BAIRD ADJUSTABLE
RATE INCOME FUND
SEMIANNUAL
REPORT
MARCH 31, 1996
(BAIRD LOGO)
BAIRD ADJUSTABLE RATE INCOME FUND
SEMIANNUAL REPORT MAY 31, 1996
DEAR SHAREHOLDERS:
For the bond markets, the year 1996 has been reminiscent of the 1994 bear
market. After recording strong, positive total returns throughout 1995, the
market indices recorded negative returns during the first five months of the new
year. Those returns ranged from -1.0% on intermediate term indices to -2.7% on
the broad market indices.
This turnaround in market performance was the result of a major shift in
investor sentiment, from highly optimistic at the beginning of the year to
cautious/apprehensive from mid-February to quarter-end. The December/January
optimism appeared to be based upon expectations of:
1. A domestic economy that would be sufficiently weak to prompt several
additional rounds of Federal Reserve easing,
2. An agreement between Congress and the White House on legislation that
would produce a balanced budget in 5-7 years,
3. Continued strong foreign demand for Treasury notes,
4. Low inflation or even deflation for the foreseeable future.
Starting around mid-February, it became apparent that three of these
assumptions were wrong. The most harmful development was the release of economic
data suggesting that the economy was not as anemic as the consensus forecast had
assumed. Federal Reserve Chairman Greenspan cited this data when he hinted that
the Fed did not believe that sharply lower interest rates were necessary to
sustain a healthy cyclical expansion.
With yields as low as 4.80% on two-year Treasury notes and 6% on long-term
Treasury bonds, the markets were ill-equipped to absorb this news. Yields that
low could be sustained only if there was a good chance that the federal funds
rate would fall to around 4% during the months ahead. Once it became apparent
that such forecasts were overly optimistic, market yields began adjusting
upward. By the end of May, those two-year and thirty-year yields had increased
to around 61/4% and 7%, respectively.
Not all of the economic fundamentals are negative, however. Most leading
indicators of inflation remain subdued, and the economy is not overheating as it
was in 1994. Indeed, there are some indications that the higher yields will act
as a brake on business activity during the second half of the year.
Consequently, we do not expect market yields to increase as much in 1996 as they
did in 1994.
Sincerely,
/s/ Marcus C. Low, Jr. /s/ James Kochan
Marcus C. Low,Jr. James Kochan
President Portfolio Manager
BAIRD
ADJUSTABLE
RATE INCOME FUND
<TABLE>
<CAPTION>
LONG-TERM INVESTMENTS 93.3% (A)<F1>
STATEMENT OF NET ASSETS
March 31, 1996 (Unaudited)
Principal Amortized Quoted
Amount Cost Market Value
- ---------- ---------- ------------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 93.3% (B)<F2>
$2,000,000 FNMA 93-72F, 5.933%, due 05/25/08,
(indexed to COFI plus 90bp subject to 10% cap) $2,000,000 $1,930,000
2,954,317 FNMA 93-101FA, 5.883%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 2,948,522 2,837,068
4,111,173 FNMA 93-107F, 5.883%, due 06/25/08,
(indexed to COFI plus 85bp subject to 10% cap) 3,706,819 3,950,581
10,000,000 FNMA 92-206FA, 5.62%, due 06/25/18,
(indexed to T10Y minus 75bp subject to 9.5% cap) 9,993,741 9,509,375
5,000,000 FNMA 93-127FA, 5.62%, due 10/25/21,
(indexed to T10Y minus 75bp subject to 9.5% cap) 4,988,811 4,739,062
5,000,000 FNMA 92-33FPAC, 5.92%, due 03/25/22,
(indexed to T10Y minus 45bp subject to 10% cap) 5,010,679 4,806,250
1,000,000 FNMA 92-204FE, 5.87%, due 10/25/22,
(indexed to T10Y minus 50bp subject to 9.5% cap) 1,000,000 933,437
265,799 FHLMC 1433FD, 6.333%, due 11/15/22,
(indexed to COFI plus 130bp subject to 10.5% cap) 265,869 256,663
1,738,879 FNMA G93-17FL, 5.56%, due 04/25/23,
(indexed to T10Y minus 25bp subject to 9.5% cap) 1,738,879 1,703,015
3,000,000 FNMA G93-19FD, 5.72%, due 04/25/23,
(indexed to T10Y minus 65bp subject to 9.5% cap) 2,993,559 2,779,687
5,000,000 FHLMC G10I, 5.10%, due 05/25/23,
(indexed to T10Y minus 55bp subject to 9.5% cap) 4,984,754 4,603,125
11,000,000 FHLMC 1608FD, 6.003%, due 06/15/23,
(indexed to COFI plus 97bp subject to 9.5% cap) 10,972,706 10,570,312
4,509,447 FNMA 93-99F, 6.283%, due 07/25/23,
(indexed to COFI plus 125bp subject to 10% cap) 4,519,579 4,340,344
7,355,168 FNMA 93-182FA, 5.72%, due 09/25/23,
(indexed to T10Y minus 65bp subject to 10% cap) 7,329,435 6,877,083
9,428,129 FHLMC 1614TA, 6.033%, due 11/15/23,
(indexed to COFI plus 100bp subject to 9.5% cap) 9,425,367 9,080,467
----------- -----------
Total long-term investments 71,878,720 68,916,469
SHORT-TERM INVESTMENTS 6.9% (A)<F1>
REPURCHASE AGREEMENTS -- 6.9%
$5,084,000 Firstar National Bank Repurchase Agreement,
4.625%, dated 03/29/96; maturing 04/01/96
(secured by $5,065,000 U.S. Treasury Note,
5.50%, due 09/30/97) $5,084,000 $5,084,000
----------- -----------
Total short-term investments 5,084,000 5,084,000
----------- -----------
Total investments $76,962,720 74,000,469
------------
------------
Liabilities, less cash and
receivables -- (0.2%) (A)<F1> (150,636)
------------
Net Assets $73,849,833
------------
------------
Net Asset Value Per Share
($0.01 par value, 300,000,000
shares authorized), redemption price
($73,849,833 / 8,501,464
shares outstanding) $8.69
------------
------------
Maximum Offering Price Per Share
(net asset value plus 3.36% of
the net asset value or 3.25% of
the offering price calculated as
$8.69 x 100 / 96.75) $8.98
------------
------------
(a)<F1>Percentages for the various classifications relate to net assets.
(b)<F2>The coupon rate shown on adjustable rate securities represents the rate
at period end. All coupon rates reset monthly.
COFI=Cost of Funds Index
T10Y=10 Year Treasury
bp=basis points
FHLMC=Federal Home Loan Mortgage Corp.
FNMA=Federal National Mortgage Association
The accompanying notes to financial statements are an integral part of this
statement.
</TABLE>
STATEMENT OF OPERATIONS
For the Period Ended March 31, 1996 (Unaudited)
INCOME:
Interest $2,414,822
----------
Total income 2,414,822
----------
EXPENSES:
Management fees 203,173
Professional fees 49,621
Administrative services 25,400
Custodian fees 9,464
Transfer agent fees 6,149
Amortization of organizational expenses 4,999
Printing and postage expense 3,180
Board of Director fees 2,250
Other expenses 566
---------
Total expenses before reimbursement 304,802
Less expenses assumed by adviser (203,173)
---------
Net expenses 101,629
----------
NET INVESTMENT INCOME 2,313,193
----------
NET REALIZED LOSS ON INVESTMENTS (85,988)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 979,560
----------
NET GAIN ON INVESTMENTS 893,572
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,206,765
----------
----------
The accompanying notes to financial statements are an integral part of this
statement.
STATEMENTS OF CHANGES IN NET ASSETS
For the Period Ended March 31, 1996 (Unaudited) and For the Year Ended September
30, 1995
1996 1995
----------- -----------
OPERATIONS:
Net investment income $2,313,193 $7,557,697
Net realized loss on investments (85,988) (6,057,608)
Net increase in unrealized appreciation
on investments 979,560 6,283,289
---------- ----------
Net increase in net assets
resulting from operations 3,206,765 7,783,378
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.24 and $0.59 per share, respectively) (2,313,193) (7,557,697)
Return of capital distribution
($1.00 per share) -- (10,441,551)
----------- -----------
Total distributions (2,313,193) (17,999,248)
----------- -----------
FUND SHARE ACTIVITIES:
Proceeds from shares issued
(0 and 130,733 shares, respectively) 0 1,173,191
Capital contribution from
Robert W. Baird & Co. Incorporated -- 4,489,671
Net asset value of shares issued in distributions
(0 and 11,046 shares, respectively) 0 99,542
Cost of shares redeemed (1,940,087 and
8,154,600 shares, respectively) (16,848,568) (73,161,040)
----------- -----------
Net decrease in net assets
derived from Fund share activities (16,848,568) (67,398,636)
----------- -----------
TOTAL DECREASE (15,954,996) (77,614,506)
NET ASSETS AT THE BEGINNING OF THE PERIOD 89,804,829 167,419,335
----------- -----------
NET ASSETS AT THE END OF THE PERIOD $73,849,833 $89,804,829
----------- -----------
----------- -----------
The accompanying notes to financial statements are an integral part of these
statements.
FINANCIAL HIGHLIGHTS
(Selected Data for each share of the Fund outstanding throughout each period)
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE FOR THE YEAR FROM
PERIOD ENDED FOR THE YEARS ENDED OCTOBER 1, 1992+<F3>
MARCH 31, SEPTEMBER 30, TO SEPTEMBER 30,
-------------------------
1996 1995 1994 1993
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $8.60 $9.07 $9.95 $10.00
Income from investment operations:
Net investment income 0.24 0.59 0.47 0.46
Net realized and unrealized gain
(loss) on investments 0.09 0.14 (0.88) (0.05)
------- ------- ------- -------
Total from investment operations 0.33 0.73 (0.41) 0.41
Capital contribution from
Robert W. Baird & Co. Incorporated -- 0.39 -- --
Less distributions:
Dividends from net investment income (0.24) (0.59) (0.47) (0.46)
Distribution from net realized gains -- -- (0.00) --
Return of capital distribution -- (1.00) -- --
------- ------- ------- -------
Total from distributions (0.24) (1.59) (0.47) (0.46)
------- ------- ------- -------
Net asset value, end of period $8.69 $8.60 $9.07 $9.95
------- ------- ------- -------
------- ------- ------- -------
TOTAL INVESTMENT RETURN****<F7> 8.0%*<F4> 12.8% (4.3%) 4.2%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's $) 73,850 89,805 167,419 142,287
Ratio of expenses (after reimbursement)
to average net assets**<F5> 0.25%*<F4> 0.3% 0.5% 0.4%
Ratio of net investment income
to average net assets***<F6> 5.7%*<F4> 6.4% 4.8% 4.3%
Portfolio turnover rate -- 3.6% 143.8% 79.4%
+<F3>Commencement of Operations.
*<F4>Annualized.
**<F5>Computed after giving effect to adviser's expense limitation
undertaking. If the Fund had paid all of its expenses, the ratios would have
been 0.7%, 0.9% and 1.1%, respectively, for the years ended September 30,
1995, 1994 and 1993.
***<F6>The ratio of net investment income prior to adviser's expense
limitation undertaking to average net assets for the years ended September
30, 1995, 1994 and 1993 would have been 5.9%, 4.4% and 3.6%, respectively.
****<F7>Total return does not include the sales load which existed when the
Fund was open to new investments. The total return for the year ended
September 30, 1995 is computed after giving effect to the capital contribution
from Robert W. Baird & Co. Incorporated. If the Fund had not received this
capital contribution, the total return would have been 8.4% for the year ended
September 30, 1995.
The accompanying notes to financial statements are an integral part of these
statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1996 (Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- The following is a summary of
significant accounting policies of the Baird Adjustable Rate Income Fund (the
"Fund"), which is one portfolio in a series of two portfolios comprising The
Baird Funds, Inc. (the "Company"), which is registered under the Investment
Company Act of 1940. The assets and liabilities of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which the
shareholder owns shares. The Company was incorporated under the laws of
Wisconsin on June 26, 1992 and commenced operations on October 1, 1992. The Fund
was closed to new investments effective December 23, 1994. The investment
objective of the Fund is to hold its existing portfolio securities to maturity
or until such time as sales become available at prices consistent with the
ability to liquidate securities at their respective par values.
(a) Securities for which market quotations are readily available are valued at
the most recent bid price. Securities for which there are no readily available
market quotations and other assets are valued at their fair value as determined
in good faith in accordance with policies approved by the Company's Board of
Directors. Valuation techniques may include the use of market quotations for
similar securities, transaction prices for the same or similar securities,
prices provided by broker-dealers or estimates of market values obtained from
yield and other data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors.
Debt securities having a remaining maturity of sixty days or less when
purchased and debt securities originally purchased with maturities in excess
of sixty days but which currently have maturities of sixty days or less are
valued at cost adjusted for amortization of premiums and accretion of
discounts.
(b) Premiums and discounts on Collateralized Mortgage Obligations in the Fund
are amortized to weighted average life. Premiums and discounts on other
securities are amortized to maturity. Investment transactions are recorded no
later than the first business day after the trade date. Cost amounts, as
reported in the schedule of investments, are the same for Federal income tax
purposes.
(c) Net realized gains and losses are computed on the basis of the cost of
specific certificates.
(d) Provision has not been made for Federal income taxes since the Fund has
elected to be taxed as a "regulated investment company" and intends to
distribute substantially all income to its shareholders and otherwise comply
with the provisions of the Internal Revenue Code applicable to regulated
investment companies. The Fund has $8,221,605 of net capital losses which expire
September 30, 2003 and $1,062,523 of 1995 post-October losses that may be used
to offset capital gains in future years to the extent provided by tax
regulations.
(e) Dividend income (if any) is recorded on the ex-dividend date. Interest
income is recorded on the accrual basis.
(f) Generally accepted accounting principles require that permanent financial
reporting and tax differences be reclassified to capital stock.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES -- The Fund has a management agreement with Robert W. Baird & Co.
Incorporated ("RWB"), with whom certain officers and directors of the Fund are
affiliated, to serve as investment adviser and manager. Under the terms of the
agreement, the Fund was to pay RWB a monthly management fee at the annual rate
of 0.50% of the daily net assets of the Fund. RWB has permanently waived all
future management fees due from the Fund effective January 1, 1995 (for the
period ending March 31, 1996, approximately $203,173).
During the period ending March 31, 1996, the Company was advised that the
Fund did not pay any brokerage fees to RWB on the execution of purchases and
sales of portfolio securities.
(3) DISTRIBUTION TO SHAREHOLDERS -- Dividends from net investment income for the
Fund are declared daily and paid monthly. Distributions of net realized gains,
if any, for the Fund, will be declared at least once a year.
The Fund will seek to maximize returns of capital to investors by making
distributions of substantially all returns of capital and revenues (subject to
retention of cash or cash equivalents not to exceed the lesser of $5,000,000 or
10% of net assets). Such a return of capital distribution was paid on September
26, 1995 in the amount of $10,441,551 ($1.00 per share).
(4) DEFERRED EXPENSES -- Organizational expenses were deferred and are being
amortized on a straight-line basis over a period of not more than five years.
These expenses were advanced by RWB who will be reimbursed by the Fund over a
period of not more than five years. The proceeds of any redemption of the
initial shares by the original shareholder will be reduced by a pro-rata portion
of any then unamortized deferred expenses in the same proportion as the number
of initial shares being redeemed bears to the number of initial shares
outstanding at the time of such redemption. The unamortized organizational
expenses for the Fund at March 31, 1996 were $14,996.
(5) INVESTMENT TRANSACTIONS -- For the period ending March 31, 1996, purchases
and proceeds from sales of investment securities of the Fund (excluding short-
term securities) were $0 and $5,923,517, respectively, and $4,939,925 and
$9,951,520, respectively, of short-term U.S. Government Securities.
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES -- As of March 31, 1996,
liabilities of the Fund included the following:
Dividends payable $353,312
Payable to shareholders for redemptions 18,704
Payable to adviser for deferred expenses 14,996
Other liabilities 46,103
(7) SOURCES OF NET ASSETS -- As of March 31, 1996, the sources of net assets
were as follows:
Fund shares issued and outstanding $86,182,200
Net unrealized depreciation on investments (2,962,251)
Accumulated net realized loss on investments (9,370,116)
-----------
$73,849,833
-----------
-----------
Aggregate net unrealized depreciation as of March 31, 1996, consisted of the
following:
Aggregate gross unrealized appreciation $243,763
Aggregate gross unrealized depreciation (3,206,014)
-----------
Net unrealized depreciation $(2,962,251)
-----------
-----------
(BAIRD LOGO)
A NORTHWESTERN MUTUAL COMPANY
Robert W. Baird & Co. Incorporated
777 E. Wisconsin Avenue, Milwaukee, WI 53202
Phone 414 765-3500. Toll Free 1-800-RW-BAIRD
Copyright 1996 Robert W. Baird & Co. Incorporated
