588,871
-----------
DELAWARE - 2.5%
1,500,000 Delaware State Economic
Development Authority
Revenue, 6.75%,
01/01/2013 (ETM) 1,662,885
-----------
FLORIDA - 2.8%
300,000 Jacksonville Florida Health
Facility Authority Hospital
Revenue, 11.50%,
10/01/2012 (ETM) 419,253
210,000 Orange County Florida
Health Revenue, 8.75%,
10/01/2009 (ETM) 226,897
1,000,000 Orlando Florida Utilities
Commission Water &
Electric Revenue, 6.75%,
10/01/2017 (ETM) 1,195,200
-----------
1,841,350
-----------
GEORGIA - 1.8%
1,020,000 Fulton County Georgia
Hospital Authority
Revenue, 7.88%,
10/01/2013 (ETM) 1,196,654
-----------
ILLINOIS - 8.7%
1,000,000 Chicago Illinois General
Obligation Project and
Refunding, 5.00%,
01/01/2017 (FSA Insured) 1,084,330
1,440,000 Chicago Illinois
Metropolitan Water
Reclamation District
General Obligation,
7.00%, 12/01/2010 (ETM) 1,613,045
1,430,000 Cook County Illinois
School District No. 100,
8.10%, 12/01/2016 (ETM) 1,926,639
1,000,000 Lake County
Community High School
District No. 128,
5.00%, 01/01/2013 1,066,520
-----------
5,690,534
-----------
INDIANA - 0.6%
285,000 Indiana Toll Road
Commission, 9.00%,
01/01/2015 (ETM) 363,868
-----------
IOWA - 2.5%
1,010,000 Des Moines Iowa
Metropolitan Wastewater
Reclamation Authority,
5.00%, 06/01/2015
(MBIA Insured) 1,093,012
530,000 Muscatine Iowa Electric
Revenue, 6.70%,
01/01/2013 (ETM) 572,092
-----------
1,665,104
-----------
LOUISIANA - 6.1%
745,000 Denham Springs-Livingston
Housing and Mortgage
Finance Authority, 7.20%,
08/01/2010 (ETM) 831,010
400,000 Houma-Terrebonne
Public Trust Financing
Authority, 7.30%,
04/01/2010 (ETM) 442,032
1,000,000 Houma-Terrebonne Public
Trust Financing Authority
Single Family Mortgage
Revenue, 7.30%,
04/01/2011 (ETM) 1,134,580
1,450,000 Jefferson Parish Louisiana
Home Mortgage
Authority, 7.10%,
08/01/2010 (ETM) 1,617,736
-----------
4,025,358
-----------
MINNESOTA - 1.1%
645,000 Western Minnesota
Municipal Power
Agency, 6.38%,
01/01/2016 (ETM) 710,197
-----------
MISSISSIPPI - 1.6%
600,000 Mississippi Housing
Financial Corporation,
0.00%, 06/01/2015 (ETM)^<F24> 430,764
600,000 Mississippi State,
6.20%, 02/01/2008 (ETM) 613,848
-----------
1,044,612
-----------
NEVADA - 3.3%
1,965,000 Reno Nevada Capital
Improvement Revenue,
5.50%, 06/01/2019
(Pre-refunded to
06/01/2012) 2,142,891
-----------
NEW JERSEY - 2.6%
1,000,000 New Jersey State
Transportation Trust
Fund Authority, 6.00%,
12/15/2017 (Pre-refunded
12/15/2011) 1,106,420
New Jersey State Turnpike
Authority: (ETM)
422,000 6.75%, 01/01/2009 421,426
130,000 6.50%, 01/01/2016 151,649
-----------
1,679,495
-----------
NEW YORK - 2.0%
1,000,000 New York, New York,
5.00%, 03/01/2016
(FGIC Insured) 1,080,540
235,000 TSASC Inc. New York,
4.75%, 06/01/2022 235,002
-----------
1,315,542
-----------
NORTH CAROLINA - 0.4%
225,000 North Carolina Eastern
Municipal Power Agency
Power Systems
Revenue, 6.40%,
01/01/2021 (ETM) 270,635
-----------
OHIO - 0.3%
150,000 Miamisburg Ohio Water
Revenue, 7.00%,
11/15/2016 (ETM) 172,633
-----------
OKLAHOMA - 4.1%
2,360,000 Tulsa County Oklahoma
Home Financing Authority
Single Family Mortgage
Revenue, 6.90%,
08/01/2011 (ETM) 2,682,518
-----------
PENNSYLVANIA - 5.0%
815,000 Philadelphia Pennsylvania
Gas Works, 7.00%,
05/15/2020 (ETM) 971,007
1,285,000 Pittsburgh Pennsylvania
Water & Sewer Authority,
7.25%, 09/01/2014 (ETM) 1,450,611
1,000,000 Wilson Pennsylvania Area
School District,
0.00%, 05/15/2011
(AMBAC Insured)^<F24> 844,890
-----------
3,266,508
-----------
SOUTH CAROLINA - 0.5%
285,000 Greenville South
Carolina Waterworks
Revenue, 7.00%,
02/01/2010 (ETM) 312,785
-----------
SOUTH DAKOTA - 1.2%
715,000 Heartland Consumers
Power District, 7.00%,
01/01/2016 (ETM) 807,321
-----------
TENNESSEE - 3.4%
430,000 Metropolitan Government
Nashville & Davidson
County Tennessee
H&E, 6.10%,
07/01/2010 (ETM) 446,989
1,545,000 Metropolitan Government
Nashville & Davidson
County Tennessee Water &
Sewer Revenue, 6.50%,
12/01/2014 (ETM) 1,796,959
-----------
2,243,948
-----------
TEXAS - 34.3%
1,125,000 Barbers Hill Texas
Independent School
District General Obligation,
5.00%, 02/15/2017
(PSF Guaranteed) 1,210,320
1,000,000 Copperas Cove Texas
Independent School
District, 5.00%,
08/15/2016
(PSF Guaranteed) 1,083,590
1,500,000 Cypress-Fairbanks Texas
Independent School
District, 5.00%,
02/15/2017
(PSF Guaranteed) 1,625,475
1,625,000 Frisco Texas Independent
School District, 6.00%,
08/15/2018
(PSF Guaranteed) 1,896,326
1,000,000 Georgetown Texas
Independent School
District, 5.00%,
02/15/2016
(PSF Guaranteed) 1,079,450
1,920,000 Houston Texas Sewer
System Revenue, 9.38%,
10/01/2013 (ETM) 2,367,802
1,315,000 La Porte Texas Independent
School District,
5.00%, 02/15/2018
(MBIA Insured) 1,405,288
1,735,000 Lufkin Texas Independent
School District,
5.00%, 08/15/2015
(PSF Guaranteed) 1,870,278
1,265,000 Mission Consolidated
Independent School
District,
5.00%, 02/15/2019
(PSF Guaranteed) 1,352,766
1,295,000 Rockwall Texas
Independent School
District,
5.00%, 02/15/2015
(PSF Guaranteed) 1,402,576
775,000 Sam Rayburn Texas
Municipal Power Agency,
6.00%, 09/01/2010 (ETM) 821,887
2,000,000 San Antonio Texas
Independent School
District,
5.00%, 08/15/2017
(PSF Guaranteed) 2,159,560
575,000 Socorro Texas Independent
School District,
5.25%, 08/15/2012
(PSF Guaranteed) 619,781
345,000 Texas Public Building
Authority Revenue,
7.13%, 08/01/2011 (ETM) 377,737
1,900,000 Trinity River Authority
Texas Revenue,
5.50%, 02/01/2021
(MBIA Insured) 2,087,739
1,000,000 University of
Houston Texas
5.25%, 02/15/2012
(FSA Insured) 1,070,130
-----------
22,430,705
-----------
UTAH - 1.1%
605,000 Salt Lake City Utah
Hospital Revenue, 8.13%,
05/15/2015 (ETM) 707,886
-----------
WASHINGTON - 1.6%
1,000,000 Washington State,
5.00%, 09/01/2013
(FGIC Insured) 1,061,050
-----------
Total Municipal Bonds
(Cost $63,396,890) 63,519,760
-----------
Shares
------
SHORT-TERM INVESTMENTS - 1.2%
MONEY MARKET FUNDS - 1.2%
782,330 Tax Free Investment
Company Cash Reserve
Portfolio - AIM Fund 782,330
-----------
Total Short-Term
Investments
(Cost $782,330) 782,330
-----------
Total Investments
(Cost $64,179,220) -
98.2% 64,302,090
-----------
Other Assets in Excess
of Liabilities - 1.8% 1,175,417
-----------
TOTAL NET
ASSETS - 100.0% $65,477,507
-----------
-----------
ETM - Escrowed to Maturity
^<F24> Non Income Producing
The accompanying notes are an integral part of these financial statements.
BAIRD CORE PLUS BOND FUND
DECEMBER 31, 2006
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 solid positive returns and outperformed its benchmark index
in 2006. Helping the Fund's strong relative performance were the following
factors:
o The Fund's significantly greater exposure to asset-backed securities
than the benchmark;
o The Fund's overweighting of BBB-rated corporate bonds relative to the
benchmark; and
o Strong performance of specific individual corporate issues, particularly
those in the auto and airline sectors.
The Fund's underweighting of below investment grade emerging market issuers
detracted slightly from relative performance in 2006. The Fund maintained its
duration-neutral strategy, holding a broadly diversified portfolio of over 140
securities at year end.
The Fund ended 2006 with a yield advantage versus its benchmark index. This
yield advantage, combined with exposure to specific sectors which we believe
have superior total return potential (asset-backed securities and collateralized
mortgage-backed obligations), enhance the Fund's prospects of adding value over
its benchmark in the coming year.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F25>
U.S. Treasury 14%
U.S. Gov't Agency 35%
AAA 17%
AA 2%
A 5%
BBB 21%
Below Baa 6%
SECTOR WEIGHTINGS*<F25>
Asset-Backed 9%
Financials 7%
Industrials 17%
Utilities 5%
Mortgage-Backed 30%
International 2%
Municipal 1%
U.S. Gov't Agency 11%
U.S. Treasuries 14%
Cash 4%
NET ASSETS: $51,839,945
SEC 30-DAY YIELD:**<F26>
Institutional Class: 5.21%
Investor Class: 5.06%
AVERAGE EFFECTIVE DURATION: 4.52 years
AVERAGE EFFECTIVE MATURITY: 7.34 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
Investor Class: 0.55%***<F27>
PORTFOLIO TURNOVER RATIO: 62.0%
TOTAL NUMBER OF HOLDINGS: 149
*<F25> Percentages shown are based on the Fund's total net assets.
**<F26> SEC yields are based on SEC guidelines and are calculated for the 30
days ended December 31, 2006.
***<F27> Includes 0.25% 12b-1 fee.
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.
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
6/30/2006 $359,096 $349,579
12/31/2006 $381,684 $368,652
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.
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
6/30/2006 $14,160 $13,983
12/31/2006 $15,023 $14,746
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, 2006 ONE YEAR FIVE YEARS INCEPTION(1)<F28>
- --------------------------------------- -------- ---------- -----------------
Baird Core Plus Bond Fund - Institutional Class Shares 6.58% 6.17% 7.00%
Baird Core Plus Bond Fund - Investor Class Shares 6.34% 5.89% 6.72%
Lehman Brothers U.S. Universal Bond Index(2)<F29> 4.97% 5.87% 6.77%
(1)<F28> For the period from September 29, 2000 (commencement of operations)
through December 31, 2006.
(2)<F29> 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 SHOWN IN THE 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. MUTUAL FUND
PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER
THAN THAT STATED.
BAIRD CORE PLUS BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2006
Principal
Amount Value
--------- -----
LONG-TERM INVESTMENTS - 96.3%
ASSET BACKED SECURITIES - 8.7%
$ 300,000 American Express Credit
Account Master Trust,
Series 2005-5, Class A,
5.39%, 02/15/2013 $ 300,114
163,739 Contimortgage Home
Equity Loan Trust,
Series 1997-5, Class A6,
6.87%, 03/15/2024 162,677
Countrywide Asset-Backed
Certificates:
600,000 Series 2005-10, Class AF6,
4.92%, 02/25/2036 584,547
400,000 Series 2006-S9, Class A3,
5.73%, 08/25/2036 397,550
300,000 Series 2006-10, Class 1AF3,
5.97%, 09/25/2046 303,939
325,000 Discover Card Master
Trust I, Series 2005-2,
Class A, 5.38%,
04/17/2012 325,717
GMAC Mortgage
Corporation Loan Trust:
104,903 Series 2004-HE5, Class A3,
3.97%, 09/25/2034 103,922
500,000 Series 2005-HE3, Class A2,
5.50%, 02/25/2036 500,512
Green Tree Financial
Corporation:
43,345 Series 1997-1, Class A5,
6.86%, 03/15/2028 44,713
395,945 Series 1998-4, Class A5,
6.18%, 04/01/2030 386,381
23,328 New Century Home
Equity Loan Trust,
Series 2003-5, Class AI3,
3.56%, 11/25/2033 23,227
76,298 Oakwood Mortgage
Investors, Inc.,
Series 1999-B, Class A3,
6.45%, 11/15/2017 71,776
300,000 Renaissance Home Equity
Loan Trust, Series 2006-2,
Class AF3, 5.80%,
08/25/2036 301,501
300,000 Residential Asset Mortgage
Products, Inc., Series
2003-RS10, Class AI7,
4.85%, 11/25/2033 295,407
417,804 Residential Asset Securities
Corporation, Series
2003-KS5, Class AI6,
3.62%, 07/25/2033 398,878
300,000 Structured Asset Securities
Corporation, Series
2005-7XS, Class 1A4B,
5.44%, 04/25/2035 295,835
-----------
4,496,696
-----------
FINANCIAL - 7.6%
175,000 AMVESCAP, Inc.
Senior Notes,
5.90%, 01/15/2007 F<F31> 175,016
300,000 Bank of America
Corporation
Subordinated Notes,
10.20%, 07/15/2015 391,169
30,000 BankBoston Capital Trust
IV, 8.25%, 12/15/2026 31,287
200,000 Banponce Trust I,
8.33%, 02/01/2027 208,579
350,000 First National Bank of
Omaha Subordinated Notes,
7.32%, 12/01/2010 351,946
250,000 First Union Capital,
7.94%, 01/15/2027 260,327
Glencore Funding LLC,
350,000 6.00%, 04/15/2014
(Acquired 03/31/2004 and
12/04/2006; Cost $148,928
and $198,740 respectively)*<F30> 341,191
30,000 Goldman Sachs Group LP, 33,540
8.00%, 03/01/2013
(Acquired 05/19/2006,
Cost $33,031)*<F30>
100,000 Health Care Service
Corporation Notes,
7.75%, 06/15/2011
(Acquired 01/26/2005;
Cost $115,000)*<F30> 108,561
350,000 Lehman Brothers Holdings
Senior Notes,
8.80%, 03/01/2015 423,046
375,000 Liberty Mutual Insurance
Notes, 7.70%, 10/15/2097
(Acquired 03/26/2003;
Cost $239,982)*<F30> 383,750
100,000 Marsh & McLennan
Companies, Inc.,
5.38%, 07/15/2014 96,223
50,000 Met Life Global Funding I
Notes, 4.75%, 06/20/2007
(Acquired 09/15/2004;
Cost $51,556)*<F30> 49,874
100,000 Principal Financial Group
(AU) Senior Notes,
8.20%, 08/15/2009
(Acquired 09/16/2005;
Cost $112,015)*<F30> F<F31> 107,041
Residential Capital
Corporation:
100,000 6.38%, 06/30/2010 101,164
375,000 6.88%, 06/30/2015 388,757
457,000 Washington Mutual Capital
I, 8.38%, 06/01/2027 479,475
-----------
3,930,946
-----------
INDUSTRIAL - 17.4%
300,000 AOL Time Warner, Inc.,
7.63%, 04/15/2031 335,148
100,000 AT&T Wireless Services,
Inc. Senior Notes,
8.75%, 03/01/2031 129,956
503,423 Atlas Air, Inc.
Pass Thru Certificates,
8.71%, 07/02/2021 529,853
Bunge Ltd. Finance
Corporation Notes:
150,000 5.35%, 04/15/2014 144,166
100,000 5.10%, 07/15/2015 93,126
375,000 Clear Channel
Communications,
4.50%, 01/15/2010 359,589
Continental Airlines, Inc.
Pass Thru Certificates:
347 7.42%, 04/01/2007 330
50,711 6.80%, 07/02/2007 50,457
168,712 6.54%, 03/15/2008 168,923
222,723 8.31%, 04/02/2011 223,836
67,889 6.90%, 01/02/2018 70,049
100,000 COX Communications Inc.
Notes, 7.88%, 08/15/2009 105,826
100,000 Deutsche Telekom
International Finance BV,
8.25%, 06/15/2030 F<F31> 122,934
350,000 Dollar General
Corporation,
8.63%, 06/15/2010 371,875
276,992 Federal Express Corporation
Pass Thru Certificates,
Series B2, 7.11%,
01/02/2014 292,290
400,000 Ford Motor Company
Debentures,
9.22%, 09/15/2021 351,000
General Motors Acceptance
Corporation Notes:
75,000 7.75%, 01/19/2010 78,500
150,000 6.75%, 12/01/2014 154,070
175,000 General Motors Nova
Scotia Finance Company,
6.85%, 10/15/2008 F<F31> 174,125
350,000 Hanson PLC,
6.13%, 08/15/2016 F<F31> 356,252
350,000 Health Management
Association,
6.13%, 04/15/2016 331,361
150,000 Hutchison Whampoa
International Limited,
6.25%, 01/24/2014
(Acquired 06/23/2005;
Cost $161,474)*<F30> F<F31> 155,540
322,000 Marathon Oil
Corporation Debentures,
9.13%, 01/15/2013 382,953
253,750 The May Department Stores
Companies Debentures,
9.75%, 02/15/2021 271,056
350,000 New York Telephone
Company Debentures,
8.63%, 11/15/2010 381,784
200,000 PCCW Capital II Ltd.,
6.00%, 07/15/2013
(Acquired 07/10/2003;
Cost $199,066)*<F30> F<F31> 201,518
300,000 Plum Creek Timberlands,
5.88%, 11/15/2015 294,802
300,000 Sprint Capital Corporation,
8.75%, 03/15/2032 361,083
250,000 Sungard Data Systems Inc.
Notes, 3.75%, 01/15/2009 236,250
175,000 TCI Communications, Inc.
Debentures,
7.88%, 08/01/2013 194,592
350,000 Telecom Italia Capital,
7.20%, 07/18/2036 F<F31> 365,651
200,000 Telefonica Emisiones,
S.A.U.,
6.42%, 06/20/2016 F<F31> 206,324
92,000 Time Warner Companies,
Inc., 6.88%, 06/15/2018 97,823
25,000 Time Warner Entertainment
Senior Notes,
8.88%, 10/01/2012 28,738
50,000 Tyco International
Group S.A.,
6.00%, 11/15/2013 F<F31> 51,734
United AirLines, Inc.
Pass Thru Certificates:
444,957 6.20%, 09/01/2008 447,738
73,583 7.76%, 12/31/2049 64,753
158,000 Univision Communication,
Inc., 3.50%, 10/15/2007 154,595
Vale Overseas Limited:
100,000 8.25%, 01/17/2034 F<F31> 118,454
125,000 6.88%, 11/21/2036 F<F31> 128,206
150,000 Viacom, Inc.,
7.70%, 07/30/2010 160,220
150,000 Viacom, Inc. Senior Notes,
6.25%, 04/30/2016
(Acquired 04/05/2006;
Cost $149,342)*<F30> 148,961
100,000 Wharf International
Finance Ltd,
7.63%, 03/13/2007 F<F31> 100,422
-----------
8,996,863
-----------
UTILITIES - 4.7%
200,000 Commonwealth Edison,
5.40%, 12/15/2011 198,421
150,000 Energy Transfer Partners,
5.65%, 08/01/2012 149,369
350,000 Kinder Morgan Energy
Partners Senior Notes,
5.35%, 08/15/2007 349,540
83,351 Kiowa Power Partners LLC,
4.81%, 12/30/2013
(Acquired 11/19/2004;
Cost $85,742)*<F30> 80,338
400,000 ONEOK, Inc. Senior
Notes, 7.13%, 04/15/2011 422,189
50,000 Pacific Gas & Electric
Company 1st Mortgage,
6.05%, 03/01/2034 50,429
200,000 PPL Energy Supply LLC,
6.20%, 05/15/2016 205,583
200,000 PSE&G Energy Holdings
LLC Senior Notes,
8.50%, 06/15/2011 215,000
50,000 PSI Energy, Inc. Debentures,
7.85%, 10/15/2007 50,848
296,837 RGS (I&M) Funding
Corporation Debentures,
9.82%, 12/07/2022 356,925
100,000 Tristate Gen & Trans Assn,
6.04%, 01/31/2018
(Acquired 10/14/2003;
Cost $100,000)*<F30> 101,024
Williams Cos. Inc. Notes:
50,000 7.13%, 09/01/2011 52,000
200,000 7.88%, 09/01/2021 214,500
-----------
2,446,166
-----------
MORTGAGE BACKED SECURITIES - 30.3%
Bank of America
Alternative Loan Trust:
221,944 Series 2005-2, Class 4A1,
5.50%, 03/25/2020 221,307
473,226 Series 2006-2, Class 6A1,
5.50%, 03/25/2021 471,672
305,187 Citigroup Mortgage Loan
Trust, Inc., Series 2005-9,
Class 2A2, 5.50%,
11/25/2035 304,467
400,000 Countrywide Alternative
Loan Trust,
6.00%, 01/15/2021 403,313
487,632 Deutsche Securities Inc.
Mortgage, Series 2006-AR5,
Class 21A, 6.00%,
10/25/2021 492,148
Federal Gold Loan Mortgage
Corporation (FGLMC):
107,899 6.00%, 05/01/2017 109,455
741,959 5.50%, 11/01/2017 743,335
375,761 6.00%, 06/01/2021 380,818
267,709 5.00%, 12/01/2020 263,029
82,088 6.50%, 09/01/2028 84,218
135,546 6.50%, 12/01/2028 139,065
98,313 6.50%, 05/01/2029 100,804
98,529 6.50%, 06/01/2029 101,025
Federal Home Loan Mortgage
Corporation (FHLMC):
379,840 Series 3122, Class VA,
6.00%, 01/15/2017 386,069
930,918 Series R009, Class AJ,
5.75%, 12/15/2018 931,660
23,091 Series 1053, Class G,
7.00%, 03/15/2021 23,053
50,535 Series 136, Class E,
6.00%, 04/15/2021 50,337
300,000 Series 2673, Class NC,
5.50%, 05/15/2021 299,514
270,160 Series 2804, Class VC,
5.00%, 07/15/2021 263,301
45,230 Series 1122, Class G,
7.00%, 08/15/2021 45,145
100,274 Series 1186, Class I,
7.00%, 12/15/2021 103,123
258,869 Series 3132, Class MA,
5.50%, 12/15/2023 258,273
241,259 Series 2598, Class QC,
4.50%, 06/15/2027 237,969
Federal National Mortgage
Association (FNMA):
310,075 5.00%, 02/01/2018 305,793
216,073 5.00%, 10/01/2018 212,894
216,042 5.00%, 11/01/2018 212,863
167,668 5.50%, 03/01/2023 166,865
296,435 5.50%, 07/01/2023 295,015
370,864 6.00%, 03/01/2026 374,880
64,485 6.50%, 09/01/2028 66,188
112,889 6.50%, 02/01/2029 115,871
243,334 5.50%, 01/01/2032 241,141
502,716 5.50%, 02/01/2035 497,327
1,971,982 5.50%, 04/01/2036 1,949,459
20,825 Series 1989-94, Class G,
7.50%, 12/25/2019 21,872
90,875 Series 1990-15, Class J,
7.00%, 02/25/2020 94,142
16,136 Series 1991-21, Class J,
7.00%, 03/25/2021 16,686
318,208 Series 1991-43, Class J,
7.00%, 05/25/2021 330,268
391,407 Series 1991-65, Class Z,
6.50%, 06/25/2021 401,652
399,459 Series 1992-129, Class L,
6.00%, 07/25/2022 404,865
122,619 Series 1993-32, Class H,
6.00%, 03/25/2023 122,726
665,088 Series 1993-58, Class H,
5.50%, 04/25/2023 665,889
298,299 Series 2003-31, Class KG,
4.50%, 12/25/2028 296,069
57,233 Series 2003-44, Class AB,
3.75%, 05/25/2033 53,981
324,779 Series 2004-W6, Class 1A6,
5.50%, 07/25/2034 322,088
387,115 First Horizon Alternative
Mortgage Securities,
Series 2006-FA6, Class 3A1,
5.75%, 11/25/2021 386,239
600,000 First Union National Bank
Commercial Mortgage
Securities Inc.,
Series 2001-C4, Class A2,
6.22%, 12/12/2033 623,310
Government National
Mortgage Association
(GNMA):
179,549 6.00%, 12/20/2028 182,050
65,142 6.50%, 01/20/2029 66,755
169,354 6.00%, 11/20/2033 171,457
217,602 Master Alternative Loans
Trust, Series 2003-5,
Class 6A1, 6.00%,
08/25/2033 215,266
Washington Mutual, Inc.
Pass-Thru Certificates:
234,866 Series 2004-CB1, Class 5A,
5.00%, 06/25/2019 229,581
269,780 Series 2004-CB3, Class 4A,
6.00%, 10/25/2019 272,402
-----------
15,728,694
-----------
INTERNATIONAL (U.S. $ DENOMINATED) - 1.8%
500,000 Export-Import Bank
Korea Notes,
4.63%, 03/16/2010 F<F31> 490,099
400,000 PEMEX Project Funding
Master Trust,
9.13%, 10/13/2010 F<F31> 448,600
-----------
938,699
-----------
TAXABLE MUNICIPAL BONDS - 0.6%
326,212 Tobacco Settlement
Financing Corporation,
6.36%, 05/15/2025 326,515
-----------
U.S. GOVERNMENT AGENCY ISSUES - 11.0%
5,475,000 Federal National Mortgage
Association (FNMA),
6.00%, 05/15/2011 5,700,751
-----------
U.S. TREASURY OBLIGATIONS - 14.2%
U.S. Treasury Bonds:
1,650,000 9.13%, 05/15/2018 2,269,395
4,400,000 6.25%, 08/15/2023 5,064,470
-----------
7,333,865
-----------
Total Long-Term
Investments
(Cost $49,761,614) 49,899,195
-----------
COLLATERAL POOL INVESTMENT
FOR SECURITIES ON LOAN - 21.3%
(Cost $11,037,325)
(Please Refer to Note 6) 11,037,325
-----------
Shares
------
SHORT-TERM INVESTMENTS - 4.1%
MONEY MARKET FUNDS - 4.1%
354,568 Short-Term Investment
Company Liquid Assets
Portfolio - AIM Fund 354,568
1,786,563 Short-Term Investment
Company Trust Prime
Portfolio - AIM Fund 1,786,563
-----------
Total Short-Term
Investments
(Cost $2,141,131) 2,141,131
-----------
Total Investments
(Cost $62,940,070) -
121.7% 63,077,651
-----------
Liabilities in Excess of
Other Assets - (21.7)% (11,237,706)
-----------
TOTAL NET
ASSETS - 100.0% $51,839,945
-----------
-----------
*<F30> Unregistered Security
F<F31> Foreign Security
The accompanying notes are an integral part of these financial statements.
BAIRD SHORT-TERM BOND FUND
DECEMBER 31, 2006
The Baird Short-Term Bond Fund seeks 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 issues, including government and corporate
securities, with maturities between one and three years.
The Fund delivered solid positive returns and outperformed its benchmark index
in 2006. Helping the Fund's strong relative performance were the following
factors:
o The Fund's exposure to high-quality mortgage-backed and asset-backed
securities which performed well relative to other sectors;
o The Fund's overweighting of BBB-rated corporate bonds relative to the
benchmark; and
o Strong performance of specific individual corporate issues, particularly
those in the auto and finance sectors.
The Fund's exposure to a small number of issues which were negatively affected
by leveraged buy-outs detracted slightly from relative performance in 2006. The
Fund maintained its duration-neutral strategy, holding a broadly diversified
portfolio of over 170 securities at year end.
The Fund ended 2006 with a yield advantage versus its benchmark index. This
yield advantage, combined with exposure to specific sectors which we believe
have superior total return potential (mortgage-backed and asset-backed
securities), enhance the Fund's prospects of continuing to add value over its
benchmark in the coming year.
PORTFOLIO CHARACTERISTICS
QUALITY DISTRIBUTION*<F32>
U.S. Treasury 11%
U.S. Gov't Agency 24%
AAA 19%
AA 5%
A 14%
BBB 26%
Below BBB 1%
SECTOR WEIGHTINGS*<F32>
Asset-Backed 9%
Financials 20%
Industrials 19%
Utilities 6%
Mortgage-Backed 13%
International 1%
Municipal 1%
U.S. Gov't Agency 18%
U.S. Treasuries 10%
Cash 3%
NET ASSETS: $148,604,711
SEC 30-DAY YIELD:**<F33>
Institutional Class: 5.14%
AVERAGE EFFECTIVE DURATION: 1.69 years
AVERAGE EFFECTIVE MATURITY: 2.02 years
ANNUALIZED EXPENSE RATIO:
Institutional Class: 0.30%
PORTFOLIO TURNOVER RATIO: 41.1%
TOTAL NUMBER OF HOLDINGS: 172
*<F32> Percentages shown are based on the Fund's total net assets.
**<F33> SEC yields are based on SEC guidelines and are calculated for the 30
days ended December 31, 2006.
BAIRD SHORT-TERM BOND FUND
BAIRD SHORT-TERM BOND FUND - INSTITUTIONAL CLASS*<F34>
VALUE OF A $250,000 INVESTMENT
Baird Short-Term Bond Fund - Lehman 1-3 Year U.S.
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
3/31/2006 $255,991 $255,650
6/30/2006 $258,202 $257,369
9/30/2006 $263,796 $262,691
12/31/2006 $266,708 $265,370
GROWTH OF A HYPOTHETICAL INVESTMENT OF $250,000 MADE ON THE FUND'S INCEPTION
DATE (8/31/04), ASSUMING REINVESTMENT OF ALL DISTRIBUTIONS.
*<F34> 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, 2006 ONE YEAR SINCE INCEPTION(1)<F35>
- --------------------------------------- -------- -----------------------
Baird Short-Term Bond Fund - Institutional Class 4.65% 2.81%
Lehman Brothers 1-3 Year Government/Credit Bond Index(2)<F36> 4.25% 2.59%
(1)<F35> For the period from August 31, 2004 (commencement of operations) to
December 31, 2006.
(2)<F36> 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 SHOWN IN THE 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 PERFORMANCE OF THE FUND AS OF THE MOST RECENT MONTH-
END, PLEASE CALL 1-866-44BAIRD OR VISIT WWW.BAIRDFUNDS.COM. MUTUAL FUND
PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER
THAN THAT STATED.
BAIRD SHORT-TERM BOND FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2006
Principal
Amount Value
--------- -----
LONG-TERM INVESTMENTS - 97.3%
ASSET BACKED SECURITIES - 9.0%
$ 400,000 AESOP Funding II LLC,
Series 2005-1A, Class A1,
3.95%, 04/20/2008
(Acquired 02/17/2005,
Cost $399,964)*<F38> $ 393,513
700,000 Bayview Financial
Acquisition Trust,
Series 2005-B, Class 1A2,
4.70%, 04/28/2039 693,297
94,840 Chase Manhatten Auto
Owner Trust,
Series 2003-C, Class A4,
2.94%, 06/15/2010 93,541
771,193 CitiFinancial Mortgage
Securities, Inc.,
Series 2004-1, Class AF2,
2.65%, 04/25/2034 753,651
375,310 CNH Equipment Trust,
Series 2005-A, Class A3,
4.02%, 04/15/2009 372,816
Countrywide Asset-Backed
Certificates:
1,000,000 Series 2006-13, Class
1AF3, 5.94%, 05/25/2033 1,006,232
1,500,000 Series 2006-S7,
5.57%, 11/25/2035 1,497,870
1,000,000 Series 2005-10, Class AF2,
4.49%, 02/25/2036 990,611
1,153,000 Series 2005-12, Class 1A2,
4.85%, 02/25/2036 1,143,120
725,000 Series 2005-13, Class AF2,
5.29%, 04/25/2036 721,671
1,500,000 Series 2006-9, Class 1AF3,
5.86%, 10/25/2046 1,507,027
500,000 Ford Credit Auto
Owner Trust, Series
2005-B, Class A4,
4.38%, 01/15/2010 494,247
902,277 Green Tree Financial
Corporation, Series
1998-3, Class A5, 6.22%,
03/01/2030 909,117
95,127 Household Automobile
Trust, Series 2003-1,
2.22%, 11/17/2009 94,189
300,000 MBNA Credit Card
Master Note Trust,
Series 2003-A3, Class A3,
2.93%, 08/15/2010 300,516
805,138 Merrill Lynch Mortgage
Investors Inc., Series
2005-A8, Class A1C1,
5.25%, 08/25/2036 796,914
58,320 New Century Home
Equity Loan Trust,
Series 2003-5, Class AI3,
3.56%, 11/25/2033 58,067
Residential Asset
Mortgage Products, Inc.:
700,000 Series 2004-RS12, Class
AI3, 3.98%, 04/25/2029 694,743
406,641 Series 2003-RS7, Class
AI6, 5.34%, 08/25/2033 403,254
Residential Asset Securities
Corporation:
11,505 Series 2003-KS9, Class
AI3, 3.25%, 12/25/2028 11,463
121,127 Series 2004-KS2, Class
AI3, 3.02%, 05/25/2029 120,450
74,585 Series 2004-KS4, Class
AI3, 3.08%, 08/25/2029 73,569
193,990 Residential Funding
Mortgage Securities,
Series 2003-HS3, Class
AI2, 3.15%, 07/25/2018 191,574
------------
13,321,452
------------
FINANCIAL - 19.8%
880,000 ABN-AMRO Bank NV,
7.00%, 04/01/2008 F<F39> 895,088
1,405,000 Allfirst Financial, Inc.
Subordinated Notes,
7.20%, 07/01/2007 1,414,786
140,000 American General
Finance Corporation
Notes, 4.50%, 11/15/2007 139,186
471,000 AMVESCAP, Inc.
Senior Notes,
5.90%, 01/15/2007 F<F39> 471,044
594,000 Bank of Oklahoma
Subordinated Notes,
7.13%, 08/15/2007 599,483
251,000 Bank United Notes,
8.00%, 03/15/2009 263,510
472,000 Bankers Trust Corporation
Subordinated Notes,
7.38%, 05/01/2008 483,359
110,000 BB&T Corporation
Subordinated Notes,
7.25%, 06/15/2007 110,896
623,000 Block Financial
Corporation Notes,
8.50%, 04/15/2007 627,775
1,156,000 BNY Capital I Notes,
Series B, 7.97%,
12/31/2026 1,203,389
500,000 Capital One Bank Notes,
4.88%, 05/15/2008 496,918
100,000 Chubb Corporation
Senior Notes,
7.13%, 12/15/2007 101,381
210,000 CIT Group Inc. Senior
Notes, 5.50%, 11/30/2007 210,463
848,000 Citicorp Capital II Notes,
8.02%, 02/15/2027 883,349
200,000 Citicorp Subordinated
Notes, 7.00%, 07/01/2007 201,423
375,000 Citifinancial Debentures,
10.00%, 05/15/2009 415,174
675,000 Comerica Incorporated
Subordinated Notes,
7.25%, 08/01/2007 682,389
550,000 Compass Bank
Subordinated Notes,
8.10%, 08/15/2009 584,710
388,000 Corestates Capital Trust I,
8.00%, 12/15/2026
(Acquired 01/26/2006 &
06/05/2006; Cost
$211,938 & $196,930
respectively)*<F38> 404,040
500,000 Countrywide Home
Loans Notes,
4.13%, 09/15/2009 485,593
537,000 Credit Suisse First Boston
USA Inc. Senior Notes,
6.50%, 06/01/2008 545,670
1,095,000 EOP Operating L.P. Notes,
7.75%, 11/15/2007 1,117,577
500,000 Executive Risk Capital
Trust, 8.68%, 02/01/2027 522,462
800,000 First Union Capital,
7.94%, 01/15/2027 833,045
200,000 Franchise Finance
Corporation Notes,
7.07%, 01/15/2008 202,917
273,000 The Goldman Sachs
Group, Inc. Senior
Unsubordinated Notes,
7.80%, 01/28/2010 292,788
400,000 HSBC Finance
Corporation Notes,
6.88%, 03/01/2007 400,769
500,000 ING Security Life
Institutional Funding
Notes, 2.70%, 02/15/2007
(Acquired 05/26/2005;
Cost $488,370)*<F38> 498,179
1,307,000 JPM Capital Trust II,
7.95%, 02/01/2027 1,360,101
575,000 Key Bank NA
Subordinated Notes,
6.50%, 10/15/2027 585,125
400,000 Lehman Brothers
Holdings, Inc. Notes,
3.50%, 08/07/2008 388,842
1,413,000 MBNA Capital Series A,
8.28%, 12/01/2026 1,472,928
500,000 MBNA Corporation Notes,
6.25%, 01/17/2007 500,142
250,000 Mellon Capital I Series A,
7.72%, 12/01/2026 260,290
180,000 Merrill Lynch & Co, Inc.,
7.00%, 01/15/2007 180,020
200,000 Met Life Global
Funding I Notes,
4.75%, 06/20/2007
(Acquired 02/11/2005;
Cost $203,862)*<F38> 199,496
200,000 Morgan Stanley Group,
Inc. Debentures,
8.33%, 01/15/2007 200,167
720,000 NB Capital Trust IV,
8.25%, 04/15/2027 751,496
625,000 New York Life Global
Funding, 3.88%,
01/15/2009 (Acquired
01/23/2006;
Cost $608,075)*<F38> 608,196
700,000 Phoenix Companies,
6.68%, 02/16/2008 706,042
633,000 PNC Financial Services
Subordinated Notes,
9.65%, 06/15/2009 693,892
530,000 PNC Funding Corporation,
6.13%, 02/15/2009 538,867
Principal Life Global:
150,000 5.13%, 06/28/2007
(Acquired 12/28/2004;
Cost $154,880)*<F38> 149,788
275,000 3.63%, 04/30/2008
(Acquired 08/17/2005;
Cost $268,452)*<F38> 268,310
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)*<F38> 1,102,360
155,000 Republic New York
Corporation Subordinated
Notes, 9.70%, 02/01/2009 168,176
600,000 Residential Capital
Corporation,
6.13%, 11/21/2008 602,972
487,000 SAFECO
Corporation Notes,
6.88%, 07/15/2007 491,177
200,000 Transamerica
Corporation Debentures,
9.38%, 03/01/2008 207,269
1,300,000 Unitrin, Inc. Senior Notes,
5.75%, 07/01/2007 1,300,972
313,000 Wells Fargo & Company
Subordinated Notes,
6.25%, 04/15/2008 316,627
211,000 Westdeutsche Landesbank
Subordinated Notes,
4.80%, 07/15/2015 F<F39> 202,376
1,000,000 Zurich Capital Trust I,
8.38%, 06/01/2037
(Acquired 04/06/2006;
Cost $1,065,970)*<F38> 1,048,168
------------
29,391,162
------------
INDUSTRIAL - 18.7%
306,000 Bell Telephone Co.
Pennsylvania Debentures,
7.38%, 07/15/2007 308,851
150,000 BellSouth
Telecommunication
Debentures,
5.88%, 01/15/2009 151,365
1,000,000 Belo Corporation Senior
Notes, 7.13%, 06/01/2007 1,003,844
125,000 British Telecom
PLC Notes,
8.13%, 12/15/2010 F<F39> 139,501
1,000,000 Bunge Limited Finance
Corporation,
4.38%, 12/15/2008 978,924
700,000 Cadbury Schweppes U.S.
Finance Notes,
3.88%, 10/01/2008
(Acquired 08/30/2005;
Cost $685,461)*<F38> 681,716
405,000 Centex Corporation
Subordinated Debentures,
8.75%, 03/01/2007 406,723
165,000 Chevron Phillips
Chemical Company Notes,
5.38%, 06/15/2007 164,848
1,300,000 Clear Channel
Communication Senior
Notes, 3.13%, 02/01/2007 1,297,603
200,000 Comcast Cable
Communications, Inc.
Notes, 6.20%, 11/15/2008 203,166
465,000 Computer Sciences
Corporation Notes,
3.50%, 04/15/2008 451,941
1,336,000 Cooper Cameron
Corporation Senior Notes,
2.65%, 04/15/2007 1,325,141
581,000 COX Communications
Inc. Notes,
7.88%, 08/15/2009 614,850
579,000 Devon Energy
Corporation Debentures,
10.13%, 11/15/2009 645,111
1,000,000 Donnelley (R.R.)
& Sons Notes,
3.75%, 04/01/2009 962,595
1,000,000 FMC Corporation Notes,
7.00%, 05/15/2008 1,015,249
1,000,000 Fiserv Inc.,
3.00%, 06/27/2008 963,889
300,000 Ford Motor Credit
Company Senior Notes,
4.95%, 01/15/2008 294,932
250,000 General Motors
Acceptance Corporation
Notes, 6.13%, 08/28/2007 250,049
Halliburton
Company Notes:
225,000 5.63%, 12/01/2008 225,637
425,000 5.50%, 10/15/2010 424,245
260,000 Harrahs Operating
Company Inc.,
7.13%, 06/01/2007 261,219
500,000 ICI Wilmington,
7.05%, 09/15/2007 504,646
International Paper
Company Notes:
250,000 7.63%, 01/15/2007 250,107
885,000 6.50%, 11/15/2007 889,327
675,000 4.00%, 04/01/2010 647,870
1,000,000 John Deere Capital
Corporation Senior Notes,
4.88%, 03/16/2009 991,089
700,000 Johnson Controls Inc.
Notes, 6.30%, 02/01/2008 702,097
Marathon Oil
Corporation Notes:
310,000 5.38%, 06/01/2007 309,886
563,000 6.85%, 03/01/2008 571,578
450,000 News America Holdings,
7.38%, 10/17/2008 464,379
800,000 Premcor Refining
Group Inc. Senior Notes,
9.50%, 02/01/2013 864,062
1,000,000 Sealed Air Corporation
Senior Notes,
5.38%, 04/15/2008
(Acquired 07/07/2006;
Cost $989,890)*<F38> 995,191
402,000 Southwestern Bell
Telephone Company Notes,
6.63%, 07/15/2007 404,158
500,000 Sprint Capital
Corporation Notes,
6.38%, 05/01/2009 510,011
1,000,000 Telecom Italia Capital,
4.00%, 11/15/2008 F<F39> 973,854
1,028,000 Telus Corporation Notes,
7.50%, 06/01/2007 F<F39> 1,035,608
700,000 Thomson Corporation,
5.75%, 02/01/2008 F<F39> 702,097
255,000 Time Warner Companies,
Inc., 8.18%, 08/15/2007 259,191
750,000 Time Warner Companies,
Inc. Debentures,
7.48%, 01/15/2008 765,195
659,195 United AirLines, Inc.
Pass Thru Certificates,
Series 2001-1,
6.20%, 09/01/2008 663,315
1,050,000 Univision Communications,
Inc., 3.50%, 10/15/2007 1,027,373
500,000 Viacom, Inc.,
5.63%, 05/01/2007 500,258
1,000,000 Wharf International
Finance Ltd.,
7.63%, 03/13/2007 F<F39> 1,004,217
------------
27,806,908
------------
UTILITIES - 6.4%
1,000,000 Baltimore Gas &
Electric Company Notes,
5.78%, 10/01/2008 1,003,321
805,000 Cilcorp Inc. Senior Notes,
8.70%, 10/15/2009 862,258
Commonwealth
Edison Notes:
1,000,000 7.63%, 01/15/2007 1,000,413
600,000 3.70%, 02/01/2008 588,130
Kinder Morgan Energy
Partners Senior Notes:
150,000 5.35%, 08/15/2007 149,803
1,000,000 6.30%, 02/01/2009 1,013,273
MidAmerican Energy
Holdings Company
Senior Notes:
200,000 4.63%, 10/01/2007 198,700
575,000 7.63%, 10/15/2007 584,023
500,000 7.52%, 09/15/2008 516,690
1,000,000 Nisource Finance
Corporation,
7.88%, 11/15/2010 1,078,862
1,032,000 Panhandle Eastern
Pipeline Senior Notes,
4.80%, 08/15/2008 1,016,684
200,000 Public Service Electric
& Gas Co. Notes,
6.25%, 01/01/2007 200,000
500,000 Sempra Energy Senior
Notes, 4.62%, 05/17/2007 498,093
860,000 System Energy Resources
1st Mortgage,
4.88%, 10/01/2007 854,721
------------
9,564,971
------------
MORTGAGE BACKED SECURITIES - 12.9%
1,083,213 Bank of America
Alternative Loan Trust,
Series 2003-4, Class 2A1,
5.00%, 06/25/2018 1,065,799
Citicorp Mortgage
Securities, Inc.:
275,800 Series 2003-11, Class 2A8,
5.50%, 12/25/2033 274,322
811,370 Series 2004-3, Class A2,
5.25%, 05/25/2034 802,032
470,447 Series 2004-4, Class A2,
5.25%, 06/25/2034 456,980
1,651,477 Countrywide Alternative
Loan Trust, Series
2005-50CB, Class 4A1,
5.00%, 11/25/2020 1,631,745
2,000,000 Deutsche Alternative
Securities Inc. Mortgage,
Series 2005-4, Class A2,
5.05%, 09/25/2035 1,981,557
Federal Home Loan
Mortgage Corporation
(FHLMC):
117,281 Series 2548, Class HA,
4.50%, 01/15/2010 115,886
208,710 Series 2835, Class VK,
5.50%, 11/15/2012 209,087
644,924 Series 3033, Class LU,
5.50%, 03/15/2013 647,810
1,113,376 Series 3124, Class VP,
6.00%, 06/15/2014 1,133,685
200,000 Series 2592, Class PD,
5.00%, 07/15/2014 198,823
325,507 Series 2789, Class VM,
5.50%, 04/15/2015 326,119
1,000,000 Series 2390, Class PW,
6.00%, 04/15/2015 1,007,912
285,070 Series 2541, Class JB,
5.00%, 02/15/2016 283,072
724,412 Series 2970, Class DA,
5.50%, 01/15/2023 724,397
Federal National Mortgage
Association (FNMA):
762,264 5.50%, 07/01/2015 764,531
1,175,000 Series 2003-24, Class LC,
5.00%, 12/25/2015 1,163,620
211,506 Series 2002-77, Class QP,
5.00%, 09/25/2026 210,256
535,961 Series 2004-W6, Class 1A4,
5.50%, 07/25/2034 535,830
1,000,000 Series 2004-W10, Class
A24, 5.00%, 08/25/2034 988,017
2,000,000 J.P. Morgan Alternative
Loan Trust, Series
2006-S2, Class A2,
5.81%, 05/25/2036 1,997,923
1,200,000 Residential Accredit Loans
Inc., Series 2003-QS17,
Class CB3, 5.50%,
09/25/2033 1,193,344
Washington Mutual, Inc.
Pass-Thru Certificates:
723,833 Series 2004-CB4, Class
21A, 5.50%, 12/25/2019 721,852
650,231 Series 2004-CB4, Class
22A, 6.00%, 12/25/2019 657,460
------------
19,092,059
------------
INTERNATIONAL (U.S. $ DENOMINATED) - 0.6%
175,000 Export-Import Bank
Korea Notes,
4.63%, 03/16/2010 F<F39> 171,535
600,000 Korea Development
Bank Notes,
3.88%, 03/02/2009 F<F39> 582,459
200,000 PEMEX Project
Funding Master Trust,
6.13%, 08/15/2008 F<F39> 201,600
------------
955,594
------------
TAXABLE MUNICIPAL BONDS - 1.6%
210,362 Educational Enhancement
Funding Corporation,
6.72%, 06/01/2025 210,776
70,000 Erie, Pennsylvania
General Obligation,
5.60%, 11/15/2007 70,020
450,000 New Jersey Economic
Development Authority,
0.00%, 02/15/2007^<F37> ETM 447,282
500,000 Redding California
Redevelopment Agency
Tax Allocation,
6.00%, 09/01/2010 507,545
1,104,101 Tobacco Settlement
Financing Corporation,
Series 2001-A, Class A,
6.36%, 05/15/2025 1,105,128
------------
2,340,751
------------
U.S. GOVERNMENT AGENCY ISSUES - 17.8%
1,000,000 Federal Home
Loan Bank (FHLB),
4.70%, 10/07/2010 983,427
Federal National Mortgage
Association (FNMA):
9,675,000 2.38%, 02/15/2007 9,642,937
15,200,000 6.00%, 05/15/2011 15,826,742
------------
26,453,106
------------
U.S. TREASURY OBLIGATIONS - 10.5%
U.S. Treasury Note:
3,000,000 5.50%, 02/15/2008 3,016,641
12,500,000 4.88%, 04/30/2011 12,581,050
------------
15,597,691
------------
Total Long-Term
Investments
(Cost $145,010,435) 144,523,694
------------
COLLATERAL POOL INVESTMENT
FOR SECURITIES ON LOAN - 28.9%
(Cost $42,992,134)
(Please Refer to Note 6) 42,992,134
------------
Shares
------
SHORT-TERM INVESTMENTS - 2.3%
MONEY MARKET FUNDS - 2.3%
3,383,098 Short-Term Investment
Company Liquid Assets
Portfolio - AIM Fund 3,383,098
------------
Total Short-Term
Investments
(Cost $3,383,098) 3,383,098
------------
Total Investments
(Cost $191,385,667) -
128.5% 190,898,926
------------
Liabilities in Excess of
Other Assets - (28.5)% (42,294,215)
------------
TOTAL NET
ASSETS - 100.00% $148,604,711
------------
------------
^<F37> Non Income Producing
*<F38> Unregistered Security
F<F39> Foreign Security
ETM - Escrowed to Maturity
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
ADDITIONAL INFORMATION ON FUND EXPENSES DECEMBER 31, 2006 (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 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
(7/1/06 - 12/31/06).
ACTUAL EXPENSES
The third and fourth columns of the following table 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 following table 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, 2006
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)<F40> 7/1/06 12/31/06 PERIOD(1)<F40> 7/1/06 PERIOD(1)<F40>
------------- --------- -------- -------------- ------- --------------
BAIRD INTERMEDIATE BOND FUND
Institutional Class 0.30% $1,000.00 $1,046.40 $1.55 $1,023.69 $1.53
Investor Class 0.55% $1,000.00 $1,045.60 $2.84 $1,022.43 $2.80
BAIRD AGGREGATE BOND FUND
Institutional Class 0.30% $1,000.00 $1,053.70 $1.55 $1,023.29 $1.53
Investor Class 0.55% $1,000.00 $1,051.30 $2.84 $1,022.43 $2.80
BAIRD INTERMEDIATE MUNICIPAL
BOND FUND
Institutional Class 0.30% $1,000.00 $1,038.40 $1.54 $1,023.69 $1.53
Investor Class 0.55% $1,000.00 $1,036.30 $2.82 $1,022.43 $2.80
BAIRD CORE PLUS BOND FUND
Institutional Class 0.30% $1,000.00 $1,062.90 $1.56 $1,023.69 $1.53
Investor Class 0.55% $1,000.00 $1,061.00 $2.86 $1,022.43 $2.80
BAIRD SHORT-TERM BOND FUND
Institutional Class 0.30% $1,000.00 $1,033.00 $1.54 $1,023.69 $1.53
(1)<F40> 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, 2006
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 $352,748,209,
$355,129,704, $64,179,220, $55,467,092
and $162,277,229, respectively) $352,131,310 $355,182,329 $64,302,090 $55,604,673 $161,790,488
Repurchase agreements
(cost $59,185,483, $30,503,904, $0,
$7,472,978 and $29,108,438, respectively) 59,185,483 30,503,904 -- 7,472,978 29,108,438
Interest receivable 4,111,648 3,542,280 1,109,548 589,449 1,743,764
Receivable for investments sold 11,951 7,171 -- 2,390 --
Receivable for Fund shares sold 154,315 2,400,185 116,168 105,785 532,708
------------ ------------ ----------- ----------- ------------
Total assets 415,594,707 391,635,869 65,527,806 63,775,275 193,175,398
------------ ------------ ----------- ----------- ------------
LIABILITIES:
Payable for collateral
received for securities loaned (See Note 6) 87,414,866 45,053,190 -- 11,037,325 42,992,134
Payable for securities purchased -- 9,671,027 -- 812,863 1,522,713
Payable for Fund shares repurchased 52,525 64,800 30,000 37,952 18,438
Payable to Advisor and Distributor 83,746 81,880 20,299 12,148 37,402
Payable to the Custodian 957 -- -- -- --
Other liabilities -- 8,495 -- 35,042 --
------------ ------------ ----------- ----------- ------------
Total liabilities 87,552,094 54,879,392 50,299 11,935,330 44,570,687
------------ ------------ ----------- ----------- ------------
NET ASSETS $328,042,613 $336,756,477 $65,477,507 $51,839,945 $148,604,711
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
NET ASSETS CONSIST OF:
Capital stock $331,731,393 $337,708,301 $65,687,283 $51,798,631 $149,369,914
Accumulated undistributed
net investment income 207,297 177,153 9,471 33,503 78,385
Accumulated net realized loss
on investments sold (3,279,178) (1,181,602) (342,117) (129,770) (356,847)
Net unrealized appreciation (depreciation)
on investments (616,899) 52,625 122,870 137,581 (486,741)
------------ ------------ ----------- ----------- ------------
NET ASSETS $328,042,613 $336,756,477 $65,477,507 $51,839,945 $148,604,711
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
INSTITUTIONAL CLASS SHARES
Net Assets $326,835,399 $334,907,855 $64,932,629 $51,551,017 $148,604,711
Shares outstanding ($0.01 par value,
unlimited shares authorized) 31,062,601 31,878,802 6,152,087 5,075,175 15,147,163
Net asset value, offering and
redemption price per share $ 10.52 $ 10.51 $ 10.55 $ 10.16 $ 9.81
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
INVESTOR CLASS SHARES
Net Assets $ 1,207,214 $ 1,848,622 $ 544,878 $ 288,928
Shares outstanding ($0.01 par value,
unlimited shares authorized) 111,284 172,253 50,663 27,724
Net asset value, offering and
redemption price per share $ 10.85 $ 10.73 $ 10.75 $ 10.42
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2006
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 $14,353,462 $14,025,596 $2,771,283 $1,851,206 $6,016,088
Income from securities lending 40,526 25,570 -- 4,482 18,157
----------- ----------- ---------- ---------- ----------
Total investment income 14,393,988 14,051,166 2,771,283 1,855,688 6,034,245
----------- ----------- ---------- ---------- ----------
EXPENSES:
Investment advisory fee 691,567 648,938 172,433 80,146 315,364
Administration fee 138,313 129,788 34,486 16,029 63,073
Distribution expense - Investor Class Shares 4,508 3,239 2,685 790 --
----------- ----------- ---------- ---------- ----------
Total expenses 834,388 781,965 209,604 96,965 378,437
----------- ----------- ---------- ---------- ----------
NET INVESTMENT INCOME 13,559,600 13,269,201 2,561,679 1,758,723 5,655,808
----------- ----------- ---------- ---------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (1,654,036) (888,625) (106,983) (55,454) (247,795)
Change in unrealized
appreciation/depreciation on investments 1,569,947 639,350 81,453 405,659 518,820
----------- ----------- ---------- ---------- ----------
Net realized and unrealized
gain (loss) on investments (84,089) (249,275) (25,530) 350,205 271,025
----------- ----------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $13,475,511 $13,019,926 $2,536,149 $2,108,928 $5,926,833
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD INTERMEDIATE BOND FUND
-------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -----------------
OPERATIONS:
Net investment income $ 13,559,600 $ 9,443,219
Net realized loss on investments (1,654,036) (687,811)
Change in unrealized appreciation/depreciation on investments 1,569,947 (4,795,310)
------------ ------------
Net increase in net assets resulting from operations 13,475,511 3,960,098
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 111,704,742 71,651,001
Shares issued to holders in reinvestment of dividends 11,932,463 8,680,587
Cost of shares redeemed (30,115,437) (34,654,355)
------------ ------------
Net increase in net assets resulting
from capital share transactions 93,521,768 45,677,233
------------ ------------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (13,507,486) (9,464,170)
------------ ------------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net investment income (77,646) (118,722)
------------ ------------
TOTAL INCREASE IN NET ASSETS 93,412,147 40,054,439
NET ASSETS:
Beginning of year 234,630,466 194,576,027
------------ ------------
End of year (including undistributed net investment
income of $207,297 and $154,379, respectively) $328,042,613 $234,630,466
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD AGGREGATE BOND FUND
-------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -----------------
OPERATIONS:
Net investment income $ 13,269,201 $ 6,761,559
Net realized gain (loss) on investments (888,625) 294,456
Change in unrealized appreciation/depreciation on investments 639,350 (3,005,159)
------------ ------------
Net increase in net assets resulting from operations 13,019,926 4,050,856
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 155,486,669 119,986,464
Shares issued to holders in reinvestment of dividends 11,939,014 6,520,179
Cost of shares redeemed (58,822,570) (11,028,752)
------------ ------------
Net increase in net assets resulting
from capital share transactions 108,603,113 115,477,891
------------ ------------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (13,106,942) (7,004,294)
From net realized gains (120,758) (149,762)
------------ ------------
Total Distributions (13,227,700) (7,154,056)
------------ ------------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net investment income (60,662) (43,249)
From net realized gains (525) (837)
------------ ------------
Total Distributions (61,187) (44,086)
------------ ------------
TOTAL INCREASE IN NET ASSETS 108,334,152 112,330,605
NET ASSETS:
Beginning of year 228,422,325 116,091,720
------------ ------------
End of year (including undistributed net investment
income of $177,153 and $10,472, respectively) $336,756,477 $228,422,325
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
--------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -----------------
OPERATIONS:
Net investment income $ 2,561,679 $ 1,726,837
Net realized loss on investments (106,983) (209,761)
Change in unrealized appreciation/depreciation on investments 81,453 (847,084)
----------- -----------
Net increase in net assets resulting from operations 2,536,149 669,992
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 36,672,168 29,861,346
Shares issued to holders in reinvestment of dividends 2,042,052 1,440,536
Cost of shares redeemed (28,525,030) (16,406,963)
----------- -----------
Net increase in net assets resulting
from capital share transactions 10,189,190 14,894,919
----------- -----------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (2,536,465) (1,658,407)
----------- -----------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net investment income (34,881) (83,967)
----------- -----------
TOTAL INCREASE IN NET ASSETS 10,153,993 13,822,537
NET ASSETS:
Beginning of year 55,323,514 41,500,977
----------- -----------
End of year (including undistributed net investment
income of $9,471 and $19,139, respectively) $65,477,507 $55,323,514
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD CORE PLUS BOND FUND
-------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -----------------
OPERATIONS:
Net investment income $ 1,758,723 $ 1,595,244
Net realized gain (loss) on investments (55,454) 22,747
Change in unrealized appreciation/depreciation on investments 405,659 (938,103)
----------- -----------
Net increase in net assets resulting from operations 2,108,928 679,888
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 35,731,850 4,215,390
Shares issued to holders in reinvestment of dividends 1,429,836 936,473
Cost of shares redeemed (18,311,499) (4,100,728)
Other capital contributions 71 --
----------- -----------
Net increase in net assets resulting
from capital share transactions 18,850,258 1,051,135
----------- -----------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (1,727,098) (1,692,217)
From net realized gains -- (21,380)
----------- -----------
Total Distributions (1,727,098) (1,713,597)
----------- -----------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net investment income (15,311) (15,455)
From net realized gains -- (291)
----------- -----------
Total Distributions (15,311) (15,746)
----------- -----------
TOTAL INCREASE IN NET ASSETS 19,216,777 1,680
NET ASSETS:
Beginning of year 32,623,168 32,621,488
----------- -----------
End of year (including undistributed net investment
income of $33,503 and $0, respectively) $51,839,945 $32,623,168
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD SHORT-TERM BOND FUND
-------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -----------------
OPERATIONS:
Net investment income $ 5,655,808 $ 2,344,937
Net realized loss on investments (247,795) (162,401)
Change in unrealized appreciation/depreciation on investments 518,820 (797,479)
------------ -----------
Net increase in net assets resulting from operations 5,926,833 1,385,057
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 79,434,155 81,066,185
Shares issued to holders in reinvestment of dividends 5,464,609 2,142,819
Cost of shares redeemed (33,715,361) (17,200,778)
------------ -----------
Net increase in net assets resulting
from capital share transactions 51,183,403 66,008,226
------------ -----------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (5,563,493) (2,308,315)
------------ -----------
TOTAL INCREASE IN NET ASSETS 51,546,743 65,084,968
NET ASSETS:
Beginning of period 97,057,968 31,973,000
------------ -----------
End of period (including undistributed net investment
income of $78,385 and $40,220, respectively) $148,604,711 $97,057,968
------------ -----------
------------ -----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD INTERMEDIATE BOND FUND - INSTITUTIONAL CLASS
--------------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.55 $10.83 $10.88 $10.86 $10.60
------ ------ ------ ------ ------
Income from investment operations:
Net investment income 0.51 0.46 0.47(1)<F41> 0.49 0.56
Net realized and unrealized
gains (losses) on investments (0.03) (0.27) (0.05) 0.14 0.27
------ ------ ------ ------ ------
Total from investment operations 0.48 0.19 0.42 0.63 0.83
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.51) (0.47) (0.47) (0.49) (0.56)
Distributions from net realized gains -- -- (0.00)(2)<F42> (0.12) (0.01)
------ ------ ------ ------ ------
Total distributions (0.51) (0.47) (0.47) (0.61) (0.57)
------ ------ ------ ------ ------
Net asset value, end of period $10.52 $10.55 $10.83 $10.88 $10.86
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 4.70% 1.77% 3.91% 5.89% 8.02%
Supplemental data and ratios:
Net assets, end of period $326,835,399 $231,800,807 $191,563,699 $149,836,855 $146,236,339
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 4.90% 4.34% 4.32% 4.39% 5.20%
Portfolio turnover rate(3)<F43> 44.8% 42.1% 44.8% 64.4% 41.1%
(1)<F41> Calculated using average shares outstanding during the period.
(2)<F42> Amount is less than $0.01.
(3)<F43> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD INTERMEDIATE BOND FUND - INVESTOR CLASS
--------------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.86 $11.13 $11.17 $11.13 $10.71
------ ------ ------ ------ ------
Income from investment operations:
Net investment income 0.50(1) 0.45 0.45(1) 0.48 0.54(1)
<F44> <F44> <F44>
Net realized and unrealized
gains (losses) on investments (0.03) (0.28) (0.05) 0.14 0.27
------ ------ ------ ------ ------
Total from investment operations 0.47 0.17 0.40 0.62 0.81
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.48) (0.44) (0.44) (0.46) (0.38)
Distributions from net realized gains -- -- (0.00)(2)<F45> (0.12) (0.01)
------ ------ ------ ------ ------
Total distributions (0.48) (0.44) (0.44) (0.58) (0.39)
------ ------ ------ ------ ------
Net asset value, end of period $10.85 $10.86 $11.13 $11.17 $11.13
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 4.47% 1.56% 3.65% 5.61% 7.74%
Supplemental data and ratios:
Net assets, end of period $1,207,214 $2,829,659 $3,012,328 $1,321,648 $1,127,162
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 4.65% 4.09% 4.07% 4.14% 4.95%
Portfolio turnover rate(3)<F46> 44.8% 42.1% 44.8% 64.4% 41.1%
(1)<F44> Calculated using average shares outstanding during the period.
(2)<F45> Amount is less than $0.01.
(3)<F46> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD AGGREGATE BOND FUND - INSTITUTIONAL CLASS
--------------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.54 $10.74 $10.71 $10.69 $10.51
------ ------ ------ ------ ------
Income from investment operations:
Net investment income 0.52 0.49(1)<F47> 0.49(1)<F47> 0.56 0.62
Net realized and unrealized
gains (losses) on investments (0.03) (0.19) 0.07 0.20 0.23
------ ------ ------ ------ ------
Total from investment operations 0.49 0.30 0.56 0.76 0.85
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.52) (0.49) (0.50) (0.56) (0.62)
Distributions from net realized gains (0.00)(2)<F48> (0.01) (0.03) (0.18) (0.05)
------ ------ ------ ------ ------
Total distributions (0.52) (0.50) (0.53) (0.74) (0.67)
------ ------ ------ ------ ------
Net asset value, end of period $10.51 $10.54 $10.74 $10.71 $10.69
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 4.88% 2.85% 5.30% 7.19% 8.30%
Supplemental data and ratios:
Net assets, end of period $334,907,855 $227,132,399 $115,382,862 $91,550,534 $87,847,176
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 5.11% 4.56% 4.58% 4.85% 5.75%
Portfolio turnover rate(3)<F49> 52.4% 46.0% 72.6% 106.7% 51.2%
(1)<F47> Calculated using average shares outstanding throughout the period.
(2)<F48> Amount is less than $0.01.
(3)<F48> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD AGGREGATE BOND FUND - INVESTOR CLASS
--------------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.75 $10.95 $10.88 $10.84 $10.57
------ ------ ------ ------ ------
Income from investment operations:
Net investment income 0.50 0.47(1) 0.48(1) 0.55 0.60(1)
<F50> <F50> <F50>
Net realized and unrealized
gains (losses) on investments (0.02) (0.19) 0.07 0.19 0.23
------ ------ ------ ------ ------
Total from investment operations 0.48 0.28 0.55 0.74 0.83
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.50) (0.47) (0.45) (0.52) (0.51)
Distributions from net realized gains (0.00)(2)<F51> (0.01) (0.03) (0.18) (0.05)
------ ------ ------ ------ ------
Total distributions (0.50) (0.48) (0.48) (0.70) (0.56)
------ ------ ------ ------ ------
Net asset value, end of period $10.73 $10.75 $10.95 $10.88 $10.84
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 4.61% 2.54% 5.20% 6.95% 8.08%
Supplemental data and ratios:
Net assets, end of period $1,848,622 $1,289,926 $708,858 $719,844 $845,481
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 4.86% 4.31% 4.33% 4.60% 5.50%
Portfolio turnover rate(3)<F52> 52.4% 46.0% 72.6% 106.7% 51.2%
(1)<F50> Calculated using average shares outstanding during the period.
(2)<F51> Amount is less than $0.01.
(3)<F52> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD INTERMEDIATE MUNICIPAL BOND FUND - INSTITUTIONAL CLASS
-----------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.56 $10.81 $10.91 $10.86 $10.25
------ ------ ------ ------ ------
Income from investment operations:
Net investment income(1)<F53> 0.39 0.39 0.40 0.42 0.43
Net realized and unrealized
gains (losses) on investments (0.01) (0.25) (0.11) 0.10 0.64
------ ------ ------ ------ ------
Total from investment operations 0.38 0.14 0.29 0.52 1.07
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.39) (0.39) (0.39) (0.43) (0.46)
Distributions from net realized gains -- -- -- (0.04) (0.00)(2)
<F54>
------ ------ ------ ------ ------
Total distributions (0.39) (0.39) (0.39) (0.47) (0.46)
------ ------ ------ ------ ------
Net asset value, end of period $10.55 $10.56 $10.81 $10.91 $10.86
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 3.69% 1.33% 2.69% 4.91% 10.72%
Supplemental data and ratios:
Net assets, end of period $ 64,932,629 $ 53,831,848 $ 36,889,211 $30,234,195 $31,221,508
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 3.72% 3.64% 3.70% 3.88% 4.11%
Portfolio turnover rate(3)<F55> 25.1% 13.7% 4.2% 17.7% 32.6%
(1)<F53> Calculated using average shares outstanding during the period.
(2)<F54> Amount is less than $0.01.
(3)<F55> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD INTERMEDIATE MUNICIPAL BOND FUND - INVESTOR CLASS
-----------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.75 $10.99 $11.09 $11.02 $10.27
------ ------ ------ ------ ------
Income from investment operations:
Net investment income(1)<F56> 0.37 0.37 0.38 0.40 0.41
Net realized and unrealized
gains (losses) on investments (0.01) (0.25) (0.12) 0.10 0.64
------ ------ ------ ------ ------
Total from investment operations 0.36 0.12 0.26 0.50 1.05
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.36) (0.36) (0.36) (0.39) (0.30)
Distributions from net realized gains -- -- -- (0.04) (0.00)(2)
<F57>
------ ------ ------ ------ ------
Total distributions (0.36) (0.36) (0.36) (0.43) (0.30)
------ ------ ------ ------ ------
Net asset value, end of period $10.75 $10.75 $10.99 $11.09 $11.02
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 3.44% 1.13% 2.40% 4.69% 10.46%
Supplemental data and ratios:
Net assets, end of period $544,878 $1,491,666 $4,611,766 $756,792 $706,207
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 3.47% 3.39% 3.45% 3.63% 3.86%
Portfolio turnover rate(3)<F58> 25.1% 13.7% 4.2% 17.7% 32.6%
(1)<F56> Calculated using average shares outstanding during the period.
(2)<F57> Amount is less than $0.01.
(3)<F58> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD CORE PLUS BOND FUND - INSTITUTIONAL CLASS
-----------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.06 $10.38 $10.45 $10.45 $10.42
------ ------ ------ ------ ------
Income from investment operations:
Net investment income 0.55(1)<F59> 0.51(1)<F59> 0.54 0.56 0.62
Net realized and unrealized
gains (losses) on investments 0.09 (0.28) 0.10 0.36 0.07
------ ------ ------ ------ ------
Total from investment operations 0.64 0.23 0.64 0.92 0.69
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.54) (0.54) (0.53) (0.56) (0.62)
Distributions from net realized gains -- (0.01) (0.18) (0.36) (0.04)
------ ------ ------ ------ ------
Total distributions (0.54) (0.55) (0.71) (0.92) (0.66)
------ ------ ------ ------ ------
Net asset value, end of period $10.16 $10.06 $10.38 $10.45 $10.45
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 6.58% 2.23% 6.29% 8.94% 6.90%
Supplemental data and ratios:
Net assets, end of period $51,551,017 $32,173,459 $32,495,641 $42,709,634 $54,221,923
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 5.49% 4.92% 4.85% 4.56% 6.03%
Portfolio turnover rate(2)<F60> 62.0% 37.6% 52.5% 103.1% 66.8%
(1)<F59> Calculated using average shares outstanding during the period.
(2)<F60> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD CORE PLUS BOND FUND - INVESTOR CLASS
-----------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.30 $10.62 $10.67 $10.65 $10.49
------ ------ ------ ------ ------
Income from investment operations:
Net investment income 0.54(1) 0.49(1) 0.53 0.53(1) 0.60(1)
<F61> <F61> <F61> <F61>
Net realized and unrealized
gains (losses) on investments 0.09 (0.29) 0.10 0.37 0.07
------ ------ ------ ------ ------
Total from investment operations 0.63 0.20 0.63 0.90 0.67
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income (0.51) (0.51) (0.50) (0.52) (0.47)
Distributions from net realized gains -- (0.01) (0.18) (0.36) (0.04)
------ ------ ------ ------ ------
Total distributions (0.51) (0.52) (0.68) (0.88) (0.51)
------ ------ ------ ------ ------
Net asset value, end of period $10.42 $10.30 $10.62 $10.67 $10.65
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total return 6.34% 1.93% 6.09% 8.60% 6.58%
Supplemental data and ratios:
Net assets, end of period $288,928 $449,709 $125,847 $124,481 $296,026
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 5.24% 4.67% 4.60% 4.31% 5.78%
Portfolio turnover rate(2)<F62> 62.0% 37.6% 52.5% 103.1% 66.8%
(1)<F61> Calculated using average shares outstanding during the period.
(2)<F62> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD SHORT-TERM BOND FUND -
INSTITUTIONAL CLASS
---------------------------------------------------------
August 31, 2004(1)<F63>
Year Ended December 31, through
2006 2005 December 31, 2004
------ ------ -----------------------
Per Share Data:
Net asset value, beginning of period $9.79 $9.93 $10.00
----- ----- ------
Income from investment operations:
Net investment income 0.43 0.33 0.08
Net realized and unrealized losses on investments 0.02 (0.15) (0.07)
----- ----- ------
Total from investment operations 0.45 0.18 0.01
----- ----- ------
Less distributions:
Dividends from net investment income (0.43) (0.32) (0.08)
----- ----- ------
Net asset value, end of period $9.81 $9.79 $9.93
----- ----- ------
----- ----- ------
Total return 4.65% 1.85% 0.10%(2)<F64>
Supplemental data and ratios:
Net assets, end of period $148,604,711 $97,057,968 $31,973,000
Ratio of expenses to average net assets 0.30% 0.30% 0.30%(3)<F65>
Ratio of net investment income to average net assets 4.48% 3.52% 2.60%(3)<F65>
Portfolio turnover rate 41.1% 31.8% 16.7%(2)<F64>
(1)<F63> Commencement of operations.
(2)<F64> Not annualized.
(3)<F65> Annualized.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2006
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 (other than NASDAQ) are valued at the last
quoted sales price. Securities traded on NASDAQ are valued at the NASDAQ
Official Closing Price. Price information on listed stocks is taken from
the exchange where the security is primarily traded. Securities that were
not traded on the valuation date, as well as stocks that are not listed on
an exchange, including NASDAQ, 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
the Advisor in accordance with procedures approved by the Corporation's
Board of Directors. In accordance with such procedures, the Advisor may
use broker quotes or, if the broker quotes are unavailable or deemed to be
unreliable, fair value will be determined by a valuation committee of the
Advisor. 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.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with GAAP, and expands disclosure about
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Management is
currently evaluating the impact of adoption of SFAS No. 157 on its
financial statements.
b) Unregistered Securities - Four of the Funds own certain investment
securities which are unregistered and thus restricted with respect to
resale. These securities are valued by the Advisor 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 $18,316,333 (5.58% of
net assets), $12,038,318 (3.57% of net assets), $2,221,848 (4.29% of net
assets) and $6,348,957 (4.27% of net assets), respectively, at December 31,
2006. Restricted securities may be deemed to be liquid as determined by the
Advisor based on several factors. These securities 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 considerations 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 continue to qualify as regulated
investment companies as provided in subchapter M of the Internal Revenue
Code 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.
On July 13, 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48 "Accounting for Uncertainty in Income
Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax
positions should be recognized, measured, presented and disclosed in the
financial statements. FIN 48 requires the evaluation of tax positions
taken or expected to be taken in the course of preparing the Funds' tax
returns to determine whether the tax positions are "more likely than not"
of being sustained by the applicable tax authority. A tax position that
meets the more-likely-than-not threshold is measured to determine the
amount of benefit or expense to recognize in the financial statements.
Adoption of FIN 48 is required as of the date of the last NAV calculation
in the first required financial statement reporting period for fiscal years
beginning after December 15, 2006 and is to be applied to all open tax
years as of the effective date. At this time, management is evaluating the
implications of FIN 48 and whether it will have any impact on the Funds'
financial statements.
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, 2006 December 31, 2006
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount Shares
-------- -------- -------- --------
Shares sold $111,623,242 10,666,486 Shares sold $ 81,500 7,531
Shares issued through Shares issued through
reinvestment of dividends 11,873,363 1,136,626 reinvestment of dividends 59,100 5,495
Shares redeemed (28,370,722) (2,710,776) Shares redeemed (1,744,715) (162,273)
------------ ---------- ----------- --------
Net Increase $ 95,125,883 9,092,336 Net Decrease $(1,604,115) (149,247)
------------ -----------
------------ -----------
Shares Outstanding: Shares Outstanding:
Beginning of period 21,970,265 Beginning of period 260,531
---------- --------
End of period 31,062,601 End of period 111,284
---------- --------
---------- --------
Year Ended Year Ended
December 31, 2005 December 31, 2005
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount 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
---------- --------
---------- --------
BAIRD AGGREGATE BOND FUND
Year Ended Year Ended
December 31, 2006 December 31, 2006
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount Shares
-------- -------- -------- --------
Shares sold $154,503,654 14,798,845 Shares sold $ 983,015 91,604
Shares issued through Shares issued through
reinvestment of dividends 11,883,604 1,141,334 reinvestment of dividends 55,410 5,207
Shares redeemed (58,350,968) (5,615,794) Shares redeemed (471,602) (44,506)
------------ ---------- --------- -------
Net Increase $108,036,290 10,324,385 Net Increase $ 566,823 52,305
------------ ---------
------------ ---------
Shares Outstanding: Shares Outstanding:
Beginning of period 21,554,417 Beginning of period 119,948
---------- -------
End of period 31,878,802 End of period 172,253
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2005 December 31, 2005
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount 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
---------- -------
---------- -------
BAIRD INTERMEDIATE MUNICIPAL BOND FUND
Year Ended Year Ended
December 31, 2006 December 31, 2006
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount Shares
-------- -------- -------- --------
Shares sold $ 36,579,100 3,475,609 Shares sold $93,068 8,603
Shares issued through Shares issued through
reinvestment of dividends 2,016,861 191,986 reinvestment of dividends 25,191 2,354
Shares redeemed (27,462,382) (2,611,483) Shares redeemed (1,062,648) (98,994)
------------ ---------- ---------- -------
Net Increase $ 11,133,579 1,056,112 Net Decrease $(944,389) (88,037)
------------ ----------
------------ ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 5,095,975 Beginning of period 138,700
---------- -------
End of period 6,152,087 End of period 50,663
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2005 December 31, 2005
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount 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
---------- --------
---------- --------
BAIRD CORE PLUS BOND FUND
Year Ended Year Ended
December 31, 2006 December 31, 2006
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount Shares
-------- -------- -------- --------
Shares sold $ 35,649,048 3,548,621 Shares sold $ 82,802 8,089
Shares issued through Shares issued through
reinvestment of dividends 1,416,531 141,751 reinvestment of dividends 13,305 1,301
Shares redeemed (18,051,110) (1,814,933) Shares redeemed (260,389) (25,330)
Other capital Other capital
contributions(1)<F66> 71 -- contributions(1)<F66> 0(2)<F67> --
------------ ---------- ---------- -------
Net Increase $ 19,014,540 1,875,439 Net Decrease $(164,282) (15,940)
------------ ---------
------------ ---------
Shares Outstanding: Shares Outstanding:
Beginning of period 3,199,736 Beginning of period 43,664
---------- -------
End of period 5,075,175 End of period 27,724
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2005 December 31, 2005
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount 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
---------- -------
---------- -------
(1)<F66> Reimbursement for NAV Break.
(2)<F67> Amount is less than $1.
BAIRD SHORT-TERM BOND FUND
Year Ended Year Ended
December 31, 2006 December 31, 2005
-------------------------- ------------------------
INSTITUTIONAL CLASS SHARES Amount Shares INSTITUTIONAL CLASS SHARES Amount Shares
-------- -------- -------- --------
Shares sold $ 79,434,155 8,124,186 Shares sold $81,066,185 8,221,158
Shares issued through Shares issued through
reinvestment of dividends 5,464,609 559,203 reinvestment of dividends 2,142,819 217,900
Shares redeemed (33,715,361) (3,449,049) Shares redeemed (17,200,778) (1,746,644)
------------ ---------- ----------- ----------
Net Increase $ 51,183,403 5,234,340 Net Increase $66,008,226 6,692,414
------------ -----------
------------ -----------
Shares Outstanding: Shares Outstanding:
Beginning of period 9,912,823 Beginning of period 3,220,409
---------- ----------
End of period 15,147,163 End of period 9,912,823
---------- ----------
---------- ----------
4. INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION
During the year ended December 31, 2006, 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 $ 87,000,294 $ 74,680,835 $ -- $15,625,591 $38,723,534
Other $116,557,214 $158,433,057 $27,938,064 $21,647,888 $54,242,291
Sales:
U.S. Government $ 53,314,823 $ 86,202,753 $ -- $ 9,451,326 $27,452,764
Other $ 65,062,154 $ 44,046,798 $16,156,518 $ 9,859,979 $19,692,610
At December 31, 2006, 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 $352,890,822 $355,290,950 $64,184,619 $55,485,672 $162,277,229
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
Gross unrealized appreciation $ 2,414,197 $ 3,195,824 $ 612,696 $ 733,192 $ 282,887
Gross unrealized depreciation (3,173,709) (3,304,445) (495,225) (614,191) (769,628)
------------ ------------ ----------- ----------- ------------
Net unrealized appreciation/depreciation $ (759,512) $ (108,621) $ 117,471 $ 119,001 $ (486,741)
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
Undistributed ordinary income $ 207,297 $ 177,153 $ 9,471 $ 33,503 $ 78,385
Undistributed long-term capital gain -- -- -- -- --
------------ ------------ ----------- ----------- ------------
Total distributable earnings $ 207,297 $ 177,153 $ 9,471 $ 33,503 $ 78,385
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
Other accumulated gains (losses) $ (3,136,565) $ (1,020,356) $ (336,718) $ (111,190) $ (356,847)
------------ ------------ ----------- ----------- ------------
Total accumulated earnings (losses) $ (3,688,780) $ (951,824) $ (209,776) $ 41,314 $ (765,203)
------------ ------------ ----------- ----------- ------------
------------ ------------ ----------- ----------- ------------
On the Statements of Asset and Liabilities, the following adjustments were made
for permanent tax adjustments:
UNDISTRIBUTED NET ACCUMULATED NET PAID IN
INVESTMENT INCOME (LOSS) REALIZED GAIN (LOSS) CAPITAL
------------------------ -------------------- -------
Baird Intermediate Bond Fund $78,450 $(78,450) --
Baird Aggregate Bond Fund $65,084 $(65,084) --
Baird Intermediate Municipal Bond Fund -- $(38,217) $38,217
Baird Core Plus Bond Fund $17,189 $(17,189) --
Baird Short-Term Bond Fund $(54,150) $54,150 --
The permanent differences primarily relate to reclasses from paydown gains and
losses from asset backed securities.
The tax components of dividends paid during the periods ended December 31, 2006
and December 31, 2005 were:
2006 2005
--------------------------------- ---------------------------------
ORDINARY LONG-TERM ORDINARY LONG-TERM
INCOME CAPITAL GAINS INCOME CAPITAL GAINS
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS
------------- ------------- ------------- -------------
Baird Intermediate Bond Fund $13,585,132 $ -- $9,582,892 $ --
Baird Aggregate Bond Fund $13,167,714 $ 121,173 $7,047,543 $ 150,599
Baird Intermediate Municipal Bond Fund $ -- $ -- $ -- $ --
Baird Core Plus Bond Fund $ 1,742,409 $ -- $1,707,672 $ 21,671
Baird Short-Term Bond Fund $ 5,563,493 $ -- $2,308,315 $ --
For the periods ended December 31, 2006 and December 31, 2005, distributions of
$2,571,346 and $1,742,374, 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, 2006, 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, 2006 and December 31, 2006 in the amount of $6,343, $73,662,
$94,149, $72,252 and $40,321, respectively.
At December 31, 2006, the Baird Intermediate Bond, Baird Aggregate Bond, Baird
Intermediate Municipal Bond, Baird Core Plus Bond and Baird Short-Term Bond
Funds had accumulated net realized capital loss carryovers of $3,130,445,
$945,859, $242,569, $38,938 and $316,526, respectively. With respect to Baird
Intermediate Bond Fund, $485,569 of the capital loss carryovers expire in 2012,
$938,114 expire in 2013 and $1,706,762 expire in 2014. With respect to Baird
Aggregate Bond Fund, $945,859 of the capital loss carryovers expire in 2014.
With respect to Baird Intermediate Municipal Bond Fund, $6,626 of the capital
loss carryovers expire in 2012, $184,660 expire in 2013 and $51,283 expire in
2014. With respect to Baird Core Plus Fund, $5,975 of the capital loss
carryovers expire in 2013 and $32,963 expire in 2014. With respect to Baird
Short-Term Bond Fund, $8,150 of the capital loss carryovers expire in 2012,
$59,190 expire in 2013 and $249,186 expire in 2014. To the extent these Funds
realize future net capital gains, those gains will be offset by any unused
capital loss carryovers.
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. SECURITIES LENDING
Each Fund may lend up to one-third of its total assets (including such loans) to
borrowers under terms of participation in a securities lending program
administered by U.S. Bancorp Asset Management, an affiliate of the Funds'
custodian, transfer agent and administrator. The securities lending agreement
requires that loans are collateralized at all times in an amount equal to at
least 102% of the market value of any loaned securities at the time of the loan,
plus accrued interest.
The Funds receive compensation in the form of fees and earn interest on the cash
collateral. The amount of fees depends on a number of factors including the
type of security, length of the loan and credit standing of the borrower. Each
Fund continues to receive interest payments or dividends on the securities
loaned during the borrowing period. Each Fund has the right under the terms of
the securities lending agreement to recover the securities from the borrower on
demand.
As of December 31, 2006, the Baird Intermediate Bond Fund, Baird Aggregate Bond
Fund, Baird Core Plus Bond Fund and Baird Short-Term Bond Fund had loaned
securities that were collateralized by cash equivalents. The cash collateral is
invested by the custodian with the approval of the Advisor. Although the cash
collateral is generally invested in readily marketable, high quality, short-term
obligations, such investments are subject to risk of payment delays or default
on the part of the issuer or counterparty or otherwise may not generate
sufficient interest to support the costs associated with securities lending. A
Fund could also experience delays in recovering its securities and possible loss
of income or value if the borrower fails to return the borrowed securities,
although this risk is mitigated by the collateral and by contract with the
securities lending agent.
As of December 31, 2006, the market value of the securities on loan and payable
on collateral due to broker were as follows:
MARKET VALUE OF PAYABLE ON COLLATERAL
SECURITIES ON LOAN DUE TO BROKER
------------------ ---------------------
Baird Intermediate Bond Fund $84,842,993 $87,414,866
Baird Aggregate Bond Fund 43,828,777 45,053,190
Baird Core Plus Bond Fund 10,746,184 11,037,325
Baird Short-Term Bond Fund 41,834,076 42,992,134
Individual reinvested cash collateral jointly pooled with collateral received by
other Baird Funds as of December 31, 2006 is as follows:
INTERMEDIATE AGGREGATE CORE PLUS SHORT-TERM OTHER
BOND FUND BOND FUND BOND FUND BOND FUND BAIRD FUNDS TOTAL
------------ --------- --------- ---------- ----------- -----
Morgan Stanley
Repurchase Agreement(1)<F68> $32,012,274 $16,498,967 $ 4,041,987 $15,744,187 $17,702,585 $ 86,000,000
Lehman Brothers
Repurchase Agreement(2)<F69> 14,889,430 7,673,938 1,879,993 7,322,878 8,233,761 40,000,000
CS First Boston
Repurchase Agreement(3)<F70> 4,466,829 2,302,181 563,999 2,196,863 2,470,128 12,000,000
Rams Funding LLC Discount
Commercial Paper 4,466,829 2,302,181 563,999 2,196,863 2,470,128 12,000,000
CS First Boston
Repurchase Agreement(4)<F71> 4,094,593 2,110,333 516,999 2,013,791 2,264,284 11,000,000
Thornburg Mortgage Capital
Discount Commercial Paper 4,094,593 2,110,333 516,998 2,013,791 2,264,285 11,000,000
Antalis Fund 3,722,357 1,918,485 469,999 1,830,719 2,058,440 10,000,000
CS First Boston
Repurchase Agreement(5)<F72> 3,722,357 1,918,485 470,000 1,830,719 2,058,439 10,000,000
Jupiter Sect. 3,722,357 1,918,485 470,000 1,830,718 2,058,440 10,000,000
Lakeside Funding LLC Interest
Bearing Commercial Paper 3,722,357 1,918,485 469,999 1,830,719 2,058,440 10,000,000
Concord Minutemen Capital
Company Interest Bearing
Commercial Paper 2,605,650 1,342,939 328,998 1,281,504 1,440,909 7,000,000
Stratford 2,233,414 1,151,091 281,999 1,098,432 1,235,064 6,000,000
Leguna Interest Bearing
Commercial Paper 1,861,179 959,242 234,999 915,360 1,029,220 5,000,000
Concord Minutemen Capital
Company Interest Bearing
Commercial Paper 1,488,943 767,394 187,999 732,288 823,376 4,000,000
Federated Prime
Obligations Fund 311,694 160,646 39,356 153,297 172,366 837,359
Merrill Lynch Premier
Institutional Fund 10 5 1 5 6 27
----------- ----------- ----------- ----------- ----------- ------------
$87,414,866 $45,053,190 $11,037,325 $42,992,134 $48,339,871 $234,837,386
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
(1)<F68> (Dated 12/29/06), 5.40%, Due 01/02/07 (Repurchase Proceeds
$86,038,700), (Collateralized by Mortgage Backed Securities)
(2)<F69> (Dated 12/29/06), 5.3925%, Due 01/02/07 (Repurchase Proceeds
$40,023,967), (Collateralized by Corporate Bonds)
(3)<F70> (Dated 12/29/06), 5.325%, Due 01/02/07 (Repurchase Proceeds
$12,007,093), (Collateralized by Mortgage Backed Securities)
(4)<F71> (Dated 12/29/06), 5.32%, Due 01/02/07 (Repurchase Proceeds
$11,006,502), (Collateralized by Agency Mortgage Backed Securities)
(5)<F72> (Dated 12/29/06), 5.3625%, Due 01/02/07 (Repurchase Proceeds
$10,005,958), (Collateralized by Mortgage Backed Securities)
7. LINE OF CREDIT
On May 24, 2006, Baird Funds, Inc. entered into an uncommitted, senior secured
line of credit ("LOC") with U.S. Bank, N.A. to provide the Funds a temporary
liquidity source to meet unanticipated redemptions. Under the terms of the LOC,
borrowings for each Fund are limited to one-third of the total assets (including
the amount borrowed) of the respective Fund, or as otherwise indicated within
the Funds' agreement with the Bank. The Bank charges interest at the Bank's
Prime Rate less 1%. During the period May 24, 2006 through December 31, 2006,
the Baird Bond Funds did not draw upon the line of credit.
8. 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 $4,508,
$3,239, $2,685 and $790, respectively, in fees pursuant to the Plan during the
year ending December 31, 2006.
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, 2006, and
the related statements of operations for the year then ended, the statements of
changes in net assets, and the financial highlights for each of the two years in
the period 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 financial highlights for each of the three years in the period ended
December 31, 2004 were audited by other auditors. Those auditors expressed an
unqualified opinion on those 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, 2006, by correspondence with
the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. 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, 2006, the
results of their operations for the year then ended, and the changes in their
net assets, and the financial highlights for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Grant Thornton LLP
Chicago, Illinois
February 19, 2007
BAIRD FUNDS, INC.
DIRECTORS & OFFICERS AS OF DECEMBER 31, 2006
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 Director Indefinite; Retired; Chairman, the Advisor (January 8 Director of
Kasten, Jr. *<F73> And Since September 2000-December 2005); Chairman & CEO, the Regal-Beloit
777 East Chairman 2000 Advisor (January 1998-January 2000); Corporation,
Wisconsin Avenue President, Chairman and CEO, the Advisor a manufacturing
Milwaukee, WI 53202 (June 1983-January 1998); President, the company
Age: 67 Advisor (January 1979-January 1983)
John W. Feldt Independent Indefinite; Retired; Senior Vice President-Finance, 8 Director of
University of Director Since September University of Wisconsin Foundation Thompson
Wisconsin Foundation 2000 (1985-2006); Vice President-Finance, Plumb Funds,
1848 University Avenue University of Wisconsin Foundation Inc., a mutual
Madison, WI 53705 (1980-1985); Associate Director, University fund complex
Age: 64 of Wisconsin Foundation (1967-1980) of which Mr.
Feldt oversees
2 portfolios;
Director of
Nakoma Mutual
Funds, a mutual
fund complex of
which Mr. Feldt
oversees 1
portfolio
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: 73 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. Independent Indefinite; Retired; Chairman Emeritus, Briggs & 8 Director of
Stratton, Jr. Director Since May Stratton Corporation, a manufacturing Midwest Air
10134 N. Port Washington 2004 company, since 2003; Chairman of the Board, Group, Inc., an
Road, #2B Briggs & Stratton Corporation (2001-2002); airline company;
Mequon, WI 53092 Chairman and CEO, Briggs & Stratton Weyco Group,
Age: 67 Corporation (1986-2001) Inc., a men's
footwear
distributor;
Wisconsin
Energy
Corporation and
its subsidiaries
Wisconsin
Electric Power
Company and
Wisconsin Gas
LLC
*<F73> Mr. Kasten is an "interested person" of the Corporation (as defined in
the 1940 Act) because of his ownership of stock of the Advisor.
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
- ----------------------- ----------- -------------- ------------------- ----------- -------------
Mary Ellen Stanek President Re-elected by Managing Director, the Advisor, and Chief N/A N/A
777 East Board annually; Investment Officer, Baird Advisors, a
Wisconsin Avenue Since September department of the Advisor, since March 2000;
Milwaukee, WI 53202 2000 President and CEO, Firstar Investment
Age: 50 Research & Management Company, LLC
("FIRMCO") (November 1998-February 2000);
President, Firstar Funds, Inc. (December
1998-February 2000); President and Chief
Operating Officer, FIRMCO (March 1994-
November 1998)
J. Bary Morgan Senior Vice Re-elected by Chief Investment Officer, Baird N/A N/A
777 East President Board annually; Investment Management, a department
Wisconsin Avenue Since February of the Advisor, since January 2004; Managing
Milwaukee, WI 53202 2003 Director, the Advisor, since January 2001;
Age: 41 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 Re-elected by Chief Compliance Officer, the Advisor N/A N/A
777 East President and Board annually; since October 2004; Assistant Compliance
Wisconsin Avenue Chief Since August Director, the Advisor since August 2002;
Milwaukee, WI 53202 Compliance 2004 Senior Vice President, the Advisor since
Age: 44 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 Re-elected by Operations Director, the Advisor since N/A N/A
777 East President Board annually; July 1992; Managing Director, the
Wisconsin Avenue Since September Advisor since January 1997; Chief Financial
Milwaukee, WI 53202 2000 Officer and Managing Director, the Advisor
Age: 47 (February 1999-December 1999).
Leonard M. Rush Treasurer Re-elected by Chief Financial Officer, the Advisor N/A N/A
777 East Board annually; since January 2000
Wisconsin Avenue Since September
Milwaukee, WI 53202 2000
Age: 60
Charles M. Weber Secretary Re-elected by Senior Vice President and Associate N/A N/A
777 East Board annually; General Counsel, the Advisor since
Wisconsin Avenue Since August July 2005; Partner, Quarles & Brady
Milwaukee, WI 53202 2005 LLP, a law firm (October 1998-June 2005)
Age: 43
Robert A. Johnson AML Officer Re-elected by Compliance Officer, the Advisor since N/A N/A
777 East Board annually; 1998, and AML Compliance Officer,
Wisconsin Avenue Since August the Advisor since January 2004
Milwaukee, WI 53202 2004
Age: 43
Bret T. Reese Assistant Re-elected by Vice President and Staff Attorney, the N/A N/A
777 East Secretary Board annually; Advisor since 2005; Senior Financial
Wisconsin Avenue Since August Analyst, the Advisor (August 2001-June
Milwaukee, WI 53202 2006 2004); Financial Analyst, Stark & Roth,
Age: 37 Inc., a hedge fund (June 2001-August 2001)
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 1, 2006 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 they 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 for periods ended June 30,
2006, management fees and expense ratios, 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 Investment Advisory Agreement. The Board also received information
periodically throughout the year that was relevant to the 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 a majority of the Independent Directors, approved the continuation of
the Investment Advisory Agreement 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 provided
for 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 each 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 Funds 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, 2006 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 (both Institutional and Investor
Class shares) had outperformed the Lehman Brothers Intermediate
Government/Credit Index for the one-year, three-year and since inception periods
ended June 30, 2006, but slightly trailed the benchmark for the five-year period
ended June 30, 2006; the Baird Aggregate Bond Fund (both Institutional and
Investor Class shares) had outperformed the Lehman Brothers Aggregate Bond Index
for the one-year, three-year, five-year and since inception periods ended June
30, 2006; the Baird Core Plus Bond Fund (both Institutional and Investor
Classes) had outperformed the Lehman Brothers U.S. Universal Bond Index for the
three-year, five-year and since inception periods ending June 30, 2006, but
slightly trailed the benchmark for the one-year period ended June 30, 2006; and
the Short-Term Bond Fund had outperformed the Lehman Brothers 1-3 Year
Government/Credit Bond Index for the one-year and since inception (8/31/04)
periods ended June 30, 2006. The Board also noted that, while the performance
of the Baird Intermediate Municipal Bond Fund was comparable but lower than the
Lehman Brothers 7-Year General Obligation Bond Index for each of the one-year,
three-year and five-year periods ended June 30, 2006, the Institutional Class of
that Fund had outperformed the Index for the period from the inception of the
Fund (3/31/01) through June 30, 2006. The Board recognized that the Advisor had
recommended a change in the Index from the Lehman Brothers 10-Year General
Obligation Bond Index at the end of the last fiscal year to better reflect the
historical and intended duration to which the Fund was managed. The Board noted
that the Fund had underperformed the 10-year Index for each of the periods ended
June 30, 2006 as would be expected under the market conditions incurred during
those periods. The Board recognized the Advisor's continued communication with
respect to the investment strategy of the Fund and noted that the Fund was
deliberately managed with measurably less interest rate and credit risk than the
10-year benchmark index and significantly less credit risk than the 7-year
benchmark.
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 one-year,
three-year and since inception periods ended June 30, 2006 and the performance
of the Institutional Class for the five-year period ending June 30, 2006 were
better than the Lipper Intermediate Investment Grade Debt Funds average; the
performance of the Institutional and Investor Class shares of the Baird
Aggregate Bond Fund over the one-year, three-year, five-year and since inception
periods ended June 30, 2006 was better than the Lipper Intermediate Investment
Grade Debt Funds average (in the top quartile for the three-year, five-year and
since inception periods); the performance of the Institutional and Investor
Class shares of the Baird Intermediate Municipal Bond Fund over the five-year
and since inception periods ended June 30, 2006 was better than the Lipper
Intermediate Municipal Debt Funds average (in the top quartile for the five-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,
five-year and since inception periods ended June 30, 2006 was better than the
Lipper Intermediate Investment Grade Debt Funds average (in the top quartile for
all periods); and the performance of the Baird Short Term Bond Fund for the one-
year and since inception periods ended June 30, 2006 was better than the Lipper
Short-Term Investment Grade Debt Funds 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 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 (0.30%) of a separately managed account 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 Funds 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 with its management
of 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 does 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, 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, approved the renewal of the
Investment Advisory Agreement with their Funds as being 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 for the most recent 12-month period ended June
30, 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.
BAIRD FUNDS, INC.
c/o U.S. Bancorp Fund Services, LLC
P.O. Box 701
Milwaukee, WI 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, WI 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.
1555 N. RiverCenter Drive, Suite 302
Milwaukee, WI 53212
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Grant Thornton LLP
175 West Jackson Boulevard, 13th Floor
Chicago, IL 60604
(BAIRD LOGO)
ANNUAL REPORT - BAIRD FUNDS
December 31, 2006
Baird LargeCap Fund
Baird MidCap Fund
Baird SmallCap Fund
TABLE OF CONTENTS
PAGE
----
LETTER TO SHAREHOLDERS 1
2006 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 48
DIRECTORS AND OFFICERS 49
DISCLOSURE REGARDING THE BOARD OF DIRECTORS' APPROVAL
OF THE INVESTMENT ADVISORY AGREEMENT FOR BAIRD EQUITY FUNDS 51
ADDITIONAL INFORMATION 54
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 LOGO)
BAIRD FUNDS, INC.
1-866-442-2473
www.bairdfunds.com
------------------
February 27, 2007
Dear Shareholders,
Thank you for investing in the Baird Funds. We are pleased to report that the
Funds reached a new milestone in 2006 with their combined net assets exceeding
$1 billion. We appreciate the opportunity to help our investors share in the
growth presented by the financial markets in 2006.
In this Annual Report we review the equities market in 2006 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. We thank you
for your support and look forward to helping you achieve your investment goals.
Thank you again for choosing Baird Funds.
Sincerely,
/s/Mary Ellen Stanek
Mary Ellen Stanek, CFA
President
Baird Funds
2006 ECONOMIC AND STOCK MARKET COMMENTARY
The Dow Jones Industrial Average and the S&P 500 Index, the primary benchmarks
used to assess the performance of the stock markets generally, posted strong
total returns for 2006 of 19.05% and 15.79%, respectively. The S&P 500 reached
a six-year high in November, though at year-end it remained roughly 100 points
below its all-time record, set in early 2000. Much of the year's gain was
realized in the second half, as oil prices fell from their mid-summer highs and
the Federal Open Market Committee (Fed) declined to continue its regimen of
interest rate increases.
During the first two quarters of the year, solid earnings and muted inflation
warred with high oil prices and rising interest rates, producing marked
volatility in the second quarter, and leaving the major indices with only small
gains. This trend continued through mid-July, amid concerns over a slowing
economy and renewed inflationary pressures. The Israeli/Hezbollah eruption
added a new dimension to existing uncertainty bred by the escalating insurgency
in Iraq and the nuclear ambitions of Iran and North Korea. The resultant spike
in oil prices to nearly $80/barrel acted as a drag on the domestic economy,
which showed signs of slowing. However, in the third quarter, the pullback of
oil prices, combined with signals that the Fed had completed its cycle of
raising short-term interest rates and suggestions that the housing market had
bottomed, produced a quick recovery in investor sentiment and rising equity
markets off the mid-July low. By September, speculation had already begun as to
the timing of an interest rate reduction. Strong fourth quarter gains followed,
with nearly half of the S&P 500's annual return for the year accruing between
October and December, on the bolstered belief in a "soft landing" for the
economy, treading the gap between inflation and recession.
One particular characteristic stood out in sharp relief against these changeable
trends -- corporate earnings that exceeded expectations. Earnings were able to
propel after-tax profits more than 24% higher from 4Q05 through 3Q06, producing
a commensurate increase in corporate spending and hiring, and helping to fuel
aggressive M&A activity, which exceeded that of the record-setting 2000.
Despite this broad market strength, overall performance was driven by pockets of
strong performers. Specifically, riskier securities such as junk bonds and
emerging markets' equities provided stellar returns as risk was well rewarded
during the year. 2006 was also not kind to active managers. Lipper reports
that fewer than 25% of managers were able to outperform their designated
benchmark, with no more than 10% of value managers' returns exceeding those of
their particular index.
In addition, 2006 marked the seventh consecutive year in which value stocks
outperformed growth across all market capitalizations, a trend that may be
flagging, if early signs are any indication. Following dramatic appreciation
and outperformance during the 1990s, growth stocks began to underperform in
2000. Value stocks became quite attractive from a valuation perspective
relative to growth issues, and powerful forces started to ignite value-oriented
industries. The resurgence of global growth, particularly in India and China,
and war in the Middle East drove commodity prices to new highs. While these
cycles typically last only a few years, the current cycle's age has resulted in
growth stock valuations that have become much more attractive relative to value
stocks. This relationship may set the stage for growth to outperform again.
The cycle of value outperformance has also coincided closely with a run of small
cap dominance over large cap, as measured by the Russell 1000(R) Index (large)
and the Russell 2000(R) Index (small). Beginning in 1999, the Russell 2000(R)
outperformed the Russell 1000(R) in seven of the last eight years. This recent
small cap run has led to large company stocks being attractively valued versus
their small company peers.
Furthermore, lower quality speculative stocks have outperformed higher quality
stocks from 2003 through the middle of 2006 with the help of an "easy money"
environment created by the Fed's cutting of short-term interest rates to
historically low levels leading up to the Iraq war. Previously, the market
decline from 2000 through early 2003 had severely punished lower quality,
speculative companies. At the market bottom, many of these companies had
experienced declines of over 75% in their share prices and teetered on
bankruptcy. The "easy money" environment spared many companies a bankrupt
epitaph and allowed their share prices to experience large percentage increases
from their lows (although still well below their peak). However, with the Fed
having raised rates 17 times over a two-year period through June 2006, the "easy
money" environment that led to increased speculative investment behavior has
ended, and we believe the stage is set for quality outperformance.
Finally, the domestic economy, despite the recent slowdown, is far healthier
than many believe. After-tax corporate profits and cash flow have been
expanding rapidly since 2002. Both of these measures of corporate profitability
reached record levels as a percentage of gross domestic product recently at 8.5%
and 15%, respectively, according to the Bureau of Economic Analysis. Although
S&P earnings per share were up 18% in the four quarters ended September 30,
2006, after-tax corporate profits advanced 24% over the same period. This
expansion in profitability is one of the key components underlying the healthy
economy and stock market since 2002.
OUTLOOK FOR 2007
Looking ahead at 2007, we believe U.S. economic growth will pace around 2.5% for
most of the year. We do not expect the housing slowdown to cause a recession.
We anticipate that corporate profits will continue to expand at a high, single-
digit pace. Inflation seems to be moderating and absent a large exogenous shock
we do not expect inflation to be a problem this year. Consequently, the Fed is
likely to stay on the sidelines for some time before cutting rates. In fact,
the minutes from recent Fed meetings indicate a higher level of concern
regarding inflation than worries about the economy rolling over into recession.
Given this backdrop, we anticipate the market will closely track earnings growth
for 2007. The valuation level of the S&P 500 is quite reasonable at
approximately 16 times trailing 12-month earnings. The current price/earnings
multiple is the lowest since the mid 1990s. Profit margins and returns on
invested capital have expanded along with record corporate profits. However, we
do not believe that these positive developments are fully reflected in stock
prices, which provides an opportunity for further increases in stock prices. In
addition, the dramatic increase in leveraged buyouts and stock repurchases is
actually reducing the supply of common stocks in the U.S. The number of
announced buyouts greater than $20 billion each reached a record in 2006 at 20
deals. We believe merger and acquisition activity will continue at a high
level. The cost of funding for purchases remains relatively cheap, private
equity firms have tremendous liquidity, and buyers seem to be willing to pay
higher prices in response to increasing competition for deals.
BAIRD LARGECAP FUND
DECEMBER 31, 2006
PORTFOLIO MANAGERS' COMMENTARY
Stock market performance trends in 2006 extended tendencies in place since the
market rebounded from the lows reached in late 2002. For the seventh consecutive
year, value stocks outperformed growth in the overall market and particularly
within the large cap universe. The large cap markets turned in their fourth
year of positive returns.
The Baird LargeCap Fund's equity performance trailed the broad market benchmarks
in 2006. Specifically, the Fund's Institutional Class shares provided a 2.89%
total return in 2006 (2.64% for Investor Class shares), lagging the 9.07% return
on the Russell 1000(R) Growth Index. Last year's winning themes in the market
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, the growth stock component of the
Russell 1000(R) Index posted a 9.07% gain in 2006 while the value stock
component gained 22.25%.
The most substantial contributors to performance within the large cap growth
universe were found at the lower end of the market cap range: the smallest two
quintiles of the Russell 1000(R) Growth Index provided the greatest boost to
performance. Companies with market caps below $10 billion, the lowest market
cap quintile, is the market capitalization segment where we define our mid cap
universe. This strength of the smallest companies in the large cap growth
benchmark presented a considerable obstacle to the LargeCap Fund's relative
returns for the year. Portfolio construction guidelines for the Fund limit
purchases of mid cap holdings to no more than 15% of assets. This disparity
accounted for a significant difference in contribution to performance versus the
benchmark.
LargeCap Fund performance in the second market capitalization quintile (roughly
$10 billion to $23 billion), however, experienced the greatest absolute positive
performance contribution and outperformance relative to the benchmark. More
significantly, this weighting reflects the continuation of our move down the
large capitalization range while maintaining focus on investing in consistently
profitable growth companies. We have lowered the weighted average market
capitalization of the companies held by the Fund from nearly $90 billion as of
the end of the first quarter of 2006 to $52 billion as of year end, with the
greatest percentage of the Fund's assets (more than 35%) now in the second
market cap quintile. We believe this strategy away from the largest of the
large cap stocks will impart consistent benefits.
Stock selection accounted for the bulk of the Fund's underperformance versus the
Russell 1000(R) Growth Index during the year, with disappointing results from
healthcare and technology holdings Teva Pharmaceutical, eBay, Corning and Maxim
Integrated Products (-26%, -32%, -22% and -23%, respectively, for the year),
though the weakness of individual IT stocks was offset somewhat by returns from
the Fund's two best performing stocks: Cisco Systems and second quarter
addition, Apple (+60% and +42%). Stock selections in the consumer groups were
bright spots for the portfolio in 2006, contributing most strongly to
performance on both an absolute and relative basis. Holdings Sysco Corp.,
Staples, Starbucks and second quarter addition Kohl's Corp. (+21%, +19%, +18%
and +20%, respectively, in 2006) positively affected the Fund's relative
performance.
The financial services sector, in which we have maintained an overweight
position in anticipation of the Federal Reserve's maintenance, and eventual
reduction, of interest rates, provided a tepid contribution to performance. We
believe the Fund's exposure to banks and other financial services companies
should prove beneficial to performance when the Fed moves to cut rates, or when
the yield curve becomes more upward-sloping.
In keeping with our down-cap movement in 2006, several higher cap positions were
eliminated from the portfolio, including Dell, Home Depot, General Electric,
UPS, and Wal-Mart. Though Wal-Mart and GE contributed positively to the Fund's
performance, by 3% and 4%, respectively, the other holdings specified
contributed meaningfully to the Fund's disappointing relative performance. From
the beginning of the year through the dates the positions were eliminated, Dell
declined 15%, UPS dropped 8%, and Home Depot declined 6%. Several positions new
to the Fund during the year were important contributors to performance.
Electronic Arts was added to the Fund mid-year and gained roughly 19% before
year-end. Western Union was purchased in October, and returned 14%, while
Oshkosh Truck, which was added to the Fund in November, gained 6% through year-
end.
As 2007 begins, we believe that the Federal Reserve Board will remain
conservative with monetary policy, avoiding the appearance of haste in making
interest rate reductions. When, however, the Fed does ease interest rates,
which we believe it will, the improving cost of borrowing should enhance
corporate profit growth, creating an environment conducive to our fundamental
investment style.
The large cap growth asset class presents opportunities for visible earnings
growth in an environment of low inflation and a reasonably healthy economy. We
are optimistic about the likelihood of corporate profit growth and expanding
multiples. As always, our goal is to be fully invested in high quality growth
companies that typically demonstrate the ability to expand earnings, not only
during economic upturns, but also when economic activity slows.
Portfolio Managers:
Douglas Guffy
Kenneth Hemauer, CFA
J. Bary Morgan, CFA
BAIRD LARGECAP FUND
A December 31, 2006 summary of the Fund's top 10 holdings and equity sector
analysis compared to the Russell 1000(R) Growth Index is shown below.
TOP 10 HOLDINGS*<F74>
Sysco Corporation 3.1%
Microsoft Corporation 3.1%
Genentech, Inc. 3.0%
Cisco Systems, Inc. 2.9%
Staples, Inc. 2.8%
Capital One Financial Corporation 2.8%
Emerson Electric Company 2.7%
Zimmer Holdings, Inc. 2.7%
State Street Corporation 2.7%
PepsiCo, Inc. 2.6%
NET ASSETS: $28,530,277
PORTFOLIO TURNOVER RATIO: 63.9%
NUMBER OF EQUITY HOLDINGS: 45
ANNUALIZED PORTFOLIO EXPENSE RATIO:***<F76>
INSTITUTIONAL CLASS: 0.75%
INVESTOR CLASS: 1.00%****<F77>
EQUITY SECTOR ANALYSIS**<F75>
LargeCap Fund Russell 1000(R) Growth Index
------------- ----------------------------
Consumer Discretionary (12.5%) 12.5% 14.2%
Consumer Staples (10.9%) 10.9% 9.8%
Energy (5.2%) 5.2% 4.0%
Financials (11.5%) 11.5% 8.4%
Health Care (16.2%) 16.2% 17.5%
Industrials (15.7%) 15.7% 14.1%
Information Technology (25.3%) 25.3% 26.9%
Materials (2.6%) 2.6% 2.8%
Telecommunication Services (0.0%) 0.0% 0.8%
Utilities (0.0%) 0.0% 1.4%
*<F74> 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, 2006.
**<F75> Percentages shown in parentheses relate to the Fund's total equity
investments as of December 31, 2006, and may not add up to 100% due
to rounding.
***<F76> 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 April 30,
2008.
****<F77> 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(R)
Institutional Class Shares Growth Index
-------------------------- ---------------
9/29/2000 $100,000 $100,000
12/31/2000 $95,854 $78,655
6/30/2001 $86,949 $67,454
12/31/2001 $86,421 $62,591
6/30/2002 $70,799 $49,587
12/31/2002 $64,357 $45,138
6/30/2003 $70,181 $51,045
12/31/2003 $78,357 $58,566
6/30/2004 $79,364 $60,170
12/31/2004 $82,442 $62,256
6/30/2005 $81,530 $61,185
12/31/2005 $85,237 $65,533
6/30/2006 $82,781 $64,924
12/31/2006 $87,700 $71,479
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(R)
Investor Class Shares Growth Index
--------------------- ---------------
9/29/2000 $10,000 $10,000
12/31/2000 $9,572 $7,865
6/30/2001 $8,672 $6,745
12/31/2001 $8,612 $6,259
6/30/2002 $7,052 $4,959
12/31/2002 $6,403 $4,514
6/30/2003 $6,953 $5,105
12/31/2003 $7,760 $5,857
6/30/2004 $7,850 $6,017
12/31/2004 $8,148 $6,226
6/30/2005 $8,037 $6,118
12/31/2005 $8,404 $6,553
6/30/2006 $8,181 $6,492
12/31/2006 $8,626 $7,148
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, 2006 ONE YEAR FIVE YEARS SINCE INCEPTION(1)<F78>
- --------------------------------------- -------- ---------- -----------------------
Baird LargeCap Fund - Institutional Class Shares 2.89% 0.29% -2.08%
Baird LargeCap Fund - Investor Class Shares 2.64% 0.03% -2.34%
Russell 1000(R) Growth Index(2)<F79> 9.07% 2.69% -5.23%
(1)<F78> For the period from September 29, 2000 (commencement of operations)
through December 31, 2006.
(2)<F79> The Russell 1000(R) Growth Index measures the performance of those
Russell 1000(R) companies with higher price-to-book ratios and higher
forecasted growth rates. The Russell 1000(R) Index consists of the
1,000 largest companies in the Russell 3000(R) Index, which represents
approximately 92% of the total market capitalization of the Russell
3000(R) 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 RETURNS SHOWN IN THE 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. MUTUAL FUND
PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER
THAN THAT STATED.
BAIRD LARGECAP FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2006
Shares Value
------ -----
COMMON STOCKS - 97.5%
AUTO COMPONENTS - 1.1%
3,575 Johnson Controls, Inc. $ 307,164
-----------
BEVERAGES - 2.6%
12,040 PepsiCo, Inc. 753,102
-----------
BIOTECHNOLOGY - 3.0%
10,522 Genentech, Inc.*<F80> 853,650
-----------
CAPITAL MARKETS - 5.1%
7,278 Legg Mason, Inc. 691,774
11,320 State Street Corporation 763,421
-----------
1,455,195
-----------
CHEMICALS - 2.6%
12,267 Praxair, Inc. 727,801
-----------
COMMERCIAL BANKS - 1.7%
10,000 Marshall & Ilsley Corp. 481,100
-----------
COMMUNICATIONS EQUIPMENT - 5.1%
29,905 Cisco Systems, Inc.*<F80> 817,303
34,704 Corning Incorporated*<F80> 649,312
-----------
1,466,615
-----------
COMPUTERS & PERIPHERALS - 4.1%
6,890 Apple Computer, Inc.*<F80> 584,548
14,680 Network Appliance, Inc.*<F80> 576,630
-----------
1,161,178
-----------
CONSUMER FINANCE - 2.8%
10,297 Capital One
Financial Corporation 791,016
-----------
ELECTRICAL EQUIPMENT - 5.2%
17,689 Emerson Electric Company 779,908
11,618 Rockwell Automation, Inc. 709,627
-----------
1,489,535
-----------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.1%
9,300 Agilent Technologies, Inc.*<F80> 324,105
-----------
ENERGY EQUIPMENT & SERVICES - 4.1%
16,762 BJ Services Company 491,462
10,635 Schlumberger Limited 671,706
-----------
1,163,168
-----------
FOOD & STAPLES RETAILING - 5.4%
24,281 Sysco Corporation 892,569
14,194 Walgreen Company 651,363
-----------
1,543,932
-----------
HEALTH CARE EQUIPMENT & SUPPLIES - 4.6%
9,690 Medtronic, Inc. 518,512
9,949 Zimmer Holdings, Inc.*<F80> 779,803
-----------
1,298,315
-----------
HEALTH CARE PROVIDERS & SERVICES - 1.5%
6,760 Cardinal Health, Inc. 435,547
-----------
HOTELS RESTAURANTS & LEISURE - 1.8%
14,563 Starbucks Corporation*<F80> 515,821
-----------
HOUSEHOLD PRODUCTS - 2.6%
11,380 Procter &
Gamble Company 731,393
-----------
INSURANCE - 1.7%
10,435 AFLAC, Incorporated 480,010
-----------
INTERNET SOFTWARE & SERVICES - 2.2%
24,457 Yahoo!, Inc.*<F80> 624,632
-----------
IT SERVICES - 4.6%
15,870 Paychex, Inc. 627,500
31,160 Western Union Company 698,607
-----------
1,326,107
-----------
MACHINERY - 8.0%
5,470 Danaher Corporation 396,247
13,285 Illinois Tool Works, Inc. 613,634
11,473 ITT Industries, Inc. 651,896
13,010 Oshkosh Truck
Corporation 629,944
-----------
2,291,721
-----------
MULTILINE RETAIL - 4.7%
8,614 Kohl's Corporation*<F80> 589,456
13,170 Target Corporation 751,349
-----------
1,340,805
-----------
OIL & GAS - 1.0%
8,350 Southwestern
Energy Company*<F80> 292,667
-----------
PHARMACEUTICALS - 6.7%
15,281 Abbott Laboratories 744,338
4,000 Allergan, Inc. 478,960
11,917 Novartis AG - ADR F<F81> 684,512
-----------
1,907,810
-----------
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 2.0%
20,025 Texas Instruments
Incorporated*<F80> 576,720
-----------
SOFTWARE - 5.5%
9,740 Adobe Systems,
Incorporated*<F80> 400,509
5,443 Electronic Arts Inc.*<F80> 274,109
29,581 Microsoft Corporation 883,289
-----------
1,557,907
-----------
SPECIALTY RETAIL - 4.6%
10,589 Best Buy Co, Inc. 520,873
30,051 Staples, Inc. 802,362
-----------
1,323,235
-----------
TRADING COMPANIES & DISTRIBUTORS - 2.1%
16,317 Fastenal Company 585,454
-----------
Total Common Stocks
(Cost $24,502,228) 27,805,705
-----------
COLLATERAL POOL INVESTMENT
FOR SECURITIES ON LOAN - 16.3%
(Cost $4,643,026)
(Please Refer to Note 6) 4,643,026
-----------
Principal
Amount
---------
SHORT-TERM INVESTMENTS - 2.6%
MONEY MARKET FUNDS - 2.6%
748,314 Short-Term Investment
Company Liquid Assets
Portfolio - AIM Fund 748,314
-----------
Total Short-Term
Investments
(Cost $748,314) 748,314
-----------
Total Investments
(Cost $29,893,568) -
116.4% 33,197,045
-----------
Liabilities in Excess of
Other Assets - (16.4)% (4,666,768)
-----------
TOTAL NET
ASSETS - 100.0% $28,530,277
-----------
-----------
ADR - American Depository Receipt
*<F80> Non Income Producing
F<F81> Foreign Security
The accompanying notes are an integral part of these financial statements.
BAIRD MIDCAP FUND
DECEMBER 31, 2006
PORTFOLIO MANAGERS' COMMENTARY
Within the mid-cap universe, 2006 was marked by contradiction of historical
trends and "conventional wisdom." Generally, the utilities and consumer staples
sectors are weak in bullish environments; however, each posted respectable
results for the year. Meanwhile, stocks in the technology and health care
sectors, usually expected to lead the advance, were tepid. In the midst of
these paradoxical results, mid-caps, as represented by the Russell MidCap(R)
Index, narrowly missed posting their seventh consecutive year of outperformance
against the S&P 500 Index. The cumulative five-year mid-cap performance
remained an impressive 2-1/3 times that of the S&P 500's results. A similar
record belongs to the mid-cap value asset class, which logged a sixth year out
of the last seven of superior performance over mid cap growth.
The Baird MidCap Fund's equity performance trailed the broad market benchmarks
in 2006. Specifically, the Fund's Institutional Class shares provided a 3.93%
total return in 2006 (3.73% for Investor Class shares), lagging the 10.66%
return on the Russell MidCap(R) Growth Index. Last year's winning themes in the
market 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, the growth stock component of the
Russell MidCap(R) Index posted a 10.66% gain in 2006 while the value stock
component gained 20.00%.
The Fund spent all four quarters of 2006 averaging well above the Russell
MidCap(R) Growth Index in the majority of our quality measures (historical
return on equity, earnings growth and dividend growth), while maintaining
average price/earnings ratios (trailing and forward) on a par with or below
those of the benchmark. Such consistent fundamental characteristics validate
the analysis behind the Fund's purchases, while indicating that the market has
yet to fully appreciate their quality and growth metrics.
Stock selection accounted for the bulk of the Fund's underperformance versus the
Russell MidCap(R) Growth Index during the year with disappointing results from
consumer discretionary and technology holdings P.F. Chang's China Bistro,
Chico's FAS, Cheesecake Factory, and Cree, Inc. (-38%, -33%, -34% and -45%,
respectively, for the year). The weakness of individual stocks in the
technology and consumer discretionary sectors was offset somewhat by returns
from two of the Fund's three best performing stocks: Alliance Data Systems and
Dick's Sporting Goods (+75% and +47%). Stock selections in consumer staples and
health care were bright spots for the portfolio in 2006, contributing strongly
to performance on both an absolute and relative basis. The Fund's holdings of
United Natural Foods, Resmed and third quarter addition Biomet (+36%, +28% and
+32%, respectively, in 2006) positively affected relative performance.
The financial services sector, in which we have maintained an overweight
position in anticipation of the Federal Reserve's maintenance, and eventual
reduction, of interest rates, provided respectable contribution to performance.
Our exposure to banks and other financial services firms should prove beneficial
to performance when the Federal Reserve Board moves to cut rates, or when the
yield curve becomes more upward-sloping.
Three stocks eliminated from the portfolio in 2006, Patterson UTI, Medicis and
Cree, contributed meaningfully to the Fund's disappointing relative performance.
From the beginning of the year through the dates the positions were eliminated,
Patterson declined 31%, Medicis dropped 27% and Cree fell 45%. Two positions
new to the Fund during the year were important contributors to performance.
Biomet was added to the Fund mid-year and gained roughly 32% before being sold
in December following an announcement that the company would be acquired by a
private equity firm. Also, Cephalon, a biotechnology company, was added to the
Fund in July and gained 12% through year-end.
As 2007 begins, we believe that the Fed will remain conservative with monetary
policy, avoiding the appearance of haste in making interest rate reductions.
However, if and when the Fed does ease interest rates, the improving cost of
borrowing should enhance corporate profit growth, creating an environment
conducive to our fundamental investment style.
The mid-cap growth asset class presents opportunities for visible earnings
growth in an environment of low inflation and a reasonably healthy economy. We
are optimistic about the likelihood of corporate profit growth and expanding
multiples. As always, our goal is to be fully invested in high quality growth
companies that typically demonstrate the ability to expand earnings, not only
during economic upturns, but also when economic activity slows.
Portfolio Managers:
Greg Edwards, CFA
J. Bary Morgan, CFA
Chuck Severson, CFA
BAIRD MIDCAP FUND
A December 31, 2006 summary of the Fund's top 10 holdings and equity sector
analysis compared to the Russell Midcap(R) Growth Index is shown below.
TOP 10 HOLDINGS*<F82>
Stericycle, Inc. 3.2%
Alliance Data Systems Corporation 3.1%
Investors Financial Services Corporation 3.1%
Cytyc Corporation 3.1%
Pharmaceutical Product Development, Inc. 2.9%
Zions Bancorporation 2.7%
Wintrust Financial Corporation 2.6%
Cameron International Corporation 2.6%
Roper Industries, Inc. 2.6%
Tractor Supply Company 2.6%
NET ASSETS: $37,080,835
PORTFOLIO TURNOVER RATIO: 78.6%
NUMBER OF EQUITY HOLDINGS: 44
ANNUALIZED PORTFOLIO EXPENSE RATIO:***<F84>
INSTITUTIONAL CLASS: 0.85%
INVESTOR CLASS: 1.10%****<F85>
EQUITY SECTOR ANALYSIS**<F83>
MidCap Fund Russell Midcap(R) Growth Index
----------- ------------------------------
Consumer Discretionary (19.0%) 19.0% 22.2%
Consumer Staples (3.5%) 3.5% 4.4%
Energy (7.5%) 7.5% 7.7%
Financials (13.2%) 13.2% 9.1%
Health Care (19.0%) 19.0% 14.6%
Industrials (17.1%) 17.1% 14.5%
Information Technology (20.7%) 20.7% 19.5%
Materials (0.0%) 0.0% 4.0%
Telecommunication Services (0.0%) 0.0% 2.1%
Utilities (0.0%) 0.0% 1.9%
*<F82> 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, 2006.
**<F83> Percentages shown in parentheses relate to the Fund's total equity
investments as of December 31, 2006, and may not add up to 100% due
to rounding.
***<F84> 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 April 30,
2008.
****<F85> 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(R)
Institutional Class Shares Growth Index
-------------------------- -----------------
12/29/2000 $100,000 $100,000
6/30/2001 $93,807 $84,792
12/31/2001 $91,108 $77,788
6/30/2002 $85,310 $62,460
12/31/2002 $76,610 $56,466
6/30/2003 $83,400 $67,046
12/31/2003 $97,200 $80,586
6/30/2004 $103,800 $85,367
12/31/2004 $109,289 $93,057
6/30/2005 $106,688 $94,639
12/31/2005 $115,372 $104,311
6/30/2006 $119,523 $108,827
12/31/2006 $119,906 $115,436
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(R)
Investor Class Shares Growth Index
--------------------- -----------------
12/29/2000 $10,000 $10,000
6/30/2001 $9,370 $8,479
12/31/2001 $9,091 $7,779
6/30/2002 $8,511 $6,246
12/31/2002 $7,631 $5,647
6/30/2003 $8,300 $6,705
12/31/2003 $9,650 $8,059
6/30/2004 $10,300 $8,537
12/31/2004 $10,839 $9,306
6/30/2005 $10,568 $9,464
12/31/2005 $11,406 $10,431
6/30/2006 $11,812 $10,983
12/31/2006 $11,832 $11,543
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, 2006 ONE YEAR FIVE YEARS SINCE INCEPTION(1)<F86>
- --------------------------------------- -------- ---------- -----------------------
Baird MidCap Fund - Institutional Class Shares 3.93% 5.65% 3.07%
Baird MidCap Fund - Investor Class Shares 3.73% 5.41% 2.84%
Russell Midcap(R) Growth Index(2)<F87> 10.66% 8.21% 2.42%
(1)<F86> For the period from December 29, 2000 (commencement of operations)
through December 31, 2006.
(2)<F87> The Russell Midcap(R) Growth Index measures the performance of those
Russell Midcap(R) Index companies with higher price-to-book ratios and
higher forecasted growth rates. The Russell Midcap(R) Index consists
of the 800 smallest companies in the Russell 1000(R) Index, which
represent approximately 30% of the total market capitalization of the
Russell 1000(R) Index. The Russell 1000(R) Index consists of the
largest companies in the Russell 3000(R) 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 RETURNS SHOWN IN THE 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. MUTUAL FUND
PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER
THAN THAT STATED.
BAIRD MIDCAP FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2006
Shares Value
------ -----
COMMON STOCKS - 97.1%
AUTO COMPONENTS - 4.4%
13,467 Autoliv, Inc. $ 812,060
53,243 Gentex Corporation 828,461
-----------
1,640,521
-----------
BIOTECHNOLOGY - 2.4%
12,606 Cephalon, Inc.*<F88> 887,589
-----------
CAPITAL MARKETS - 5.3%
24,647 Eaton Vance Corporation 813,597
27,189 Investors Financial
Services Corporation 1,160,155
-----------
1,973,752
-----------
COMMERCIAL BANKS - 7.6%
24,104 East West Bancorp, Inc. 853,764
19,818 Wintrust Financial
Corporation 951,660
12,196 Zions Bancorporation 1,005,438
-----------
2,810,862
-----------
COMMERCIAL SERVICES & SUPPLIES - 5.2%
19,623 Brady Corporation -
Class A 731,546
15,772 Stericycle, Inc.*<F88> 1,190,786
-----------
1,922,332
-----------
COMMUNICATIONS EQUIPMENT - 1.4%
50,240 Tellabs, Inc.*<F88> 515,462
-----------
COMPUTERS & PERIPHERALS - 2.0%
20,407 Avid Technology, Inc.*<F88> 760,365
-----------
ELECTRICAL EQUIPMENT - 4.5%
11,552 Rockwell Automation, Inc. 705,596
18,850 Roper Industries, Inc. 947,024
-----------
1,652,620
-----------
ENERGY EQUIPMENT & SERVICES - 7.1%
28,981 BJ Services Company 849,723
17,866 Cameron International
Corporation*<F88> 947,791
20,583 Smith International, Inc. 845,344
-----------
2,642,858
-----------
FOOD & STAPLES RETAILING - 2.5%
25,390 United Natural
Foods, Inc.*<F88> 912,009
-----------
HEALTH CARE EQUIPMENT & SUPPLIES - 10.4%
40,538 Cytyc Corporation*<F88> 1,147,225
13,844 Gen-Probe, Incorporated*<F88> 725,010
9,140 Hologic, Inc.*<F88> 432,139
18,881 ResMed, Inc.*<F88> 929,323
12,736 Varian Medical
Systems, Inc.*<F88> 605,852
-----------
3,839,549
-----------
HOTELS RESTAURANTS & LEISURE - 1.7%
25,849 The Cheesecake
Factory Incorporated*<F88> 635,885
-----------
HOUSEHOLD DURABLES - 2.3%
8,705 Harman International
Industries, Incorporated 869,717
-----------
IT SERVICES - 6.8%
18,605 Alliance Data
Systems Corporation*<F88> 1,162,254
7,245 Cognizant Technology
Solutions Corporation*<F88> 559,024
17,652 Global Payments, Inc. 817,288
-----------
2,538,566
-----------
LIFE SCIENCES TOOLS & SERVICES - 4.6%
10,718 Covance Inc.*<F88> 631,397
33,723 Pharmaceutical Product
Development, Inc. 1,086,555
-----------
1,717,952
-----------
MACHINERY - 6.2%
8,971 Harsco Corporation 682,693
17,853 Joy Global Inc. 863,014
15,688 Oshkosh Truck
Corporation 759,613
-----------
2,305,320
-----------
OFFICE ELECTRONICS - 2.0%
21,347 Zebra Technologies
Corporation - Class A*<F88> 742,662
-----------
OIL & GAS - 1.9%
19,901 Southwestern
Energy Company*<F88> 697,530
-----------
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 2.4%
27,579 Microchip Technology
Incorporated 901,833
-----------
SOFTWARE - 4.3%
47,781 Activision, Inc.*<F88> 823,745
21,631 NAVTEQ*<F88> 756,436
-----------
1,580,181
-----------
SPECIALTY RETAIL - 10.5%
21,095 Advance Auto Parts, Inc. 750,138
38,927 Chico's FAS, Inc.*<F88> 805,400
14,783 Dick's Sporting
Goods, Inc.*<F88> 724,219
21,161 Tractor Supply Company*<F88> 946,109
20,896 Williams-Sonoma, Inc.*<F88> 656,970
-----------
3,882,836
-----------
TRADING COMPANIES & DISTRIBUTORS - 1.6%
16,365 Fastenal Company 587,176
-----------
Total Common Stocks
(Cost $28,689,463) 36,017,577
-----------
COLLATERAL POOL INVESTMENT
FOR SECURITIES ON LOAN - 44.0%
(Cost $16,309,878)
(Please Refer to Note 6) 16,309,878
-----------
Total Investments
(Cost $44,999,341) -
141.1% 52,327,455
-----------
Liabilities in Excess of
Other Assets - (41.1)% (15,246,620)
-----------
TOTAL NET
ASSETS - 100.0% $37,080,835
-----------
-----------
*<F88> Non Income Producing
The accompanying notes are an integral part of these financial statements.
BAIRD SMALLCAP FUND
DECEMBER 31, 2006
PORTFOLIO MANAGERS' COMMENTARY
Within the small-cap universe, 2006 was marked by contradiction of historical
trends and "conventional wisdom." Generally, the utilities and consumer staples
sectors are weak in bullish environments; however, each performed strongly.
Meanwhile, stocks in technology and health care, usually expected to lead the
advance, lagged markedly. Despite these paradoxical results, small caps, as
represented by the Russell 2000(R) Index, recorded their eighth consecutive year
of outperformance against the S&P 500. A similar record belongs to the small-
cap value asset class, which logged a sixth year out of the last seven of
superior performance over small-cap growth.
The Baird SmallCap Fund's equity performance trailed the broad market benchmarks
in 2006. Specifically, the Fund's Institutional Class shares provided a 8.13%
total return in 2006 (7.89% for Investor Class shares), lagging the 13.35%
return on the Russell 2000(R) Growth Index. Last year's winning themes in the
market 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, the growth stock component of the
Russell 2000(R) Index posted a 13.35% gain in 2006 while the value stock
component gained 23.48%.
The portfolio spent all four quarters of 2006 averaging well above the index in
the majority of our quality measures (historical return on equity, earnings
growth and dividend growth), while maintaining price/earnings ratios (based on
both trailing and forward 12-month earnings) appreciably below those of the
benchmark. Such consistent fundamental characteristics validate the analysis
behind the Fund's purchases, while indicating that the market has yet to fully
appreciate their quality and growth metrics.
Stock selection accounted for the bulk of the Fund's underperformance versus the
Russell 2000(R) Growth Index during the year with disappointing results from
consumer discretionary, industrial and health care holdings P.F. Chang's China
Bistro, Red Robin Gourmet Burgers, Argon ST, Salix Pharmaceuticals and United
Surgical Partners (-23%, -30%, -28%, -31% and -12%, respectively, for the year).
The weakness of individual stocks in health care was offset somewhat by returns
from the Fund's best performing stock: Allscripts Healthcare (+101%). Stock
selections in information technology and energy were bright spots for the
portfolio in 2006, contributing strongly to performance on both an absolute and
relative basis. The Fund's holdings of Varian Semiconductor, Open Solutions,
Plexus Corp., Oceaneering International, Gulfmark Offshore and first quarter
addition RSA Security (+55%, +64%, +57%, +59%, +26%, and +70%, respectively, in
2006) positively affected the Fund's relative performance.
The financial services sector, in which we have maintained an overweight
position in anticipation of the Federal Reserve's maintenance, and eventual
reduction, of interest rates, provided the weakest absolute contribution to
portfolio performance. Our exposure to banks and other financial services firms
should prove beneficial to performance when the Fed moves to cut rates. For the
present, however, the continued inverted yield curve has left regional banks
struggling with loan growth and pressure on net interest margins.
Three stocks eliminated from the Fund's portfolio in 2006, Tekelec, Kronos and
Grey Wolf, contributed meaningfully to disappointing relative performance. From
the beginning of the year through the dates the positions were eliminated,
Tekelec declined 26%, Kronos dropped 29% and Grey Wolf declined 19%. Two
positions new to the Fund during the year were important contributors to
performance. DTS, a digital audio products supplier, was added to the Fund in
February and gained 43% during the year. Additionally, RSA Security, a software
company, was added to the Fund in March and gained 70% before it was sold in
September, following the announcement of its acquisition by EMC Corp.
As 2007 begins, we believe that the Fed will remain conservative with monetary
policy, avoiding the appearance of haste in making interest rate reductions.
When, however, the Fed does ease interest rates, the improving cost of borrowing
should enhance corporate profit growth, creating an environment conducive to our
fundamental investment style.
To focus more narrowly on the corporate climate and stock market, Bear Stearns'
analysis suggests that the M&A cycle is not yet exhausted. With considerable
private money available to invest in quality companies at reasonable valuations,
it is possible that we will benefit from additional buyouts in its portfolios in
the coming year.
Portfolio Managers:
Greg Edwards, CFA
Chuck Severson, CFA
BAIRD SMALLCAP FUND
A December 31, 2006 summary of the Fund's top 10 holdings and equity sector
analysis compared to the Russell 2000(R) Growth Index is shown below.
TOP 10 HOLDINGS*<F89>
Allscripts Healthcare Solutions, Inc. 3.1%
Providence Service Corporation 3.1%
United Community Banks, Inc. 2.9%
Varian Semiconductor
Equipment Associates, Inc. 2.7%
LKQ Corporation 2.6%
Hibbett Sporting Goods, Inc. 2.6%
Boston Private Financial Holdings, Inc. 2.6%
United Natural Foods, Inc. 2.6%
Natus Medical Incorporated 2.6%
Wintrust Financial Corporation 2.6%
NET ASSETS: $71,712,174
PORTFOLIO TURNOVER RATIO: 52.8%
NUMBER OF EQUITY HOLDINGS: 43
ANNUALIZED PORTFOLIO EXPENSE RATIO:***<F91>
INSTITUTIONAL CLASS: 0.95%
INVESTOR CLASS: 1.20%****<F92>
EQUITY SECTOR ANALYSIS**<F90>
SmallCap Fund Russell 2000(R) Growth Index
------------- ----------------------------
Consumer Discretionary (14.4%) 14.4% 16.3%
Consumer Staples (5.6%) 5.6% 2.9%
Energy (7.8%) 7.8% 5.6%
Financials (12.7%) 12.7% 9.4%
Health Care (19.9%) 19.9% 19.3%
Industrials (16.9%) 16.9% 17.0%
Information Technology (22.7%) 22.7% 24.6%
Materials (0.0%) 0.0% 3.6%
Telecommunication Services (0.0%) 0.0% 1.2%
Utilities (0.0%) 0.0% 0.3%
*<F89> 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, 2006.
**<F90> Percentages shown in parentheses relate to the Fund's total equity
investments as of December 31, 2006, and may not add up to 100% due
to rounding.
***<F91> 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 April 30,
2008.
****<F92> 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(R)
Institutional Class Shares Growth Index
-------------------------- ---------------
6/30/2004 $100,000 $100,000
12/31/2004 $108,400 $108,163
6/30/2005 $108,100 $104,286
12/31/2005 $112,000 $112,655
6/30/2006 $116,300 $119,494
12/31/2006 $121,105 $127,689
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(R)
Investor Class Shares Growth Index
--------------------- ---------------
6/30/2004 $10,000 $10,000
12/31/2004 $10,830 $10,816
6/30/2005 $10,780 $10,429
12/31/2005 $11,160 $11,266
6/30/2006 $11,570 $11,949
12/31/2006 $12,041 $12,769
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, 2006 ONE YEAR SINCE INCEPTION(1)<F93>
- --------------------------------------- -------- -----------------------
Baird SmallCap Fund - Institutional Class Shares 8.13% 7.95%
Baird SmallCap Fund - Investor Class Shares 7.89% 7.70%
Russell 2000(R) Growth Index(2)<F94> 13.35% 10.27%
(1)<F93> For the period from June 30, 2004 (commencement of operations) through
December 31, 2006.
(2)<F94> The Russell 2000(R) Growth Index measures the performance of those
Russell 2000(R) Index companies with higher price-to-book and higher
forecasted growth rates. The Russell 2000(R) Index consists of the
2,000 smallest U.S. domiciled publicly-traded common stocks that are
included in the Russell 3000(R) 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 RETURNS SHOWN IN THE 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. MUTUAL FUND
PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER
THAN THAT STATED.
BAIRD SMALLCAP FUND
SCHEDULE OF INVESTMENTS DECEMBER 31, 2006
Shares Value
------ -----
COMMON STOCKS - 93.6%
AIRLINES - 1.8%
49,901 SkyWest, Inc. $ 1,272,974
-----------
AUTO COMPONENTS - 2.6%
82,513 LKQ Corporation*<F95> 1,896,974
-----------
COMMERCIAL BANKS - 9.8%
66,188 Boston Private Financial
Holdings, Inc. 1,867,164
37,161 Pinnacle Financial
Partners, Inc.*<F95> 1,233,002
65,173 United Community
Banks, Inc. 2,106,391
38,194 Wintrust Financial
Corporation 1,834,076
-----------
7,040,633
-----------
COMMERCIAL SERVICES & SUPPLIES - 5.0%
47,858 Brady Corporation -
Class A 1,784,146
74,335 Marlin Business
Services Corporation*<F95> 1,786,270
-----------
3,570,416
-----------
COMPUTERS & PERIPHERALS - 4.1%
40,232 Avid Technology, Inc.*<F95> 1,499,044
47,244 Rackable Systems, Inc.*<F95> 1,463,147
-----------
2,962,191
-----------
DIVERSIFIED FINANCIAL SERVICES - 2.0%
49,663 Heartland Payment
Systems, Inc.*<F95> 1,402,980
-----------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 8.3%
64,140 Argon ST, Inc.*<F95> 1,381,576
69,265 DTS, Inc.*<F95> 1,675,520
60,702 Plexus Corp.*<F95> 1,449,564
47,850 ScanSource, Inc.*<F95> 1,454,640
-----------
5,961,300
-----------
ENERGY EQUIPMENT & SERVICES - 5.8%
35,141 Dawson Geophysical
Company*<F95> 1,280,187
29,524 GulfMark Offshore, Inc.*<F95> 1,104,493
44,309 Oceaneering
International, Inc.*<F95> 1,759,067
-----------
4,143,747
-----------
FOOD & STAPLES RETAILING - 2.6%
51,937 United Natural
Foods, Inc.*<F95> 1,865,577
-----------
HEALTH CARE EQUIPMENT & SUPPLIES - 4.7%
36,665 Kyphon Inc.*<F95> 1,481,266
111,965 Natus Medical
Incorporated*<F95> 1,859,739
-----------
3,341,005
-----------
HEALTH CARE PROVIDERS & SERVICES - 13.0%
82,490 Allscripts Healthcare
Solutions, Inc.*<F95> 2,226,405
45,324 Computer Programs &
Systems, Inc. 1,540,563
34,109 Healthways, Inc.*<F95> 1,627,340
87,580 Providence Service
Corporation*<F95> 2,200,886
61,354 United Surgical Partners
International, Inc.*<F95> 1,739,386
-----------
9,334,580
-----------
HOTELS RESTAURANTS & LEISURE - 3.1%
29,539 PF Chang's China
Bistro, Inc.*<F95> 1,133,707
31,063 Red Robin Gourmet
Burgers Inc.*<F95> 1,113,608
-----------
2,247,315
-----------
HOUSEHOLD PRODUCTS - 1.4%
20,370 Central Garden &
Pet Company*<F95> 986,315
-----------
IT SERVICES - 4.6%
56,511 Forrester Research, Inc.*<F95> 1,532,013
66,703 SRA International, Inc. -
Class A*<F95> 1,783,638
-----------
3,315,651
-----------
LEISURE EQUIPMENT & PRODUCTS - 2.2%
36,653 RC2 Corporation*<F95> 1,612,732
-----------
MACHINERY - 4.5%
34,107 Bucyrus International,
Inc. - Class A 1,765,378
32,081 ESCO Technologies, Inc.*<F95> 1,457,761
-----------
3,223,139
-----------
PHARMACEUTICALS - 1.8%
108,435 Salix Pharmaceuticals, Ltd.*<F95> 1,319,654
-----------
SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT - 2.7%
41,748 Varian Semiconductor
Equipment Associates, Inc.*<F95> 1,900,369
-----------
SOFTWARE - 2.7%
21,356 Open Solutions Inc.*<F95> 803,840
35,631 THQ Inc.*<F95> 1,158,720
-----------
1,962,560
-----------
SPECIALTY RETAIL - 5.2%
61,610 Hibbett Sporting
Goods, Inc.*<F95> 1,880,953
40,734 Tractor Supply Company*<F95> 1,821,217
-----------
3,702,170
-----------
TRADING COMPANIES & DISTRIBUTORS - 5.7%
47,852 Applied Industrial
Technologies, Inc. 1,258,986
94,690 Beacon Roofing
Supply, Inc.*<F95> 1,782,066
22,406 Watsco, Inc. 1,056,667
-----------
4,097,719
-----------
Total Common Stocks
(Cost $60,370,975) 67,160,001
-----------
COLLATERAL POOL INVESTMENT FOR
SECURITIES ON LOAN - 38.2%
(Cost $27,386,967)
(Please Refer to Note 6) 27,386,967
-----------
Principal
Amount
---------
SHORT-TERM INVESTMENTS - 6.2%
MONEY MARKET FUNDS - 6.2%
2,893,950 Short-Term Investment
Company Liquid Assets
Portfolio - AIM Fund 2,893,950
1,525,987 Short-Term Investment
Trust Prime Portfolio -
AIM Fund 1,525,987
-----------
Total Short-Term
Investments
(Cost $4,419,937) 4,419,937
-----------
Total Investments
(Cost $92,177,879) -
138.0% 98,966,905
-----------
Liabilities in Excess of
Other Assets - (38.0)% (27,254,731)
-----------
TOTAL NET
ASSETS - 100.0% $71,712,174
-----------
-----------
*<F95> Non Income Producing
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
ADDITIONAL INFORMATION ON FUND EXPENSES DECEMBER 31, 2006 (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
(7/1/06 - 12/31/06).
ACTUAL EXPENSES
The third and fourth columns of the following table 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 following table 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, 2006
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)<F96> 7/1/06 12/31/06 PERIOD(1)<F96> 12/31/06 PERIOD(1)<F96>
------------- --------- -------- -------------- -------- --------------
BAIRD LARGECAP FUND
Institutional Class 0.75% $1,000.00 $1,059.40 $3.89 $1,021.42 $3.82
Investor Class 1.00% $1,000.00 $1,058.30 $5.19 $1,020.16 $5.09
BAIRD MIDCAP FUND
Institutional Class 0.85% $1,000.00 $1,002.40 $4.29 $1,020.92 $4.33
Investor Class 1.10% $1,000.00 $1,001.70 $5.55 $1,019.66 $5.60
BAIRD SMALLCAP FUND
Institutional Class 0.95% $1,000.00 $1,041.30 $4.89 $1,020.42 $4.84
Investor Class 1.20% $1,000.00 $1,040.70 $6.17 $1,019.16 $6.11
(1)<F96> 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, 2006
BAIRD LARGECAP BAIRD MIDCAP BAIRD SMALLCAP
FUND FUND FUND
-------------- ------------ --------------
ASSETS:
Investments, at value (cost $26,749,941;
$33,956,506 and $73,635,144 respectively) $30,053,418 $41,284,620 $80,424,170
Repurchase agreements (cost $3,143,627;
$11,042,835 and $18,542,735 respectively) 3,143,627 11,042,835 18,542,735
Dividends receivable 14,512 3,015 6,711
Interest receivable 1,902 4,826 14,588
Receivable for investments sold -- 1,189,065 --
Receivable for fund shares sold 5,794 4,745 223,061
Other assets 6,032 5,838 4,691
----------- ----------- -----------
Total assets 33,225,285 53,534,944 99,215,956
----------- ----------- -----------
LIABILITIES:
Payable for collateral received
for securities loaned (See Note 6) 4,643,026 16,309,878 27,386,967
Payable to Advisor and Distributor 6,260 20,922 41,491
Payable for fund shares repurchased 3,831 2,332 8,508
Accrued expenses and other liabilities 41,891 120,977 66,816
----------- ----------- -----------
Total liabilities 4,695,008 16,454,109 27,503,782
----------- ----------- -----------
NET ASSETS $28,530,277 $37,080,835 $71,712,174
----------- ----------- -----------
----------- ----------- -----------
NET ASSETS CONSIST OF:
Capital stock $27,988,668 $30,447,881 $64,831,661
Accumulated undistributed net investment income 203 -- --
Accumulated net realized gain (loss) on investments sold (2,762,071) (695,160) 91,487
Net unrealized appreciation on investments 3,303,477 7,328,114 6,789,026
----------- ----------- -----------
NET ASSETS $28,530,277 $37,080,835 $71,712,174
----------- ----------- -----------
----------- ----------- -----------
INSTITUTIONAL CLASS SHARES
Net Assets $27,442,329 $32,057,214 $64,008,514
Shares outstanding
($0.01 par value, unlimited shares authorized) 3,217,096 3,436,591 5,319,537
Net asset value, offering and redemption price per share $ 8.53 $ 9.33 $ 12.03
----------- ----------- -----------
----------- ----------- -----------
INVESTOR CLASS SHARES
Net Assets $ 1,087,948 $ 5,023,621 $ 7,703,660
Shares outstanding
($0.01 par value, unlimited shares authorized) 128,018 548,110 644,338
Net asset value, offering and redemption price per share $ 8.50 $ 9.17 $ 11.96
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2006
BAIRD LARGECAP BAIRD MIDCAP BAIRD SMALLCAP
FUND FUND FUND
-------------- ------------ --------------
INVESTMENT INCOME:
Dividends $ 287,210 $ 381,998 $ 170,585
Interest 25,259 102,625 109,624
Income from securities lending 3,420 16,381 18,431
----------- ----------- ----------
Total investment income 315,889 501,004 298,640
----------- ----------- ----------
EXPENSES:
Investment advisory fees 172,798 549,742 518,853
Administration fees 11,864 35,147 27,537
Shareholder servicing fees 17,456 22,340 82,313
Fund accounting fees 25,554 35,185 33,333
Professional fees 24,593 24,653 25,143
Federal and state registration 26,294 29,172 26,760
Directors fees 8,030 7,990 8,270
Custody fees 6,441 20,954 9,110
Reports to shareholders 3,026 8,976 13,601
Distribution fees - Investor Class Shares (See Note 8) 4,265 12,185 12,573
Miscellaneous expenses 2,120 6,095 3,335
----------- ----------- ----------
Total expenses 302,441 752,439 760,828
Expense reimbursement by Advisor (98,794) (117,213) (168,361)
----------- ----------- ----------
Total expenses 203,647 635,226 592,467
----------- ----------- ----------
NET INVESTMENT INCOME (LOSS) 112,242 (134,222) (293,827)
----------- ----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 3,822,130 5,175,206 1,686,398
Change in unrealized appreciation/depreciation on investments (3,222,372) (5,482,914) 2,986,275
----------- ----------- ----------
Net realized and unrealized gain (loss) on investments 599,758 (307,708) 4,672,673
----------- ----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 712,000 $ (441,930) $4,378,846
----------- ----------- ----------
----------- ----------- ----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD LARGECAP FUND
-------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -----------------
OPERATIONS:
Net investment income $ 112,242 $ 273,336
Net realized gain on investments 3,822,130 2,075,582
Change in unrealized appreciation/depreciation on investments (3,222,372) (360,051)
----------- -----------
Net increase in net assets resulting from operations 712,000 1,988,867
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 8,900,784 4,077,942
Shares issued to holders in reinvestment of dividends 112,014 269,481
Cost of shares redeemed (10,858,598) (42,940,244)
----------- -----------
Net decrease in net assets resulting
from capital share transactions (1,845,800) (38,592,821)
----------- -----------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net investment income (110,900) (258,497)
----------- -----------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net investment income (1,174) (15,591)
----------- -----------
TOTAL DECREASE IN NET ASSETS (1,245,874) (36,878,042)
NET ASSETS:
Beginning of year 29,776,151 66,654,193
----------- -----------
End of year (including undistributed net investment income
of $203 and $35, respectively) $28,530,277 $29,776,151
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD MIDCAP FUND
-------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -----------------
OPERATIONS:
Net investment loss $ (134,222) $ (214,719)
Net realized gain on investments 5,175,206 4,534,559
Change in unrealized appreciation/depreciation on investments (5,482,914) 1,330,768
----------- -----------
Net increase (decrease) in net assets resulting from operations (441,930) 5,650,608
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 27,770,122 22,919,718
Shares issued to holders in reinvestment of dividends 6,860,350 2,763,152
Cost of shares redeemed (80,341,536) (28,445,712)
----------- -----------
Net decrease in net assets resulting
from capital share transactions (45,711,064) (2,762,842)
----------- -----------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net realized gains (5,953,538) (2,976,399)
----------- -----------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net realized gains (990,249) (155,477)
----------- -----------
TOTAL DECREASE IN NET ASSETS (53,096,781) (244,110)
NET ASSETS:
Beginning of year 90,177,616 90,421,726
----------- -----------
End of year $37,080,835 $90,177,616
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
BAIRD SMALLCAP FUND
-------------------------------------
Year Ended Year Ended
December 31, 2006 December 31, 2005
----------------- -----------------
OPERATIONS:
Net investment loss $ (293,827) $ (169,732)
Net realized gain (loss) on investments 1,686,398 (622,142)
Change in unrealized appreciation/depreciation on investments 2,986,275 2,209,185
----------- -----------
Net increase in net assets resulting from operations 4,378,846 1,417,311
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 36,379,202 33,342,662
Shares issued to holders in reinvestment of dividends 420,515 --
Cost of shares redeemed (16,364,194) (4,785,759)
----------- -----------
Net increase in net assets resulting
from capital share transactions 20,435,523 28,556,903
----------- -----------
DISTRIBUTIONS TO
INSTITUTIONAL CLASS SHAREHOLDERS:
From net realized gains (425,164) --
----------- -----------
DISTRIBUTIONS TO
INVESTOR CLASS SHAREHOLDERS:
From net realized gains (50,691) --
----------- -----------
TOTAL INCREASE IN NET ASSETS 24,338,514 29,974,214
NET ASSETS:
Beginning of period 47,373,660 17,399,446
----------- -----------
End of period $71,712,174 $47,373,660
----------- -----------
----------- -----------
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD LARGECAP FUND - INSTITUTIONAL CLASS
-----------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $8.33 $8.13 $7.78 $6.41 $8.63
----- ----- ----- ----- -----
Income from investment operations:
Net investment income 0.04 0.04(1)<F97> 0.06(1)<F97> 0.02 0.02
Net realized and unrealized
gains (losses) on investments 0.20 0.24 0.35 1.37 (2.22)
----- ----- ----- ----- -----
Total from investment operations 0.24 0.28 0.41 1.39 (2.20)
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (0.04) (0.08) (0.06) (0.02) (0.02)
----- ----- ----- ----- -----
Net asset value, end of period $8.53 $8.33 $8.13 $7.78 $6.41
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Total return 2.89% 3.39% 5.21% 21.75% (25.53)%
Supplemental data and ratios:
Net assets, end of period $27,442,329 $27,375,626 $64,754,140 $59,743,783 $48,900,767
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) 1.12% 0.93% 0.93% 0.95% 0.95%
Ratio of net investment income
to average net assets 0.44% 0.46% 0.72% 0.34% 0.23%
Ratio of net investment income
to average net assets (before waivers) 0.07% 0.28% 0.54% 0.14% 0.03%
Portfolio turnover rate(2)<F98> 63.9% 28.6% 23.2% 24.8% 16.2%
(1)<F97> Calculated using average shares outstanding during the period.
(2)<F98> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD LARGECAP FUND - INVESTOR CLASS
-----------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $8.29 $8.09 $7.75 $6.40 $8.61
----- ----- ----- ----- -----
Income from investment operations:
Net investment income (loss) 0.01 0.02(1) 0.04(1) 0.01 (0.00)(2)
<F99> <F99> <F1>
Net realized and unrealized
gains (losses) on investments 0.21 0.23 0.35 1.35 (2.21)
----- ----- ----- ----- -----
Total from investment operations 0.22 0.25 0.39 1.36 (2.21)
----- ----- ----- ----- -----
Less distributions:
Dividends from net investment income (0.01) (0.05) (0.05) (0.01) (0.00)(2)
<F1>
----- ----- ----- ----- -----
Net asset value, end of period $8.50 $8.29 $8.09 $7.75 $6.40
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Total return 2.64% 3.15% 5.00% 21.20% (25.65)%
Supplemental data and ratios:
Net assets, end of period $1,087,948 $2,400,525 $1,900,053 $634,160 $647,018
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) 1.37% 1.18% 1.18% 1.20% 1.20%
Ratio of net investment income (loss)
to average net assets 0.19% 0.21% 0.47% 0.09% (0.02)%
Ratio of net investment income (loss)
to average net assets (before waivers) (0.18)% 0.03% 0.29% (0.11)% (0.22)%
Portfolio turnover rate(3)<F2> 63.9% 28.6% 23.2% 24.8% 16.2%
(1)<F99> Calculated using average shares outstanding during the period.
(2)<F1> Amount is less than $0.01.
(3)<F2> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD MIDCAP FUND - INSTITUTIONAL CLASS
-----------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $11.12 $10.91 $9.72 $7.66 $9.11
------ ------ ----- ----- -----
Income from investment operations:
Net investment loss (0.02)(1) (0.02)(1) (0.04)(1) (0.07) (0.07)(1)
<F3> <F3> <F3> <F3>
Net realized and unrealized
gains (losses) on investments 0.46 0.63 1.25 2.13 (1.38)
------ ------ ----- ----- -----
Total from investment operations 0.44 0.61 1.21 2.06 (1.45)
------ ------ ----- ----- -----
Less distributions:
Distributions from net realized gains (2.23) (0.40) (0.02) -- --
------ ------ ----- ----- -----
Net asset value, end of period $9.33 $11.12 $10.91 $9.72 $7.66
------ ------ ----- ----- -----
------ ------ ----- ----- -----
Total return 3.93% 5.56% 12.44% 26.89% (15.92)%
Supplemental data and ratios:
Net assets, end of period $32,057,214 $85,670,669 $86,476,869 $28,629,656 $20,864,264
Ratio of expenses to average net assets 0.85% 0.85% 0.85% 1.20% 1.25%
Ratio of expenses to average
net assets (before waivers) 1.01% 0.98% 1.05% 1.20% 1.39%
Ratio of net investment loss
to average net assets (0.17)% (0.21)% (0.43)% (0.81)% (0.84)%
Ratio of net investment loss
to average net assets (before waivers) (0.33)% (0.34)% (0.63)% (0.81)% (0.98)%
Portfolio turnover rate(2)<F4> 78.6% 77.4% 77.9% 81.8% 55.4%
(1)<F3> Calculated using average shares outstanding during the period.
(2)<F4> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD MIDCAP FUND - INVESTOR CLASS
-----------------------------------------------------------------------
Year Ended December 31,
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Per Share Data:
Net asset value, beginning of period $10.99 $10.82 $9.65 $7.63 $9.09
------ ------ ----- ----- -----
Income from investment operations:
Net investment loss (0.04) (0.05)(1) (0.07)(1) (0.09) (0.09)(1)
<F5> <F5> <F5>
Net realized and unrealized
gains (losses) on investments 0.45 0.62 1.26 2.11 (1.37)
------ ------ ----- ----- -----
Total from investment operations 0.41 0.57 1.19 2.02 (1.46)
------ ------ ----- ----- -----
Less distributions:
Distributions from net realized gains (2.23) (0.40) (0.02) -- --
------ ------ ----- ----- -----
Net asset value, end of period $9.17 $10.99 $10.82 $9.65 $7.63
------ ------ ----- ----- -----
------ ------ ----- ----- -----
Total return 3.73% 5.24% 12.32% 26.47% (16.06)%
Supplemental data and ratios:
Net assets, end of period $5,023,621 $4,506,947 $3,944,857 $959,209 $801,703
Ratio of expenses to average net assets 1.10% 1.10% 1.10% 1.45% 1.50%
Ratio of expenses to average
net assets (before waivers) 1.26% 1.23% 1.30% 1.45% 1.64%
Ratio of net investment loss
to average net assets (0.42)% (0.46)% (0.68)% (1.06)% (1.09)%
Ratio of net investment loss
to average net assets (before waivers) (0.58)% (0.59)% (0.88)% (1.06)% (1.23)%
Portfolio turnover rate(2)<F6> 78.6% 77.4% 77.9% 81.8% 55.4%
(1)<F5> Calculated using average shares outstanding during the period.
(2)<F6> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD SMALLCAP FUND - INSTITUTIONAL CLASS
--------------------------------------------------------
Year Ended Year Ended June 30, 2004(1)<F7>
December 31, December 31, through
2006 2005 December 31, 2004
------------ ------------ -----------------
Per Share Data:
Net asset value, beginning of period $11.20 $10.84 $10.00
------ ------ ------
Income from investment operations:
Net investment loss(2)<F8> (0.05) (0.06) (0.03)
Net realized and unrealized gains on investments 0.96 0.42 0.87
------ ------ ------
Total from investment operations 0.91 0.36 0.84
------ ------ ------
Less distributions:
Distributions from net realized gains (0.08) -- --
------ ------ ------
Net asset value, end of period $12.03 $11.20 $10.84
------ ------ ------
------ ------ ------
Total return 8.13% 3.32% 8.40%(3)<F9>
Supplemental data and ratios:
Net assets, end of period $64,008,514 $45,010,093 $17,331,262
Ratio of expenses to average net assets 0.95% 0.95% 0.95%(4)<F10>
Ratio of expenses to average net assets (before waivers) 1.23% 1.31% 1.89%(4)<F10>
Ratio of net investment loss to average net assets (0.46)% (0.57)% (0.65)%(4)<F10>
Ratio of net investment loss to average net assets (before waivers) (0.74)% (0.93)% (1.59)%(4)<F10>
Portfolio turnover rate(5)<F11> 52.8% 56.4% 34.7%(3)<F9>
(1)<F7> Commencement of operations.
(2)<F8> Calculated using average shares outstanding during the period.
(3)<F9> Not annualized.
(4)<F10> Annualized.
(5)<F11> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
FINANCIAL HIGHLIGHTS
BAIRD SMALLCAP FUND - INVESTOR CLASS
--------------------------------------------------------
Year Ended Year Ended June 30, 2004(1)<F12>
December 31, December 31, through
2006 2005 December 31, 2004
------------ ------------ -----------------
Per Share Data:
Net asset value, beginning of period $11.16 $10.83 $10.00
------ ------ ------
Income from investment operations:
Net investment loss(2)<F13> (0.08) (0.09) (0.05)
Net realized and unrealized gains on investments 0.96 0.42 0.88
------ ------ ------
Total from investment operations 0.88 0.33 0.83
------ ------ ------
Less distributions:
Distributions from net realized gains (0.08) -- --
------ ------ ------
Net asset value, end of period $11.96 $11.16 $10.83
------ ------ ------
------ ------ ------
Total return 7.89% 3.05% 8.30%(3)<F14>
Supplemental data and ratios:
Net assets, end of period $7,703,660 $2,363,567 $68,184
Ratio of expenses to average net assets 1.20% 1.20% 1.20%(4)<F15>
Ratio of expenses to average net assets (before waivers) 1.48% 1.56% 2.14%(4)<F15>
Ratio of net investment loss to average net assets (0.71)% (0.82)% (0.90)%(4)<F15>
Ratio of net investment loss to average net assets (before waivers) (0.99)% (1.18)% (1.84)%(4)<F15>
Portfolio turnover rate(5)<F16> 52.8% 56.4% 34.7%(3)<F14>
(1)<F12> Commencement of operations.
(2)<F13> Calculated using average shares outstanding during the period.
(3)<F14> Not annualized.
(4)<F15> Annualized.
(5)<F16> Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
The accompanying notes are an integral part of these financial statements.
BAIRD FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2006
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 Baird LargeCap Fund seeks long-term growth of capital through investments in
equity securities of large-capitalization companies. Dividend income is a
secondary consideration.
The Baird MidCap Fund seeks long-term growth of capital through investments in
equity securities of mid-capitalization companies.
The Baird SmallCap Fund seeks long-term growth of capital through investments in
equity securities of small-capitalization companies.
On December 31, 2006, one shareholder related to the Advisor held approximately
58% 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 (other than NASDAQ) are valued at the last quoted sales price.
Securities traded on NASDAQ are valued at the NASDAQ Official Closing
Price. Price information on listed stocks is taken from the exchange where
the security is primarily traded. Securities that were not traded on the
valuation date, as well as stocks that are not listed on an exchange,
including NASDAQ, 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 acquisition 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 the Advisor in
accordance with procedures approved by the Corporation's Board of
Directors. In accordance with such procedures, the Advisor may use broker
quotes or, if the broker quotes are unavailable or deemed to be unreliable,
fair value will be determined by a valuation committee of the Advisor. 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.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in accordance with GAAP, and expands disclosure about
fair value measurements. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Management is
currently evaluating the impact of adoption of SFAS No. 157 on its
financial statements.
b) Foreign Securities - Investing in securities of foreign companies and
foreign governments involves special risks and considerations 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. Occasionally, events that affect those 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.
c) Federal Income Taxes - The Funds intend to continue to qualify as regulated
investment companies as provided in subchapter M of the Internal Revenue
Code 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.
On July 13, 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48 "Accounting for Uncertainty in Income
Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax
positions should be recognized, measured, presented and disclosed in the
financial statements. FIN 48 requires the evaluation of tax positions
taken or expected to be taken in the course of preparing the Funds' tax
returns to determine whether the tax positions are "more likely than not"
of being sustained by the applicable tax authority. A tax position that
meets the more-likely-than-not threshold is measured to determine the
amount of benefit or expense to recognize in the financial statements.
Adoption of FIN 48 is required as of the date of the last NAV calculation
in the first required financial statement reporting period for fiscal years
beginning after December 15, 2006 and is to be applied to all open tax
years as of the effective date. At this time, management is evaluating the
implications of FIN 48 and whether it will have any impact on the Funds'
financial statements.
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, 2006 December 31, 2006
------------------------ -----------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount Shares
-------- -------- -------- --------
Shares sold $ 8,494,502 1,011,084 Shares sold $ 406,282 48,746
Shares issued through Shares issued through
reinvestment of dividends 110,843 12,995 reinvestment of dividends 1,171 138
Shares redeemed (9,118,187) (1,094,378) Shares redeemed (1,740,411) (210,595)
----------- ---------- ----------- --------
Net Decrease $ (512,842) (70,299) Net Decrease $(1,332,958) (161,711)
----------- -----------
----------- -----------
Shares Outstanding: Shares Outstanding:
Beginning of period 3,287,395 Beginning of period 289,729
---------- --------
End of period 3,217,096 End of period 128,018
---------- --------
---------- --------
Year Ended Year Ended
December 31, 2005 December 31, 2005
------------------------ -----------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount 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
---------- -------
---------- -------
BAIRD MIDCAP FUND
Year Ended Year Ended
December 31, 2006 December 31, 2006
------------------------ -----------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount Shares
-------- -------- -------- --------
Shares sold $ 24,906,207 2,109,560 Shares sold $2,863,915 250,734
Shares issued through Shares issued through
reinvestment of dividends 5,870,101 625,975 reinvestment of dividends 990,249 107,988
Shares redeemed (77,918,215) (7,000,989) Shares redeemed (2,423,321) (220,539)
------------ ---------- ---------- --------
Net Decrease $(47,141,907) (4,265,454) Net Increase $1,430,843 138,183
------------ ----------
------------ ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 7,702,045 Beginning of period 409,927
---------- --------
End of period 3,436,591 End of period 548,110
---------- --------
---------- --------
Year Ended Year Ended
December 31, 2005 December 31, 2005
------------------------ -----------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount 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 Increase $ 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
---------- -------
---------- -------
BAIRD SMALLCAP FUND
Year Ended Year Ended
December 31, 2006 December 31, 2006
------------------------ -----------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount Shares
-------- -------- -------- --------
Shares sold $30,531,287 2,601,055 Shares sold $5,847,915 501,916
Shares issued through Shares issued through
reinvestment of dividends 369,831 30,717 reinvestment of dividends 50,684 4,238
Shares redeemed (15,510,501) (1,330,621) Shares redeemed (853,693) (73,644)
----------- ---------- ---------- -------
Net Increase $15,390,617 1,301,151 Net Increase $5,044,906 432,510
----------- ----------
----------- ----------
Shares Outstanding: Shares Outstanding:
Beginning of period 4,018,386 Beginning of period 211,828
---------- -------
End of period 5,319,537 End of period 644,338
---------- -------
---------- -------
Year Ended Year Ended
December 31, 2005 December 31, 2005
------------------------ -----------------------
INSTITUTIONAL CLASS SHARES Amount Shares INVESTOR CLASS SHARES Amount 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
--------- -------
--------- -------
4. INVESTMENT TRANSACTIONS AND INCOME TAX INFORMATION
During the year ended December 31, 2006, purchases and sales of investment
securities (excluding short-term investments) were as follows:
Baird Baird Baird
LargeCap Fund MidCap Fund SmallCap Fund
------------- ----------- -------------
Purchases: $16,853,812 $ 55,290,297 $47,721,521
Sales: $23,445,807 $108,457,760 $31,261,039
At December 31, 2006, accumulated earnings/losses on a tax basis were as
follows:
LARGECAP MIDCAP SMALLCAP
FUND FUND FUND
-------- ------ --------
Cost of Investments $26,810,528 $34,871,277 $73,693,370
----------- ----------- -----------
----------- ----------- -----------
Gross unrealized appreciation $ 3,834,888 $ 8,153,894 $ 9,953,396
Gross unrealized depreciation (591,998) (1,740,551) (3,222,596)
----------- ----------- -----------
Net unrealized appreciation $ 3,242,890 $ 6,413,343 $ 6,730,800
----------- ----------- -----------
----------- ----------- -----------
Undistributed ordinary income $ 203 $ -- $ 221,455
Undistributed long-term capital gain -- 219,611 12
----------- ----------- -----------
Total distributable earnings $ 203 $ 219,611 $ 221,467
----------- ----------- -----------
----------- ----------- -----------
Other accumulated losses $(2,701,484) $ -- $ (71,754)
----------- ----------- -----------
Total accumulated earnings $ 541,609 $ 6,632,954 $ 6,880,513
----------- ----------- -----------
----------- ----------- -----------
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, 2006, the Baird SmallCap Fund elected to defer
capital losses occurring between November 1, 2006 and December 31, 2006 in the
amount of $71,754.
At December 31, 2006, the Baird LargeCap Fund had accumulated net realized
capital loss carryovers of $1,167,011 that expire in 2012 and $1,534,473 that
expire in 2011. 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, 2006, the Baird LargeCap Fund
utilized $3,842,197 in capital loss carryovers from previous years. During the
year ended December 31, 2006 the Baird SmallCap Fund utilized $545,967 in
capital loss carryovers from previous years.
During the year ended December 31, 2006, the Funds paid the following dividends:
ORDINARY INCOME DIVIDENDS NET LONG-TERM CAPITAL GAINS
------------------------- ---------------------------
Baird LargeCap Fund $112,074 --
Baird MidCap Fund 355,507 $6,588,280
Baird SmallCap Fund -- 475,855
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 -- --
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 the year ended December 31, 2006 and through April 30, 2007, and again for
the year ended December 31, 2007 and through April 30, 2008 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,
--------------------------------
2006 2005 2004
---- ---- ----
REIMBURSED / ABSORBED EXPENSES SUBJECT
TO RECOVERY BY ADVISOR UNTIL: 2009 2008 2007
BAIRD LARGECAP FUND $ 98,794 $109,024 $114,127
BAIRD MIDCAP FUND $117,213 $129,774 $116,179
BAIRD SMALLCAP FUND $168,361 $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, 2006.
6. SECURITIES LENDING
Each Fund may lend up to one-third of its total assets (including such loans) to
borrowers under terms of participation in a securities lending program
administered by U.S. Bancorp Asset Management, an affiliate of the Funds'
custodian, transfer agent and administrator. The securities lending agreement
requires that loans are collateralized at all times in an amount equal to at
least 102% of the market value of any loaned securities at the time of the loan,
plus accrued interest.
The Funds receive compensation in the form of fees and earn interest on the cash
collateral. The amount of fees depends on a number of factors including the
type of security, length of the loan and credit standing of the borrower. Each
Fund continues to receive interest payments or dividends on the securities
loaned during the borrowing period. Each Fund has the right under the terms of
the securities lending agreement to recover the securities from the borrower on
demand.
As of December 31, 2006, the Baird LargeCap, Baird MidCap and Baird SmallCap
Funds had loaned securities that were collateralized by cash equivalents. The
cash collateral is invested by the custodian with the approval of the Advisor.
Although the cash collateral is generally invested in readily marketable, high
quality, short-term obligations, such investments are subject to risk of payment
delays or default on the part of the issuer or counterparty or otherwise may not
generate sufficient interest to support the costs associated with securities
lending. A Fund could also experience delays in recovering its securities and
possible loss of income or value if the borrower fails to return the borrowed
securities, although this risk is mitigated by the collateral and by contract
with the securities lending agent.
As of December 31, 2006, the market value of the securities on loan and payable
on collateral due to broker were as follows:
MARKET VALUE OF PAYABLE ON COLLATERAL
SECURITIES ON LOAN DUE TO BROKER
------------------ ---------------------
Baird LargeCap Fund $ 4,471,398 $ 4,643,026
Baird MidCap Fund 15,683,569 16,309,878
Baird SmallCap Fund 26,104,491 27,386,967
Individual reinvested cash collateral jointly pooled with collateral received by
other Baird Funds as of December 31, 2006 is as follows:
LARGECAP MIDCAP SMALLCAP OTHER
FUND FUND FUND BAIRD FUNDS TOTAL
-------- ------ -------- ----------- -----
Morgan Stanley
Repurchase Agreement(1)<F17> $1,700,327 $ 5,972,854 $10,029,404 $ 68,297,415 $ 86,000,000
Lehman Brothers
Repurchase Agreement(2)<F18> 790,850 2,778,072 4,664,839 31,766,239 40,000,000
CS First Boston
Repurchase Agreement(3)<F19> 237,255 833,421 1,399,452 9,529,872 12,000,000
Rams Funding LLC
Discount Commercial Paper 237,255 833,421 1,399,452 9,529,872 12,000,000
CS First Boston
Repurchase Agreement(4)<F20> 217,483 763,970 1,282,831 8,735,716 11,000,000
Thornburg Mortgage Capital
Discount Commercial Paper 217,484 763,970 1,282,831 8,735,715 11,000,000
Antalis Fund 197,712 694,518 1,166,210 7,941,560 10,000,000
CS First Boston
Repurchase Agreement(5)<F21> 197,712 694,518 1,166,209 7,941,561 10,000,000
Jupiter Sect. 197,712 694,518 1,166,210 7,941,560 10,000,000
Lakeside Funding LLC Interest
Bearing Commercial Paper 197,712 694,518 1,166,210 7,941,560 10,000,000
Concord Minutemen
Capital Company Interest
Bearing Commercial Paper 138,399 486,163 816,347 5,559,091 7,000,000
Stratford 118,627 416,711 699,726 4,764,936 6,000,000
Leguna Interest Bearing
Commercial Paper 98,856 347,259 583,105 3,970,780 5,000,000
Concord Minutemen
Capital Company Interest
Bearing Commercial Paper 79,085 277,807 466,484 3,176,624 4,000,000
Federated Prime Obligations Fund 16,556 58,156 97,654 664,993 837,359
Merrill Lynch Premier
Institutional Fund 1 2 3 21 27
---------- ----------- ----------- ------------ ------------
$4,643,026 $16,309,878 $27,386,967 $186,497,515 $234,837,386
---------- ----------- ----------- ------------ ------------
---------- ----------- ----------- ------------ ------------
(1)<F17> (Dated 12/29/06), 5.40%, Due 01/02/07 (Repurchase Proceeds
$86,038,700), (Collateralized by Mortgage Backed Securities)
(2)<F18> (Dated 12/29/06), 5.3925%, Due 01/02/07 (Repurchase Proceeds
$40,023,967), (Collateralized by Corporate Bonds)
(3)<F19> (Dated 12/29/06), 5.325%, Due 01/02/07 (Repurchase Proceeds
$12,007,093), (Collateralized by Mortgage Backed Securities)
(4)<F20> (Dated 12/29/06), 5.32%, Due 01/02/07 (Repurchase Proceeds
$11,006,502), (Collateralized by Agency Mortgage Backed Securities)
(5)<F21> (Dated 12/29/06), 5.3625%, Due 01/02/07 (Repurchase Proceeds
$10,005,958), (Collateralized by Mortgage Backed Securities)
7. LINE OF CREDIT
During the course of operations, certain Funds' custody accounts with U.S. Bank,
N.A. (the "Bank") were overdrawn at times during the year due to shareholder
redemptions within those Funds. In May 2006, Baird Funds, Inc. entered into an
uncommitted, senior secured line of credit ("LOC") with U.S. Bank, N.A. to
provide the Funds a temporary liquidity source to meet unanticipated
redemptions. Under the terms of the LOC, borrowings for each Fund are limited
to one-third of the total assets (including the amount borrowed) of the
respective Fund, or as otherwise indicated within the Funds' agreement with the
Bank. The Bank charges interest at the Bank's Prime Rate less 1% (weighted
average rate of 7.20% during 2006). For the year ended December 31, 2006, the
Baird LargeCap Fund and Baird MidCap Fund incurred $533 and $1,595 in interest
charges respectively, which are included in the Funds' custody fees, on average
daily loan balances of $11,975 and $35,828. The Baird SmallCap Fund did not
draw upon the LOC during 2006.
8. 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 $4,265, $12,185 and $12,573, respectively, in fees
pursuant to the Plan during the year ended December 31, 2006.
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, 2006, and
the related statements of operations for the year then ended, the statements of
changes in net assets, and the financial highlights for each of the two years in
the period 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 financial highlights for each of the three years in the period ended
December 31, 2004 were audited by other auditors. Those auditors expressed an
unqualified opinion on those 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, 2006, by correspondence with
the custodian and brokers. 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, 2006, the
results of their operations for the year then ended, and the changes in their
net assets, and the financial highlights for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/Grant Thornton LLP
Chicago, Illinois
February 19, 2007
BAIRD FUNDS, INC.
DIRECTORS & OFFICERS AS OF DECEMBER 31, 2006
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 Director Indefinite; Retired; Chairman, the Advisor (January 8 Director of
Kasten, Jr. *<F22> And Since September 2000-December 2005); Chairman & CEO, Regal-Beloit
777 East Chairman 2000 the Advisor (January 1998-January 2000); Corporation,
Wisconsin Avenue President, Chairman and CEO, the Advisor a manufacturing
Milwaukee, WI 53202 (June 1983-January 1998); President, the company
Age: 67 Advisor (January 1979-January 1983)
John W. Feldt Independent Indefinite; Retired; Senior Vice President-Finance, 8 Director of
University of Director Since September University of Wisconsin Foundation Thompson
Wisconsin Foundation (1985-2006); Vice President-Finance, Plumb Funds,
1848 University Avenue 2000 University of Wisconsin Foundation Inc., a mutual
Madison, WI 53705 (1980-1985); Associate Director, fund complex
Age: 64 University of Wisconsin Foundation of which Mr.
(1967-1980) Feldt oversees
2 portfolios;
Director of
Nakoma Mutual
Funds, a mutual
fund complex of
which Mr. Feldt
oversees 1
portfolio
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: 73 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. Independent Indefinite; Retired; Chairman Emeritus, Briggs & 8 Director of
Stratton, Jr. Director Since May Stratton Corporation, a manufacturing Midwest Air
10134 N. Port Washington 2004 company, since 2003; Chairman of the Group, Inc., an
Road, #2B Board, Briggs & Stratton Corporation airline company;
Mequon, WI 53092 (2001-2002); Chairman and CEO, Briggs Weyco Group,
Age: 67 & Stratton Corporation (1986-2001) Inc., a men's
footwear
distributor;
Wisconsin
Energy
Corporation and
its subsidiaries
Wisconsin
Electric Power
Company and
Wisconsin Gas
LLC
*<F22> Mr. Kasten is an "interested person" of the Corporation (as defined in
the 1940 Act) because of his ownership of stock of the Advisor.
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
- ----------------------- ----------- -------------- ------------------- ----------- -------------
Mary Ellen Stanek President Re-elected by Managing Director, the Advisor, and N/A N/A
777 East Board annually; Chief Investment Officer, Baird
Wisconsin Avenue Since September Advisors, a department of the Advisor,
Milwaukee, WI 53202 2000 since March 2000; President and CEO,
Age: 50 Firstar Investment Research & Management
Company, LLC ("FIRMCO") (November
1998-February 2000); President, Firstar
Funds, Inc. (December 1998-February 2000);
President and Chief Operating Officer,
FIRMCO (March 1994-November 1998)
J. Bary Morgan Senior Vice Re-elected by Chief Investment Officer, Baird N/A N/A
777 East President Board annually; Investment Management, a department
Wisconsin Avenue Since February of the Advisor, since January 2004;
Milwaukee, WI 53202 2003 Managing Director, the Advisor since
Age: 41 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 Re-elected by Chief Compliance Officer, the Advisor N/A N/A
777 East President and Board annually; since October 2004; Assistant Compliance
Wisconsin Avenue Chief Since August Director, the Advisor since August 2002;
Milwaukee, WI 53202 Compliance 2004 Senior Vice President, the Advisor since
Age: 44 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 Re-elected by Operations Director, the Advisor since N/A N/A
777 East President Board annually; July 1992; Managing Director, the
Wisconsin Avenue Since September Advisor since January 1997; Chief
Milwaukee, WI 53202 2000 Financial Officer and Managing Director,
Age: 47 the Advisor (February 1999- December 1999)
Leonard M. Rush Treasurer Re-elected by Chief Financial Officer, the Advisor N/A N/A
777 East Board annually; since January 2000
Wisconsin Avenue Since September
Milwaukee, WI 53202 2000
Age: 60
Charles M. Weber Secretary Re-elected by Senior Vice President and Associate N/A N/A
777 East Board annually; General Counsel, the Advisor since
Wisconsin Avenue Since August July 2005; Partner, Quarles & Brady
Milwaukee, WI 53202 2005 LLP, a law firm (October 1998-June 2005)
Age: 43
Robert A. Johnson AML Officer Re-elected by Compliance Officer, the Advisor since N/A N/A
777 East Board annually; 1998, and AMLCompliance Officer,
Wisconsin Avenue Since August the Advisor since January 2004
Milwaukee, WI 53202 2004
Age: 43
Bret T. Reese Assistant Re-elected by Vice President and Staff Attorney, N/A N/A
777 East Secretary Board annually; the Advisor since 2005; Senior
Wisconsin Avenue Since August Financial Analyst, the Advisor
Milwaukee, WI 53202 2006 (August 2001-June 2004); Financial
Age: 37 Analyst, Stark & Roth, Inc., a
hedge fund (June 2001-August 2001)
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 1, 2006 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 they 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 for periods ended June 30,
2006, management fees and expense ratios, 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 Investment Advisory Agreement. The Board also received information
periodically throughout the year that was relevant to the 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 a majority of the Independent Directors, approved the continuation of
the Investment Advisory Agreement 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, while acknowledging
the recent departures of portfolio managers and research analysts within the
Baird Investment Management department of the Advisor. The Board considered the
Advisor's disciplined investment decision-making process used for the Funds.
The Board also considered other services that the Advisor provided for 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 Funds were appropriate
and that each Fund was likely to continue to benefit from services provided
under its agreement with the Advisor.
INVESTMENT PERFORMANCE OF THE ADVISOR AND THE FUNDS
- ---------------------------------------------------
In considering the investment performance of each Fund, the Board reviewed
information as of June 30, 2006 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 (both Institutional and Investor Class
shares), the Board observed that the Fund had outperformed its primary
benchmark, the Russell 1000(R) Growth Index, for the period from inception
(9/29/00) through June 30, 2006, but lagged the index for the one-year and five-
year periods then ended. The Board further noted that, for the period from the
Fund's inception through June 30, 2006, the Fund (Institutional Class shares)
had performed in the top quartile of the Lipper universe of Large Cap Growth
Funds, and that for the five-year period then ended the Fund had performed above
the Lipper Large Cap Growth Funds average. The Board recognized that the
investment strategy of the LargeCap Fund focused on producing long-term risk
adjusted return.
The Board noted that the Baird MidCap Fund (both Institutional and Investor
Class shares) had outperformed the Russell MidCap(R) Growth Index, its primary
benchmark, for the period from the Fund's inception through June 30, 2006 and
that its Institutional Class outperformed the benchmark for the five-year period
then ended, while acknowledging that the Fund had underperformed that benchmark
for the one-year and three-year periods ending June 30, 2006. The Board further
noted that, for the period from the Fund's inception through June 30, 2006, 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 Funds average. For the five-year
period ending June 30, 2006, the Fund had performed above the Lipper Mid Cap
Growth Funds average.
With respect to the Baird SmallCap Fund, the Board observed that the Fund had
underperformed its benchmark index, the Russell 2000(R) Growth Index, for the
year-to-date, one-year, and since inception periods ended June 30, 2006. They
also noted that the Fund had performed in the bottom quartile of funds in the
Lipper Small Cap Core Funds category for each of the periods. The Board
recognized that the Fund had been in operation for a short period of time and
also referred to commentary by the Advisor with respect to the Advisor's focus
on low-risk, high quality growth stocks as opposed to investments that could be
considered more speculative.
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 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 was either below or slightly above 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 10 basis points (or 0.10%) 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. The Board noted that each Fund's
total expense ratio (both for its Institutional and Investor Class shares),
after fee waivers and expense reimbursements by the Advisor, was not only lower
than the average and median expense ratios for all funds in its Lipper category,
but in the lowest quartile (other than Investor Class shares of the SmallCap
Fund, which was in the second lowest quartile) and compared favorably to the
average and median expense ratios for institutional class shares of other
similarly sized funds in its Lipper category. Each Fund's total expense ratio
was also significantly below its Morningstar category average.
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 have generally
been 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 and the performance of the
Fund.
BENEFITS DERIVED FROM THE RELATIONSHIP WITH THE FUNDS
- -----------------------------------------------------
The Board noted that the Advisor derives 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.
However, the Board determined such products and services have been used for
legitimate purposes relating to the Funds by providing assistance in the
Advisor's investment decision-making process. 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 structures 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 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.
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.
ADDITIONAL TAX INFORMATION
The Baird LargeCap Fund designates 100% of dividends declared in 2006 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 in 2006 qualify for the
dividend received deduction. The SmallCap Fund did not pay any dividends in
2006.
BAIRD FUNDS, INC.
c/o U.S. Bancorp Fund Services, LLC
P.O. Box 701
Milwaukee, WI 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, WI 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.
1555 N. RiverCenter Drive, Suite 302
Milwaukee, WI 53212
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Grant Thornton LLP
175 West Jackson Boulevard, 13th Floor
Chicago, IL 60604
ITEM 2. CODE OF ETHICS.
- -----------------------
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.
- ----------------------------------------
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.
- -----------------------------------------------
Fees Billed by Grant Thornton LLP. The aggregate fees billed for professional
services by Grant Thornton LLP ("GT") during the last two fiscal years were as
follows:
FYE 12/31/2006 FYE 12/31/2005
--------------- ---------------
Audit Fees $105,000 $100,000
Audit-Related Fees - -
Tax Fees $25,200 $24,000
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
policies and procedures, the audit committee pre-approved all audit and tax
services provided by GT during fiscal 2006. During the past two fiscal years,
the Registrant did not receive any non-audit services from 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 RWB and 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; verification and related analytical services provided to RWB in
connection with its various GIPS composite performance presentations; and a 2006
tax analysis regarding RWB's ownership and sale of certain securities. GT
charged the following amounts for such non-audit services to RWB and its
affiliates: $165,600 in 2006 and $142,350 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.
- ----------------------------------------------
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.
- --------------------------------
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.
- --------------------------------
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 PURCHASERS.
- ----------------------------------
Not applicable because the Registrant is not a closed-end management investment
company.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------------------------------------------------------------
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.
- ---------------------------------
(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 (the "Act")), 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 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.
- -----------------
(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 6, 2007
----------------------------
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 6, 2007
----------------------------
By: /s/ Leonard M. Rush
----------------------------
Leonard M. Rush, Treasurer
Date: March 6, 2007
----------------------------