High Yield Fund
|Total Net Assets:||$275.73 Million (3/31/21)|
|Category:||High Yield Bond|
|Benchmark:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q1 2021
PM Commentary Q1 2021
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.
Our team brings many years of credit research experience to the bond market. We are proud to have provided our shareholders with what we believe is a conservative approach to investing in high yield bonds since 1995.
Jeff Sitzmann, Portfolio Manager
Overall Morningstar Rating™ of BUFHX based on risk-adjusted returns among 633 High Yield Bond funds as of 5/31/21.
|As of 5/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||1.69||3.24||19.06||7.58||6.38||5.70||6.40||6.49||7.10|
|BUFFALO HIGH YIELD FUND - Institutional||1.64||3.31||19.12||7.71||6.52||5.85||6.55||6.65||7.25|
|ICE BofAML U.S. High Yield Index||1.56||2.31||15.18||6.79||7.24||6.25||7.27||7.41||7.16|
|Lipper High Yield Bond Funds Index||1.83||2.92||15.93||6.28||6.79||5.64||6.15||6.29||5.97|
|Morningstar High Yield Bond Category||1.73||2.52||14.56||5.81||6.11||5.25||6.07||6.35||5.91|
|As of 3/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||1.73||1.73||27.07||7.06||6.54||5.68||6.21||6.53||7.08|
|BUFFALO HIGH YIELD FUND - Institutional||1.77||1.77||27.28||7.19||6.68||5.83||6.36||6.69||7.24|
|ICE BofAML U.S. High Yield Index||0.90||0.90||23.31||6.53||7.94||6.31||7.21||7.35||7.15|
|Lipper High Yield Bond Funds Index||1.47||1.47||24.07||5.95||7.30||5.68||6.07||6.20||5.95|
|Morningstar High Yield Bond Category||1.10||1.10||21.79||5.43||6.54||5.31||6.00||6.30||5.89|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 3/31/21)|
Hypothetical Growth of $10,000
— Record Date (6/17/21); Payment Date (6/18/21) – Ordinary Income & Capital Gains, if any
— Record Date (7/19/21); Payment Date (7/20/21) – Ordinary Income & Capital Gains, if any
— Record Date (8/17/21); Payment Date (8/18/21) – Ordinary Income & Capital Gains, if any
— Record Date (9/17/21); Payment Date (9/20/21) – Ordinary Income & Capital Gains, if any
— Record Date (10/18/21); Payment Date (10/19/21) – Ordinary Income & Capital Gains, if any
— Record Date (11/17/21); Payment Date (11/18/21) – Ordinary Income & Capital Gains, if any
— Record Date (12/2/21); Payment Date (12/3/21) – Capital Gains, if any
— Record Date (12/17/21); Payment Date (12/20/21) – Ordinary Income, if any
|(As of 3/31/21)|| |
|# of Holdings||138|
|3-Yr Annualized Turnover Ratio||33.06%|
|Average Duration||2.72 years|
|Average Maturity||7.19 years|
|30-day SEC Yield||3.04%|
Top 10 Holdings
|Name of Holding||% of Net|
|Open Lending (1 mo LIBOR + 6.500%, 3/11/27)||2.58%|
|Nuance Communications (1.500%, 11/1/35)||2.46%|
|MPLX (6.875%, 8/15/23)||2.17%|
|Daseke (1 mo LIBOR + 5.000%, 2/27/24)||1.86%|
|Builders FirstSource (5.000%, 3/1/30)||1.62%|
|Michaels Stores (8.000%, 7/15/27)||1.61%|
|CNX Resources (7.250%, 3/14/27)||1.61%|
|Treehouse Foods (4.000%, 9/1/28)||1.55%|
|Diebold Nixdorf (8.500%, 4/15/24)||1.52%|
|Comstock Resources (9.750%, 8/15/26)||1.41%|
|TOP 10 HOLDINGS TOTAL||18.39%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
CAPITAL MARKET OVERVIEW
(As of 3/31/21) — The U.S. high yield sector continued its rally in the quarter, keeping yields at record lows. High yield bond prices continued their recovery from the COVID-19 sell-off in March 2020 amid stimulus and vaccine optimism. The high yield market, as demonstrated by the JP Morgan Domestic High Yield Index, posted positive returns in each month of the quarter (0.56% in January, 0.44 % in February, and 0.39% in March) maintaining yields at a 4.72% level. The 10-year U.S. Treasury Bond declined -7.08% during the quarter while the S&P 500 Index logged a return of 6.17%.
Following $3.4 billion in cash outflows in the final quarter of 2020, high yield mutual funds recorded another $10.2 billion in outflows this quarter. Interestingly, between the months of April to August 2020, high yield funds posted five consecutive months of inflows totaling $59.1 billion, which included the two largest monthly inflows ever recorded in April ($17.1 billion) and May ($20.5 billion), only to be followed by seven consecutive months of outflows totaling -$9.2 billion.
High yield new issuance volume was a record $158.6 billion during the three-month period after posting $99 billion in the previous quarter. Refinancing continued to be the primary use of proceeds accounting for ~77% of transaction volume in the quarter. According to JP Morgan, mid-tier and upper tier (B-split BBB) issues accounted for the bulk of activity in the quarter (86%) with the heaviest volume coming from Energy (20.3%), Gaming/Lodging (9.8%), and Telecommunications (6.8%).
The yield on the 10-year Treasury Bond increased 82 basis points (bps) during the quarter, from 0.92% to 1.74%, as early signs of inflation and a “return to normal” post-COVID outlook crept into the market. According to data from JP Morgan, the higher credit rating silos, which are more sensitive to interest rate movements, posted negative returns in the quarter while the lower tier silos performed better, as investors sought higher yields. The Defaulted segment produced the largest gain of 21.86% and the BB segment was the worst performer with a 0.09% loss.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 406 bps, 38 bps tighter than the preceding December quarter and 194 bps tighter than its 20-year historical average of 600 bps. The yield to worst for the high yield market at quarter end was 4.72%, below the 20-year average of 8.34%, and essentially unchanged from the 4.71% at the end of the 4th quarter of 2020.
(As of 3/31/21) — The Buffalo High Yield Fund (BUFHX) increased 1.73% in the quarter, outperforming the ICE BofAML U.S. High Yield Index return of 0.90% for the three-month period. The Fund also outperformed the Lipper High Yield Bond Funds Index return of 1.47%.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 1Q21|
|Contribution to Return|
During the period 112 out of the 143 issues in the Buffalo High Yield Fund produced positive returns. The three top contributors were Southwest Airlines 1.25% convertible bonds, J2 Global 1.75% convertible bonds, and Quad Graphics 7.00% corporate bonds. The rise in Southwest Airlines convertible bonds was driven by the underlying common stock rallying throughout the quarter as COVID-19 vaccinations began rolling out and interest in air travel picked up steam. J2 Global improved on the back of the underlying common stock increasing over 22% during the quarter, driven by better than expected earnings and continued demand for its cloud-based communication services. Quad Graphics corporate bonds returned to near par levels, after the company reported better than expected earnings during the quarter, and investors were attracted to its higher coupon, lower duration profile.
Guidewire 1.25% convertible bonds, Smile Direct Club zero coupon convertible bonds, and the Air Transport Services 1.125% convertible bonds were the worst performers during the quarter. Guidewire performed well in the December quarter and gave some of that back this period as investors rolled out of Technology and into value sectors. Smile Direct Club convertible bonds were issued during the quarter as the stock was peaking and then retreated after the issuance. Air Transport Services convertible bonds declined after the common stock peaked at year-end despite Amazon announcing that it was purchasing another eleven aircraft from the company.
(As of 3/31/21) — We are managing the Fund cautiously yet actively, focusing on high quality, below investment grade issuers with defensive business models and manageable credit metrics. We will continue to deploy 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 and less interest rate sensitivity due to their floating rate structures. Finally, we continue to look for opportunities in convertible bonds and preferred stocks. We ended the period with 143 positions, up slightly from the previous quarter’s level of 138 (excluding cash).
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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