High Yield Fund
|Total Net Assets:||$186.83 Million (3/31/20)|
|Category:||High Yield Bond|
|Benchmark:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q1 2020
PM Commentary Q1 2020
Fund Objective & Investment Process
The investment objective of the Buffalo High Yield Fund is primarily current income, with long-term growth of capital as a secondary objective. The High Yield Fund normally invests at least 80% of its net assets in higher-yielding, higher-risk debt securities rated below investment grade by the major rating agencies (or in similar unrated securities), commonly known as “junk bonds”. Debt securities can include fixed and floating rate bonds as well as bank debt and convertible debt securities.
While the Fund maintains flexibility to invest in bonds of varying maturities, the Fund generally holds bonds with intermediate-term maturities. With respect to the remaining 20% of the Fund’s net assets, the Fund may invest in investment grade debt securities, U.S. Treasury Securities (typically with maturities of 60 days or less), money market funds, and equity investments, including dividend paying stocks and convertible preferred stocks.
The Fund maintains a flexible investment policy which allows it to invest in debt securities with varying maturities. However, it is anticipated that the dollar-weighted average maturity of debt securities that the Fund purchases will not exceed 15 years and that the average maturity of all securities that the Fund holds at any given time will be 10 years or less. The lowest rated debt security that the Fund will hold is D quality (defaulted securities). Although the Fund will not purchase D quality debt securities, the Fund may continue to hold these securities and will sell them at the Fund managers’ discretion.
The Fund’s managers perform extensive fundamental investment research to identify investment opportunities for the Fund. When evaluating investments and the credit quality of rated and unrated securities, the managers look at a number of past, present and estimated future factors, including financial strength of the issuer, cash flow, management, borrowing requirements, sensitivity to changes in interest rates and business conditions, and relative value.
Jeff Sitzmann, Portfolio Manager
Overall Morningstar Rating™ of BUFHX based on risk-adjusted returns among 631 High Yield Bond funds as of 4/30/20.
|As of 4/30/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||-9.48||-9.33||-4.70||0.76||2.09||4.42||5.30||6.06||6.48|
|BUFFALO HIGH YIELD FUND - Institutional||-9.46||-9.29||-4.64||0.88||2.23||4.56||5.45||6.21||6.63|
|ICE BofAML U.S. High Yield Index||-9.82||-9.82||-5.26||1.43||3.19||5.66||6.56||6.54||6.69|
|Lipper High Yield Bond Funds Index||-10.93||-11.00||-6.44||0.72||2.21||4.97||5.39||5.00||5.42|
|Morningstar High Yield Bond Category||-9.70||-9.68||-5.67||0.63||2.15||4.68||5.40||5.38||5.44|
|As of 3/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||-12.52||-12.52||-6.67||-0.12||1.47||4.29||4.98||5.82||6.35|
|BUFFALO HIGH YIELD FUND - Institutional||-12.50||-12.50||-6.62||0.00||1.60||4.44||5.14||5.97||6.50|
|ICE BofAML U.S. High Yield Index||-13.12||-13.12||-7.45||0.55||2.67||5.50||6.22||6.34||6.55|
|Lipper High Yield Bond Funds Index||-14.29||-14.29||-8.47||-0.18||1.68||4.80||5.04||4.78||5.28|
|Morningstar High Yield Bond Category||-12.70||-12.70||-7.67||-0.18||1.66||4.52||5.05||5.17||5.31|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 3/31/20)|
Hypothetical Growth of $10,000
Record Date: June 17, 2020 | Payable Date: June 18, 2020
Record Date: July 17, 2020 | Payable Date: July 20, 2020
Record Date: August 17, 2020 | Payable Date: August 18, 2020
Record Date: September 17, 2020 | Payable Date: September 18, 2020
Record Date: October 19, 2020 | Payable Date: October 20, 2020
Record Date: November 17, 2020 | Payable Date: November 18, 2020
Record Date: December 17, 2020 | Payable Date: December 18, 2020
|(As of 3/31/20)|| |
|# of Holdings||136|
|3-Yr Annualized Turnover Ratio||33.06%|
|Average Duration||3.44 years|
|Average Maturity||6.55 years|
|30-day SEC Yield||4.98%|
Top 10 Holdings
|Name of Holding||% of Net|
|MacDonald Dettwiler (Term Loan B, 7/5/24)||2.19%|
|Consolidated Communications (6.500%, 10/1/22)||2.10%|
|Quad Graphics (7.000%, 5/1/22)||1.75%|
|Phillips Van Heusen (7.750%, 11/15/23)||1.70%|
|MPLX (6.875%, 8/15/23)||1.64%|
|Nuance Communications (1.500% , 11/1/35)||1.63%|
|Brunswick (7.375%, 9/1/23)||1.59%|
|Performance Food Group Escrow Corp (5.500% , 10/15/27)||1.49%|
|Cardtronics (1.000%, 12/1/20)||1.49%|
|Treehouse Foods (6.000%, 2/15/24)||1.44%|
|TOP 10 HOLDINGS TOTAL||15.53%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
|A & Above||0.00|
CAPITAL MARKET OVERVIEW
(As of 3/31/20) — After producing positive returns in the past three consecutive quarters of 2019, the U.S. high yield sector suffered a significant correction during the period, driven by the
COVID-19 outbreak and plunging crude oil prices. The Saudi-Russian power struggle over oil output and the virus pandemic overshadowed everything in the month of March. The U.S Federal Reserve (the “Fed”) enacted extraordinary measures including slashing interest rates, removing the caps on the size of asset purchases, and restarting the Term Asset-Backed Securities Loan Facility (TALF). Congress passed a $2+ trillion
economic relief package in concert with the Fed’s moves, but in spite of these efforts, the flight to quality ensued quickly and painfully. The 10-year Treasury bond returned 12.09% during the quarter, while the S&P 500 Index logged a return of -19.60%.
The flight to quality along with increased market volatility resulted in high yield mutual funds experiencing cash outflows of about $16.7 billion during the quarter. In fact, the $13 billion outflow in the month of March was the second largest monthly outflow for high yield, trailing only the $13.6 billion outflow in June 2013. This follows a $3 billion inflow in the previous quarter and a $3.2 billion inflow in the 3rd quarter of 2019. The
$73 billion in high yield new issuance during the quarter was essentially all brought to market in January and February as demand vanished in March. In fact, only five bonds, totaling $4.2 billion, priced during the month of March compared to March 2019’s volume total of $26.6 billion.
During the quarter, the yield on the 10-year U.S. Treasury Bond declined from 1.92% to 0.67% as investors scrambled to safety. The U.S. high yield universe as a whole was on the opposite side of that flight to quality, with negative returns in every industry, sector, and credit rating silo. According to data from JP Morgan, the highest quality end of the high yield credit spectrum (i.e., split BBB and BB), suffered less than the lower
end of the quality spectrum. The split BBB segment produced the smallest loss at -8.35% and split B was the worst performer with a -24.56% loss.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 9.49%, which was 525 basis points (bps) wider than at year-end and 339 bps wider than the 20-year historical average of 610 bps. The yield to worst for the high yield market at quarter end was 10.00%, above the 20-year average of 8.70%, and above the yield of 6.84% as of December 31st.
(As of 3/31/20) — The Buffalo High Yield Fund (BUFHX) decreased -12.52% for the quarter, compared to a decline of -13.12% for the ICE BofAML U.S. High Yield Index. The Fund also declined less than the Lipper High Yield Bond Funds Index, which produced a return of -14.28%
for the quarter.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 4Q19|
|Unweighted Return||Contribution to Return|
There were only a handful of securities that delivered positive returns for the Fund, with the three top contributors being Brunswick 7.375% corporate bonds, Dermira 3.000%
convertible notes, and Holly Energy Partners 6.000% corporate notes. Brunswick is an investment grade credit with a high coupon and a relatively short maturity date of 2023, which protected it somewhat from the downturn. Dermira was acquired by Eli Lilly in March, and the notes were converted at a small premium to par. Holly Energy Partner notes were called by the company in February at a premium.
Specific securities that detracted the most from performance include MPLX 6.875% corporate bonds, Energy Transfer common equity, and US Silica bank debt. All three
companies are directly exposed to the energy exploration and production (E&P) sector, which was significantly hurt by plummeting crude prices.
(As of 3/31/20) — Until March, the United States had been enjoying a growing economy with modest inflation that had created a favorable environment for risky assets. However, near the end of February and early March, the COVID-19 pandemic and plummeting crude oil prices wreaked havoc on the markets. The U.S. high yield default rate increased to a three-year high of 3.54% in March, which was up 91 bps from the 2.63% level in December 2019, and above the 3.44% long-term average.
We are concerned first and foremost about the ongoing COVID-19 pandemic and the fallout on global economies, while previous issues such as China trade talks and the upcoming presidential election become a secondary focus. We are managing the Fund cautiously yet actively, focusing on high-quality issuers with defensive business models and manageable credit metrics. We ended the quarter with 136 positions unchanged from the previous quarter’s level (excluding cash). We will continue to deploy the Fund’s cash in opportunities that we believe offer the most appealing risk/reward tradeoff with a bias toward shorter durations and less levered credits. Additionally, we believe bank loans offer a more defensive position as they provide senior positioning in the capital structure. Finally, we continue to look for opportunities in convertible bonds and preferreds.
We get to know the companies we invest in and learn how they run their business.
Top-Down & Bottom-Up
We identify Top-Down broad, secular growth trends and search for companies from the Bottom-Up.
We construct our portfolios based on our own proprietary investment strategy.
Sticking to our disciplined investment strategy ensures we maintain a consistent, balanced approach.
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