Baird Funds N-CSRCertified annual shareholder report (management investment company)

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, asset classes, types of fixed income securities 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.

Dear Shareholder,

2019 saw a strong rebound in financial markets from the volatility and uncertainty of 2018 and returns in the U.S. fixed income market were truly phenomenal. In the taxable bond market, accommodative monetary policy from global central banks, including a pivot away from additional rate hikes by the U.S. Fed, allayed global recessionary fears while strong domestic and foreign demand helped drive corporate spreads tighter. In the municipal bond market, 2019 was a rewarding year for investors driven to a large extent by the supportive demographics of an aging society in need of income and the impact of the Tax Cuts and Jobs Act which continued to drive demand for tax-exempt securities.

Amidst this backdrop, all of the Baird Bond Funds delivered strong nominal and risk adjusted results to investors. The Funds’ long-term track records remain very competitive and we believe the portfolios are positioned well as we enter 2020.

Our commitment to our long-term principles to generate competitive risk-controlled returns over full market cycles; support and strengthen our long-tenured, seasoned investment group and team-based, collaborative culture; deliver outstanding client service; and provide products that are competitively priced, continues to generate strong alignment with the interests of our investors and helped drive assets under management in the Baird Bond Funds to just over $62.7 billion at year end.

We greatly value the trust you have placed in us and are privileged to provide you with fixed income investment management services. We can assure you that we never lose sight of the fact that our long-term success rests on the trust you have placed in us to be effective stewards of your assets.

Thank you for your continued investment in the Baird Bond Funds.

Sincerely,

Mary Ellen Stanek, CFA

President

Baird Funds

Treasury yields fell in 2019 as growing recession fears compelled the Fed to pivot to a more accommodative policy stance which included three rate cuts and a renewed expansion of its balance sheet in the second half of the year. The 10-year yield fell to a low of 1.46% on September 4th before trending higher to end the year at 1.92%. In January, Chairman Powell said that the Fed would be “patient”, signaling a prolonged pause to further rate hikes. As global growth slowed and US/China trade tensions rose, the Fed made the first “insurance” rate cut in July and ultimately cut the fed funds rate two more times, bringing the target range to 1.50%-1.75% by the end of October. In a worrisome signal to investors looking for signs of recession, the yield spread between the 3-month Treasury bill and 10-year Treasury note inverted on multiple occasions in 2019, reaching its most negative level of -52 bps on August 28. Seeing disruption in short-term lending markets, the Fed began to provide additional Repo funding to the market in September. The Fed went even further in October, committing to buy $60B per month of Treasury Bills into Q2 2020 to rebuild excess reserve levels and to ensure ample liquidity and short-term funding market stability. The pivot to accommodation by the Fed, along with easing measures by other global central banks, calmed the market’s recession concerns. The curve steepened and the 3-month to 10-year yield spread “de-inverted”, closing the year at positive 37 bps. De-escalation in US/China trade tensions provided additional market support as the two countries agreed to a “phase one deal”, preventing new tariffs on December 15th, and halving the tariffs that had been implemented on September 1. Furthermore, China committed over two years to a $200B increase in purchases of U.S. goods, primarily agricultural products. Partisan politics weighed on market sentiment throughout the year, culminating in the House of Representatives voting to impeach President Trump. In the UK, markets got clarity on Brexit, as Boris Johnson and the Conservative party won a historically large majority in Parliament this month, paving the way for Britain to approve the separation agreement with the European Union by the January 31, 2020 deadline.

Fixed income fund inflows occurred at a record pace in 2019 after experiencing $70B of outflows in the last three months of 2018. Flows into fixed income funds and ETFs for 2019 entering the last week reached $450B, breaking the previous record set in 2017 (see chart, below). The ICI data doesn’t fully capture demand from all market participants – such as insurance companies, pensions, and foreign investors. However, data

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from the Fed showed a strong appetite from foreign buyers, as net buying of investment grade corporate bonds in the first nine months of the year reached nearly $115B (or a $152B annualized pace), absorbing over a third of the $355B U.S. corporate net supply during that period. Global investors have been drawn to the positive yields on U.S. debt, as over $11 trillion in global bonds were priced at negative yields at year end, according to Bloomberg, down from a peak of $17 trillion in late August.

Fixed income industry outflows and fears of a central bank policy mistake tipping the U.S. economy into recession contributed to wider spreads at the end of 2018, setting the stage for a rebound in 2019. Accommodative monetary policy from global central banks, including a pivot away from additional rate hikes by the U.S. Fed, allayed global recessionary fears while strong domestic and foreign demand helped drive corporate spreads tighter. U.S. Investment Grade Corporates ended the year 60 bps tighter at 93 bps while High Yield Corporates tightened a remarkable 190 bps to end the year at 336 bps. U.S. Agency Pass-throughs were an outlier, widening 4 bps in 2019 to 39 bps, as prepayment risks remained elevated and the Fed no longer supported the sector with additional purchases, instead allowing its MBS holdings to continue to run off, and only reinvesting in Treasuries. Emerging Market Debt also widened 13 bps in 2019 to 573 bps, primarily driven by country-specific news such as Argentina’s currency crisis and debt default.

The returns in the U.S. fixed income market were truly phenomenal considering that the 10-year Treasury yield began the year at 2.68%. Both credit risk and duration risk were rewarded in 2019.  U.S. Investment Grade Corporates posted the strongest overall returns in 2019 (+14.54%), and returns on longer maturities (U.S. Gov’t/Credit + 9.71%) were substantially greater than those on shorter maturities (U.S. 1-3 Yr. Gov’t/Credit Index +4.03%).

As we ring in 2020, we see the year as likely a “continuation of gradual”, in terms of growth and inflation, but with bouts of higher volatility. The outlook for Fed policy and short-term interest rates is a holding pattern – patiently waiting to see if the three rate cuts in 2019 are sufficient to sustain growth around 2%. Global growth quite likely bottomed in 2019 and the risk of global recession has diminished, however, it is likely global growth will be impacted in the first half of 2020 if not longer as a result of the global Coronavirus (COVID-19) outbreak. On the inflation front, the Fed will likely adopt a new approach to meeting their 2% inflation objective sometime in the first half of 2020 in response to inflation remaining persistently below their 2% target for most of this cycle. The new approach will effectively be a “make-up strategy” that would allow inflation to run above 2% for a period of time if inflation has been below 2% for prior periods to achieve an average inflation rate of 2% over the long term. Given that inflation has persistently run below 2% in the last several years, the Fed would signal that no policy action would be required if inflation would run modestly above 2% for an extended period of time under this new approach. While the full global economic impact of the Coronavirus (COVID-19) is still unknown, we currently expect U.S. real growth of 1.5%-2.5% in 2020, extending the longest post-WWII expansion further with only a modest increase in inflation.

While bouts of higher volatility may well persist, modest economic growth, moderate inflation, and the Fed’s evolving approach to inflation targeting lead us to expect a low, accommodative fed funds rate target with potential for the yield curve to steepen. The new federal budget deal boosts federal spending, creating a larger deficit which must be funded through additional federal borrowing. While few policymakers are currently focused on the growing federal debt, there is risk this could ultimately put upward pressure on Treasury rates, but not meaningfully so in 2020. Positive consumer confidence should benefit retail spending as many households have benefited from the strong equity and fixed income market returns. In addition, a de-escalation of trade tensions may help support business confidence, translating into improved growth in business capital expenditures.

Our outlook for corporate credit is mixed – we continue to see value in BBB-rated credit where business models are strong and management teams are committed to deleveraging.  However, A-rated credit appears to be more fully-valued as the year-end spread of 70 bps is only a few basis points away from the tightest levels since the financial crisis. The probability of a near-term recession remains relatively low and we expect corporate earnings growth to be positive, though at a moderate pace. We remain cautious on the prospects for Agency Pass-through securities, as the Fed continues its balance sheet reduction, but find value in select collateral that offers better prepayment protections. We are optimistic on the outlook for other securitized sectors, such as Non-Agency RMBS, CMBS and ABS, which we believe offer value versus higher-rated credit and expect to outperform equivalent-duration Treasuries in 2020.

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The Baird Ultra Short Bond Fund seeks current income consistent with preservation of capital. The Fund’s primary benchmark index against which it measures performance is the Bloomberg Barclays U.S. Short-Term Government/Corporate Index. The Bloomberg Barclays U.S. Short-Term Government/Corporate Index is an unmanaged, market value weighted index of investment grade, fixed-rate debt issues, including government and corporate securities, with maturities of less than one year.

Treasury yields fell in 2019 as growing recession fears compelled the Fed to pivot to a more accommodative policy stance which included three rate cuts and a renewed expansion of its balance sheet in the second half of the year. The 10-year Treasury fell to a low of 1.46% on September 4th before trending higher to end the year at 1.92%, still 76 basis points lower for the year. In January, Chairman Powell said the Fed would be “patient”, signaling a prolonged pause to further rate hikes. As global growth slowed and US/China trade tensions rose, the Fed made the first “insurance” rate cut in July and ultimately cut the Fed funds rate two more times, bringing the target range to 1.50%-1.75% by the end of October. The pivot to more accommodation by the Fed, along with easing measures by other global central banks, calmed the market’s recession concerns. The curve steepened and the 3-month to 10-year yield spread “de-inverted”, closing the year at positive 37 basis points. De-escalation in US/China trade tensions provided additional market support as the two countries agreed to a “phase one deal” and, in the UK, markets got clarity on Brexit, as Boris Johnson and the Conservative party won a historically large majority in Parliament, paving the way for Britain to approve the separation agreement with the European Union by the January 31, 2020 deadline.

During 2019, the Fund’s Institutional Class Shares generated strong absolute and relative returns and outperformed its benchmark by 42 basis points net of fees.

The primary factors contributing to the Fund’s absolute and relative performance in 2019 include:

The economic outlook for 2020 is largely similar to what occurred in 2019, with a continuation of modest economic growth (1.5% – 2.5%) and moderate inflation at or below the Fed’s 2.0% target level for Core PCE. With this outlook, a stable but accommodative Fed stance is also likely to prevail for the year. One would expect that a favorable economic, inflation and monetary backdrop would imply stable market rates as well, but bouts of higher volatility are to be expected, particularly since 2020 is an election year, other geopolitical “hotspots” persist such as Iran and the global economic impact of the Coronavirus (COVID-19) outbreak is currently unknown. Prior to the outbreak, the global economic picture appeared to be improving on the margin, with the timing of Brexit resolved and the “Phase One” trade agreement between the U.S and China in place.

We maintain an overweight to Investment Grade Corporate Credit, particularly Financials. We maintain an allocation to the MBS/ABS sectors at the senior part of the capital structure due to what we believe are favorable risk/reward characteristics and the broad sector diversification benefits they provide. As a reminder, we only purchase U.S. dollar denominated securities in the cash bond market (no derivatives). We believe the Fund is well positioned to add value relative to its benchmark.

Portfolio Characteristics

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This schedule summarizes the Fund’s holdings by asset type. Details are reported for each of the Fund’s 50 largest individual holdings and for investments that, in total for any issuer, represent more than 1% of the Fund’s net assets. The total value of smaller holdings is reported as a single amount within each category.

The Fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, as of the quarter end. For the second and fourth fiscal quarters, the complete listing of the Fund’s holdings is available electronically at http://www.bairdassetmanagement.com/baird-funds/funds-and-performance#Literature and in the Fund’s Form N-CSR on the Securities and Exchange Commission’s website (www.sec.gov) or you can have it mailed to you without charge by calling 1-866-44BAIRD. For the first and third fiscal quarters, the Fund files the lists with the SEC on Part F of Form N-PORT. Shareholders can look up the Fund’s Forms N-CSR or Part F of Form N-PORT on the SEC’s website (www.sec.gov).

Long-Term Investments

Long-Term Investments (cont.)

Long-Term Investments (cont.)

Long-Term Investments (cont.)

Short-Term Investments

Summary of Fair Value Exposure at December 31, 2019

The Fund has adopted authoritative fair valuation accounting standards which establish a definition of fair value and set out a hierarchy for measuring fair value.  These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion on changes in valuation techniques and related inputs during the period. These standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Summary of Fair Value Exposure at December 31, 2019 (cont.)

The fair value hierarchy is organized into three levels based upon the assumptions (referred to as “inputs”) used in pricing the asset or liability.  These standards state that “observable inputs” reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources and “unobservable inputs” reflect an entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. These inputs are summarized into three broad levels and described below:

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used to value the Fund’s investments as of December 31, 2019:

Changes in valuation techniques may result in transfers into or out of assigned levels within the fair value hierarchy. There were no transfers into or out of Level 3 during the reporting period, as compared to the security classifications from the prior year’s annual report. See the Fund’s Valuation Policy in Note 2a to the financial statements.

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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 Bloomberg Barclays 1-3 Year U.S. Government/Credit Bond Index. The Bloomberg Barclays 1-3 Year U.S. Government/Credit Bond Index is an unmanaged, market value weighted index of investment grade, fixed-rate debt issues, including government and credit securities, with maturities between one and three years.

Treasury yields fell in 2019 as growing recession fears compelled the Fed to pivot to a more accommodative policy stance which included three rate cuts and a renewed expansion of its balance sheet in the second half of the year. The 10-year Treasury fell to a low of 1.46% on September 4th before trending higher to end the year at 1.92%, still 76 basis points lower for the year. In January, Chairman Powell said the Fed would be “patient”, signaling a prolonged pause to further rate hikes. As global growth slowed and US/China trade tensions rose, the Fed made the first “insurance” rate cut in July and ultimately cut the Fed funds rate two more times, bringing the target range to 1.50%-1.75% by the end of October. The pivot to more accommodation by the Fed, along with easing measures by other global central banks, calmed the market’s recession concerns. The curve steepened and the 3-month to 10-year yield spread “de-inverted”, closing the year at positive 37 basis points. De-escalation in US/China trade tensions provided additional market support as the two countries agreed to a “phase one deal” and, in the UK, markets got clarity on Brexit, as Boris Johnson and the Conservative party won a historically large majority in Parliament, paving the way for Britain to approve the separation agreement with the European Union by the January 31, 2020 deadline.

During 2019, the Fund’s Institutional Class Shares generated strong absolute and relative returns and outperformed its benchmark by 65 basis points net of fees.

The primary factors contributing to the Fund’s absolute and relative performance in 2019 include:

The economic outlook for 2020 is largely similar to what occurred in 2019, with a continuation of modest economic growth (1.5% – 2.5%) and moderate inflation at or below the Fed’s 2.0% target level for Core PCE. With this outlook, a stable but accommodative Fed stance is also likely to prevail for the year. One would expect that a favorable economic, inflation and monetary backdrop would imply stable market rates as well, but bouts of higher volatility are to be expected, particularly since 2020 is an election year, other geopolitical “hotspots” persist such as Iran and the global economic impact of the Coronavirus (COVID-19) outbreak is currently unknown. Prior to the outbreak, the global economic picture appeared to be improving on the margin, with the timing of Brexit resolved and the “Phase One” trade agreement between the U.S and China in place.

We maintain an overweight to Investment Grade Corporate Credit, particularly Financials. We maintain an allocation to the MBS/ABS sectors at the senior part of the capital structure due to what we believe are favorable risk/reward characteristics and the broad sector diversification benefits they provide. As a reminder, we only purchase investment grade, U.S. dollar denominated securities in the cash bond market (no derivatives). The Fund remains duration neutral to its benchmark and we believe it is well positioned to add value relative to its benchmark.

Portfolio Characteristics

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This schedule summarizes the Fund’s holdings by asset type. Details are reported for each of the Fund’s 50 largest individual holdings and for investments that, in total for any issuer, represent more than 1% of the Fund’s net assets. The total value of smaller holdings is reported as a single amount within each category.

The Fund reports a complete list of its holdings in regulatory filings four times in each fiscal year, as of the quarter end. For the second and fourth fiscal quarters, the complete listing of the Fund’s holdings is available electronically at http://www.bairdassetmanagement.com/baird-funds/funds-and-performance#Literature and in the Fund’s Form N-CSR on the Securities and Exchange Commission’s website (www.sec.gov) or you can have it mailed to you without charge by calling 1-866-44BAIRD. For the first and third fiscal quarters, the Fund files the lists with the SEC on Part F of Form N-PORT. Shareholders can look up the Fund’s Forms N-CSR or Part F of Form N-PORT on the SEC’s website (www.sec.gov).

Long-Term Investments

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Long-Term Investments (cont.)

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Long-Term Investments (cont.)

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Long-Term Investments (cont.)

Short-Term Investment

Summary of Fair Value Exposure at December 31, 2019

The Fund has adopted authoritative fair valuation accounting standards which establish a definition of fair value and set out a hierarchy for measuring fair value.  These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion on changes in valuation techniques and related inputs during the period. These standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Summary of Fair Value Exposure at December 31, 2019 (cont.)

The fair value hierarchy is organized into three levels based upon the assumptions (referred to as “inputs”) used in pricing the asset or liability.  These standards state that “observable inputs” reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources and “unobservable inputs” reflect an entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. These inputs are summarized into three broad levels and described below: