High Yield Fund
(As of 6/30/17)
May 19, 1995
Total Fund Assets
BofA Merrill Lynch HY Master II
Overall Morningstar™ rating out of 602 High Yield Bond funds as of 8/31/17 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure).
RISK VS CATEGORY
The Morningstar™ Risk vs Category rating is an assessment of the variations in a fund’s monthly returns, with an emphasis on downside variations, in comparison to the 602 funds in the High Yield Bond category, as of 8/31/17.
High Yield Fund News
International Fund #4
Discovery Fund #7
Flexible Income Fund #15
Using techniques identified in the article, a few income funds are highlighted (including the Buffalo High Yield Fund) that pay regular dividends and preserved investors’ capital during the period before and through the Great Recession.
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.
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
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.
|As of 8/31/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo High Yield Fund||0.92||4.35||5.38||3.93||5.26||6.46||7.07||7.23|
|BofA Merrill Lynch HY Master II||1.23||6.09||8.79||4.81||6.49||7.88||9.11||7.41|
|Lipper High Yield Bond Funds Index||1.17||5.99||8.67||3.89||5.88||6.44||7.88||6.08|
|Morningstar High Yield Bond||1.10||5.18||7.61||3.21||5.29||6.39||7.69||6.11|
|As of 6/30/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo High Yield Fund||1.68||3.86||7.92||3.86||5.52||6.33||7.07||7.26|
|BofA Merrill Lynch HY Master II||2.14||4.91||12.75||4.48||6.91||7.54||8.92||7.42|
|Lipper High Yield Bond Funds Index||1.90||4.72||12.30||3.48||6.28||6.06||7.67||6.07|
|Morningstar High Yield Bond||1.74||4.09||10.78||3.02||5.70||6.04||7.51||6.11|
|Year||Buffalo High Yield Fund||BofA Merrill Lynch HY Master II Index||Morningstar High Yield Bond Category|
|vs BofA Merrill Lynch HY Master II|
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower of higher than the performance quoted and can be obtained here. Performance is annualized for periods greater than 1 year. Each Morningstar category average represents a universe of funds with similar objectives.
Growth of $10k
This chart illustrates the performance of a hypothetical $10,000 investment made in the Fund on the Inception Date. Assumes reinvestment of dividends and capital gains. This chart does not imply future performance.
|# of Holdings||122|
|3-Yr Annualized Turnover Ratio||34.52%|
|Average Duration||3.18 years|
|Average Maturity||5.42 years|
|30-day SEC Yield||4.09%|
|Name of Holding||% of Net Assets|
|Bankrate Inc Del (144A 6.125%)||2.56%|
|Akorn Inc TLB||2.54%|
|Lions Gate Entertainment Cv (1.25%)||2.19%|
|DigitalGlobe TLB (12/16)||2.13%|
|KCG Holdings (144A 6.875%)||1.96%|
|Tutor Perini (7.625%)||1.91%|
|Endo Finance (144A 5.75%)||1.74%|
|Valeant Pharmaceuticals TLF1||1.67%|
|Triumph Group Inc New (4.875%)||1.64%|
|Consolidated Communications (6.5%)||1.64%|
|TOP 10 HOLDINGS TOTAL||19.98%|
As of 3/31/17. Top 10 Holdings for the quarter are not disclosed until 60 days after quarter end. Those listed are for the previous quarter. Fund holdings are subject to change and are not recommendations to buy or sell any securities.
Buffalo publishes this listing of securities held as of the most recent calendar-quarter end, with a 30 or 60 day lag depending on the portfolio. Buffalo may exclude any portion of holdings from publication when deemed in the best interest of the portfolio.
The portfolio data and its presentation here may differ from the complete schedules of investments in regulatory filings due to differing accounting and reporting requirements.
As of 6/30/17. Security weightings are subject to change and are not recommendations to buy or sell any securities.
Sector Allocation may not equal 100% due to rounding.
As of 6/30/17. Allocation percentages may not equal 100% due to rounding.
|Duration Breakout (%)*|
|Quality Breakout (%)|
Standard & Poor’s is the rating source for the Quality Breakout Table. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO), such as Moody’s or Standard & Poor’s. The firm evaluates the of credit worthiness of an issuer with respect to debt obligations, including specific securities, money market instruments, or other bonds. Ratings are measured on a scale that generally ranges from AAA (highest grade) to D (lowest grade); ratings are subject to change without notice. Not Rated (NR) indicates that the debtor was not rated by an NRSRO and should not be interpreted as indicating low quality. All ratings are as of 3/31/17.
CAPITAL MARKET OVERVIEW
The Buffalo High Yield Fund gained 1.68% for the quarter but underperformed the Bank of America Merrill Lynch High Yield Master II Index by 46 basis points (bps), which rose 2.14% during the period. After producing positive returns in the previous quarter, the U.S. high yield sector continued to generate favorable results in the period, but with returns decelerating on a sequential monthly basis throughout the quarter (April 1.13%, May 0.89%, and June 0.10%). The market’s performance was driven by: (i) continued, albeit modest, economic growth of the U.S. gross domestic product (GDP); (ii) a healthy labor market with additional jobs added and the unemployment rate near cycle lows; (iii) the Federal Reserve maintaining a gradual pace of increasing interest rates and timing of plans to reduce their balance sheet; (iv) the equity market indexes continue to reach record highs; and (v) expectations for fiscal stimulus. The favorable market conditions, resulted in investors buying risky assets. The 10-year Treasury bond produced a return 1.32% during the quarter while stocks, as measured by the S&P 500 Index, produced a return of 3.09%.
According to data from JP Morgan, high yield funds experienced outflows during the quarter of about $1.3 billion compared to outflows of $8.2 billion in the previous quarter. The high yield new issuance calendar in the second quarter fell sequentially to $77 billion from $99 billion in the March 2017 quarter and from $102 billion compared to the year-over-year period ending June 30, 2016.
During the quarter, the yield on the 10-year Treasury bond declined by 8 bps from 2.39% to 2.31%. The drop in Treasury yields aided the returns of investment grade and BBB crossover issues that are more sensitive to the movement in interest rates while weakness in energy pricing negatively impacted energy issues and lower credit quality CCC credits. This led to relative outperformance in higher-quality fixed income products during the period. According to data from JP Morgan, the BB-rated segment returned 2.53%, outpacing the B-rated segment and CCC-rated segments, which returned 1.69% and 1.44% respectively. The fund’s straight bond segment continues to be biased toward higher-quality, non-investment grade securities of relatively short duration which contributed to the fund’s underperformance during the quarter. On a positive note, the fund’s underweight to energy helped relative results as energy bonds declined by 1.45% in the quarter. The fund is underexposed to the energy sector with a weighting of about 6% compared to the Bank of America Merrill Lynch High Yield Master II Index at 13%.
According to data from JP Morgan, the U.S. high yield market’s spread to worst at the end of the June 30 period was 441bps, 15 bps lower than the preceding quarter and 172 bps below its 20-year historical average of 613 bps. The yield to worst for the high yield market at quarter-end was 6.12%, below the 20-year average of 9.22%, and below the yield of 6.27% at the end of the previous quarter.
The fund’s cash balance decreased during the period as new security purchases exceeded the holdings in the fund that were called away or sold outright. The fund’s composition by asset class at quarter-end was as follows:
The approximate rate and contribution of return from the various asset classes in the fund during the quarter is as follows. As shown in the table below, all of the fund’s asset classes (excluding cash) produced positive returns during the period. The fund’s straight corporates, convertible preferred, and common stock outperformed the index total return, while convertibles, preferred stock, and bank loans underperformed the index total return.
|Unweighted Return||Contribution to Return|
Specific securities that contributed most positively to performance include Insulet Corporation 2.000% convertible bonds, Spectranetics 2.625% convertible bonds, and Valeant Pharmaceuticals 5.375% straight corporates bonds. Insulet rallied on better underlying fundamentals. Spectranetics advanced on the announcement the company is being acquired by Koninklijke Philips NV. Valeant rose on continued progress on its restructuring.
Specific securities that detracted most from performance include The Medicines Co. 2.750% convertible bonds, Whiting Petroleum 1.250% convertible bonds, and Covanta Holding 5.875% straight corporate bonds. The Medicines Co. declined on reduced merger and acquisition expectations, Whiting Petroleum declined on the drop in oil prices, and Covanta Holding also traded lower due to weak energy prices.
The market for high yield securities remains well bid as yields and spreads bounce around cycle lows. A growing economy with modest inflation has created a favorable environment for risky assets. The slowdown in new issuance activity has reduced the supply of bonds available for purchase, while slowing default rates have reduced investor’s risk premium requirements. However, several risk factors could negatively influence the favorable environment. Our concerns include: the Federal Reserve taking a more aggressive tightening policy stance; fiscal stimulus policy not coming to fruition; continued energy price declines; geopolitical issues escalate such as with North Korea; and increasing protectionism.
Within this environment of low spreads and yields, we are managing the fund cautiously yet actively. During the quarter we initiated twenty-eight new positions and had 17 positions reduced due to sales, maturities, or calls. We ended the quarter with 130 holdings compared to the previous quarter’s level of 122 positions (excluding cash).
We are managing the fund with an emphasis on higher-quality, non-investment grade issuers with defensive business models and manageable credit metrics. We will continue to deploy the fund’s cash in opportunities that we believe offer the most appealing risk/reward trade-off with a bias toward shorter durations and less levered credits. We believe bank loans offer a compelling opportunity as they offer senior positioning in the capital structure and floating interest rates, and we remain constructive in regards to convertible bonds and preferred issues.
The opinions expressed are those of the Portfolio Manager(s) and are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security. Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security. Diversification does not assure a profit, nor does it protect against a loss in a declining market. Earnings growth is not representative of the fund’s future performance.
|General Account Forms|
|New Account Application|
|Change or Add Account Details|
|Power of Attorney|
|Individual Retirement Account (IRA) Forms|
|IRA Account Application|
|IRA Beneficiary Addition / Change Form|
|IRA / Qualified Plan Distribution Request Form|
|IRA Transfer Form|
|Coverdell Education Savings Accounts (ESA) Forms|
|Coverdell ESA Application|
|Coverdell ESA Distribution Request|
|Coverdell ESA Transfer Form|
|Retirement Savings Options for Individuals|
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.
Sign Up for Automatic Updates
Stay up-to-date with the most recent media coverage and press releases about the Buffalo Funds.
FOR FINANCIAL PROFESSIONALS
FOR INDIVIDUAL INVESTORS
The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating™ for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating™ metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
The Buffalo High Yield Fund received 4 stars among 602 for the three-year, 3 stars among 479 for the five-year, and 3 stars among 317 High Yield Bond funds for the ten-year period ending 8/31/17.
In each Morningstar Category, the 10% of funds with the lowest measured risk are described as Low Risk, the next 22.5% Below Average, the middle 35% Average, the next 22.5% Above Average, and the top 10% High. Morningstar Risk is measured for up to three time periods (three, five, and 10 years). These separate measures are then weighted and averaged to produce an overall measure for the fund. Funds with less than three years of performance history are not rated.
©2017 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.
Bond ratings are grades given to bonds that indicates their credit quality as determined by a private independent rating service such as [Standard & Poor's or Moody’s, etc.]. The firm evaluates a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from 'AAA', which is the highest grade, to 'D', which is the lowest grade. Not Rated category includes holdings that are not rated by any rating agencies.