Morningstar Magazine - June/July 2018 - 97

strong name might be sold for valuation
reasons, to manage risk, or to take advantage
of better opportunities.
Lululemon Athletica LULU is an example of both
a successful investment and a sale of a
company that no longer meets expectations. The
team built a position when product problems
created a controversy, but a new CEO promised
a turnaround. The stock had a good run,
but increased competition and the leader's abrupt
departure led to a decision to take profits. The
first-quarter sale of Italian oil and gas company
Eni ENI:IT, as the CEO faces trial concerning
a bribery scandal, reflects the team's emphasis
on governance.
Governance is one aspect of the team's
consideration of sustainability, which includes
environmental and labor practices. "We believe
that great businesses are good corporate
citizens," Beitner says. "Companies that have labor
strife or that run afoul of regulations can
torpedo a portfolio." (His personal philanthropy
reflects his awareness of environmental risks.
He recently joined the board of Alliance for
Climate Education, "an organization in Boulder,
but with national scope. It does exciting
work," educating teenagers on the science of
climate change and solutions to the problem.)
The Long Haul

The mutual fund versions of the strategies have
short but solid records. In 2017's rally, International
Growth and Global Growth each landed
in the top quartile of its Morningstar Category:
foreign large growth and world large stock,
respectively. While neither strategy is designed
to outperform on the downside, both are
near the norms for their category through April
as markets have declined. Since the funds'
inception in April 2016 through April 2018,
International Growth is in line with its benchmark,
the MSCI ACWI ex USA index, and Global Growth
has handily beat the MSCI ACWI.
More revealing are the longer records of the
corresponding separate accounts. Baird
Chautauqua International Growth Equity's record
dates to the beginning of 2006, and Baird
Chautauqua Global Growth Equity's inception date

is early 2007, so both have been through full
market cycles involving dramatic ups and downs.
Over the trailing 10 years through April, the
International strategy returned an annualized 6.4%,
well more than twice the 2.3% return of the
MSCI ACWI ex USA. The Global strategy's
annualized 10.1% return of that time nearly doubles
the MSCI ACWI's 5.1% showing.
That long-term record was one of the factors
leading to the inclusion of Baird Chautauqua
International Growth in Morningstar
Prospects, a collection of up-and-coming or
under-the-radar strategies that do not have
Analyst Ratings but that Morningstar's manager
research analysts believe may be worth full
coverage someday.
"Expect volatility here," warns senior analyst
Greg Carlson, who oversees the Prospects list.
Over the past three, five, and 10 years through
April, the separate account composite has earned
High Morningstar Risk Scores, which emphasize
downside volatility. Beitner, however, notes
that the International Growth strategy's downside
capture relative to benchmark MSCI ACWI
ex USA is comparable to that of its typical peer,
which Morningstar's calculations bear out.
Either way, Carlson says that "investors have
been well-compensated for the risk." The strategy
compares favorably to other foreign largegrowth strategies even on risk-adjusted returns,
as reflected in its 4-star Morningstar Rating
as of April. Meanwhile, the Baird Chautauqua
Global Growth Equity separate account composite,
which also has High risk scores, earned 5 stars.
A Good Fit

The Baird acquisition brought Chautauqua
to the attention of the advisors at The Ragen
Group, which is part of Baird's private
wealth management business. The seven-person
team based in Seattle oversees more than
$2 billion in assets. Client accounts are invested
primarily in individual stocks and bonds,
but foreign stocks were stretching the advisors'
bandwidth. Chautauqua International Growth
Fund enabled them to diversify their portfolios in a
manner that accorded with their own concentrated stock-picking philosophy.

"We did not want to own an extensive index
fund," says Cam Ragen, financial advisor
and managing director of the group. "We wanted
to find a manager with the courage of their
convictions. We believe that over time, active
management creates healthy returns."
Vice president and financial advisor Phil Banta
notes that their own stock-picking approach
is more value-oriented than Chautauqua's but says
that the strategies are more similar than not,
given that both take a concentrated approach with
a long-term orientation. "We did due diligence
with other international strategies, too. At the end
of the day, Chautauqua's philosophy and
approach was most similar to how we invest. They
feel like an extension of our team, so this was
a good fit for us and our clients."
For its part, the Chautauqua team appreciates
the opportunity to work with a select group
of clients who understand the strategy and intend
to stick with it. That's another freedom that the
firm's alliance with Baird preserved: Chautauqua
sets a limit on the number of clients that members
of the investment team regularly engage with.
It's a deliberate balance. "We know that retirement
benefits are hard-earned and that endowments
have noble goals, so it's important for us to
know our clients," Beitner says. "But we also want
to spend most of our time on investments."
Chautauqua also has the right to decide when
to close strategies to new clients. Beitner
is aware of the risks that come with outgrowing
capacity, but he figures the danger point at
north of $20 billion in assets given the firm's focus
on large, liquid companies. Morningstar's Carlson
considers the International Growth strategy
"still quite nimble" with less than $600 million in
assets, including the mutual fund. While that
strategy has significant overlap with the Global
Growth, the two together are under $1 billion.
No new products are on the horizon. "We'd
need to get to scale in these current strategies
before we'd even think about that," laughs
Beitner. Clients and fund shareholders can expect
Chautauqua to maintain its strict focus. K
Laura Lallos is managing editor of Morningstar magazine.

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