High Yield Fund
|Total Net Assets:||$293.91 Million (6/30/21)|
|Category:||High Yield Bond|
|Benchmark:||ICE BofAML U.S. High Yield Index|
Fund Fact Sheet Q2 2021
PM Commentary Q2 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 625 High Yield Bond funds as of 8/31/21.
|As of 8/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||1.43||4.72||12.11||7.41||6.10||6.23||6.43||6.45||7.08|
|BUFFALO HIGH YIELD FUND - Institutional||1.47||4.83||12.22||7.54||6.24||6.38||6.58||6.60||7.24|
|ICE BofAML U.S. High Yield Index||2.28||4.64||10.26||6.82||6.49||6.90||7.27||7.54||7.18|
|Lipper High Yield Bond Funds Index||2.08||5.07||11.15||6.33||6.13||6.37||6.18||6.50||5.99|
|Morningstar High Yield Bond Category||1.70||4.24||9.56||5.87||5.54||5.90||6.08||6.45||5.92|
|As of 6/30/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||2.52||4.30||18.44||7.77||6.62||5.87||6.46||6.53||7.11|
|BUFFALO HIGH YIELD FUND - Institutional||2.56||4.38||18.58||7.90||6.76||6.02||6.61||6.68||7.27|
|ICE BofAML U.S. High Yield Index||2.77||3.70||15.62||7.15||7.30||6.50||7.39||7.62||7.19|
|Lipper High Yield Bond Funds Index||2.77||4.27||16.68||6.66||6.92||5.89||6.28||6.52||6.00|
|Morningstar High Yield Bond Category||2.50||3.62||14.69||6.16||6.21||5.48||6.17||6.54||5.93|
|BUFFALO HIGH YIELD FUND - Investor||3.54||10.35||9.40||1.96||1.80||6.65||5.98||-2.26||12.32||9.27|
|BUFFALO HIGH YIELD FUND - Institutional||3.69||10.52||9.56||2.11||1.95||6.81||6.14||-2.12||12.40||9.43|
|ICE BofAML U.S. High Yield Index||4.38||15.58||7.42||2.50||-4.64||17.49||7.48||-2.26||14.41||6.17|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 6/30/21)|
Hypothetical Growth of $10,000
— 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 6/30/21)|| |
|# of Holdings||146|
|3-Yr Annualized Turnover Ratio||41.81%|
|Average Duration||2.84 years|
|Average Maturity||7.32 years|
|30-day SEC Yield||2.85%|
Top 10 Holdings
|Name of Holding||Maturity Date||% of Net|
|Nuance Communications||1.500%, 11/1/35||2.16%|
|Northern Oil & Gas||8.125%, 3/1/28||2.02%|
|CNX Resources||7.250%, 3/14/27||1.56%|
|Builders FirstSource||5.000%, 3/1/30||1.52%|
|Diebold Nixdorf||8.500%, 4/15/24||1.48%|
|Treehouse Foods||4.000%, 9/1/28||1.46%|
|Quad Graphics||7.000%, 5/1/22||1.44%|
|Comstock Resources||9.750%, 8/15/26||1.38%|
|PVH Corporation||7.750%, 11/15/23||1.32%|
|TOP 10 HOLDINGS TOTAL||16.89%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
CAPITAL MARKET OVERVIEW
(As of 6/30/21) — The U.S. high yield market continued its positive return streak in the quarter, posting its fifth consecutive positive quarter, after suffering a significant correction in the March 2020 quarter driven by the COVID-19 outbreak and plunging crude oil prices. In fact, high yield bond yields posted record lows in June, hitting 4.30% as investors seemed willing to believe the Federal Reserves’ claim that inflation will prove transitory. The 10-year Treasury Bond returned 3.26% during the quarter while the S&P 500 Index posted a return of 8.55%.
Despite the positive returns, high yield funds experienced a cash outflow of $3.2 billion in the 2nd quarter. Meanwhile, high yield issuers brought the third-highest quarterly volume of new issuance on record with $140.5 billion, which followed the $158.6 billion issued in the preceding quarter. According to JP Morgan, split BBB and BB-rated issues accounted for the bulk of activity (42%), and new issuance was tilted heavily toward Energy (11.4%), Health Care (9.7%), and Services (9.5%).
During the quarter, the 10-year Treasury Bond’s yield fell 27 basis points (bps) from 1.74% to 1.47%, reversing a third of the 82 bps increase in the 1st quarter. Every sector in the U.S. high yield universe and every credit rating silo produced positive returns during the period. According to data from JP Morgan, the higher and lower quality ends of the high yield credit spectrum outperformed the split BB/B rated credits, with the lower split B/CCC segment performing the best at 3.90% and 3.31%, respectively. The split BB segment was the laggard with a smaller gain of 2.46%.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 370 bps, 36 bps tighter than the preceding quarter and 225 bps tighter than its 20-year historical average of 595 bps. The yield to worst for the high yield market at quarter end was at an all-time record low of 4.30%, well below the 20-year average of 8.24%, and below the yield of 4.72% at the end of the prior quarter.
(As of 6/30/21) — The Buffalo High Yield Fund (BUFHX) produced a return of 2.52% for the quarter but slightly trailed the ICE BofA U.S. High Yield Index and the Lipper High Yield Bond Funds Index, which both gained 2.77% during the quarter.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 2Q21|
|Contribution to Return|
During the period, only 12 out of 148 issues in the Buffalo High Yield Fund produced negative returns. The top three contributors were Nuance Communications 1.5% convertible bonds, Northern Oil & Gas 8.125% corporate bonds, and Mitek Systems 0.75% convertible bonds. In early April, Microsoft announced the acquisition of Nuance for a 23% premium, driving the strong performance in Nuance convertible bonds. The Northern Oil & Gas bonds, along with the Energy sector as a whole, improved on the back of the 24% rally in West Texas Intermediate crude oil during the quarter, as the COVID-19 vaccinations roll-out increased travel demand. Mitek Systems convertible bonds performed well after beating quarterly expectations and the announced acquisition of ID R&D, a provider of biometric identity fraud software, in early June.
The Southwest Airlines 1.25% convertible bonds, Air Transport Services 1.125% convertible bonds, and the Lumentum 0.50% convertible bonds were the worst performers during the quarter. Southwest Airlines convertible bonds were the top performer in the preceding quarter, and gave some of that back near the end of this quarter, after the CEO announced he would be stepping down in 2022. Despite Amazon exercising warrants to increase its stake in Air Transport Services to 20% early in the quarter, the convertible bonds declined in conjunction with the common stock, after the company reported that Department of Defense traffic through its Omni Air division was lighter than analysts expected. Lumentum convertible bonds were negatively-impacted after several peer Apple suppliers missed estimates and Lumentum then posted its own disappointing quarterly results.
(As of 6/30/21) — We are monitoring the ongoing recovery from the COVID-19 pandemic and the Federal Reserve’s responses to emerging inflation, which will hopefully return to normal later this year and into 2022. The potential for new regulatory changes to various industries from the Biden administration is another area of focus. We are managing the portfolio cautiously yet actively, maintaining our ongoing bias for high-quality issuers with defensive business models and manageable credit metrics. We ended the quarter with 148 positions, up slightly from the previous quarter’s level of 143 (excluding cash). 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 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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