High Yield Fund
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™ based on risk-adjusted returns among 607 High Yield Bond funds as of 1/31/19.
|As of 1/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO HIGH YIELD FUND||0.56||3.12||0.34||4.91||3.38||8.66||5.58||6.89|
|ICE BofAML U.S. High Yield Index||1.37||4.59||1.57||9.46||4.61||10.91||7.10||7.11|
|Lipper High Yield Bond Funds Index||1.00||4.47||0.56||8.30||3.83||9.83||5.97||5.83|
|Morningstar High Yield Bond Category||1.08||4.04||0.71||7.50||3.41||9.14||5.88||5.83|
|As of 12/31/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO HIGH YIELD FUND||-3.96||-2.26||-2.26||3.38||2.78||8.78||5.43||6.77|
|ICE BofAML U.S. High Yield Index||-4.67||-2.26||-2.26||7.27||3.82||10.99||6.89||6.93|
|Lipper High Yield Bond Funds Index||-4.95||-2.98||-2.98||6.12||3.05||9.82||5.78||5.66|
|Morningstar High Yield Bond Category||-4.33||-2.59||-2.59||5.59||2.71||9.25||5.68||5.68|
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.
3 Year Risk Metrics
|vs ICE BofAML U.S. High Yield Index (As of 12/31/18)|
Hypothetical Growth of $10,000
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.
Record Date: February 19 | Payable Date: February 20
Record Date: March 18 | Payable Date: March 19
Record Date: April 17 | Payable Date: April 18
Record Date: May 17 | Payable Date: May 18
Record Date: June 17 | Payable Date: June 18
Record Date: July 17 | Payable Date: July 18
Record Date: August 19 | Payable Date: August 20
Record Date: September 17 | Payable Date: September 18
Record Date: October 17 | Payable Date: October 18
Record Date: November 18 | Payable Date: November 19
Record Date: December 17 | Payable Date: December 18
|(As of 12/31/18)|| |
|# of Holdings||124|
|3-Yr Annualized Turnover Ratio||32.36%|
|Average Duration||3.47 years|
|Average Maturity||5.64 years|
|30-day SEC Yield||5.26%|
Top 10 Holdings
|Name of Holding||% of Net|
|MacDonald Dettwiler (Term Loan B, 7/5/24)||2.37%|
|Wildhorse Resource Dev (6.875%, 2/1/25)||2.26%|
|Consolidated Communications (6.500%, 10/1/22)||2.07%|
|Quad Graphics (7.000%, 5/1/22)||1.97%|
|Triumph Group (4.875%, 4/1/21)||1.88%|
|FTI Consulting (6.000%, 11/15/22)||1.80%|
|Phillips Van Heusen (7.750%, 11/15/23)||1.73%|
|Andeavor Logistics (6.875%, 8/15/23)||1.70%|
|Brunswick (7.375%, 9/1/23)||1.62%|
|Live Nation Entertainment (5.375%, 6/15/22)||1.52%|
|TOP 10 HOLDINGS TOTAL||18.92%|
As of 12/31/18. 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.
Percentages of Total Assets as of 12/31/18. Allocation percentages may not equal 100% due to rounding.
|Duration Breakout (%)*|
|Quality Breakout (%)|
|A & Above||0.00|
All ratings are as of 12/31/18. 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.
CAPITAL MARKET OVERVIEW
(As of 12/31/18) — After producing positive returns in the 3rd quarter, the U.S. high yield sector reversed course, generating negative performance in the 4th quarter with negative returns in all three months. The market’s performance was driven by global growth indicators slowing, significant declines in crude oil and equities, ongoing concern over trade war with China, and somewhat confusing signals from the Federal Reserve regarding its current views on the market.
Despite these headwinds, the quarter also experienced declining treasury rates and continued, albeit modest, economic growth of U.S. Gross Domestic Product (GDP) The healthy labor market continued with additional jobs added and the unemployment rate remaining near cycle lows. A quiet new issue market provided support for secondary pricing.
Given the uncertain market conditions, equity markets and high yield markets performed poorly during the quarter as investors began moving away from higher risk assets. The 10-year Treasury bond returned 3.87% during the quarter, while the JP Morgan US High Yield Index declined -4.79% and the S&P 500 Index declined -13.52%.
According to data from JP Morgan, cash outflows from high yield mutual funds accelerated during the quarter to the tune of $20.2 billion, compared to outflows of $0.5 billion in the previous quarter. High yield new issuance for the period was a benign $19 billion, the lowest volume since the $1 billion in the 4th quarter of 2008, and well below the average quarterly volume of $77 billion during the last seven years.
During the quarter, the 10-year Treasury bond yield declined by 38 basis points (bps) from 3.06% to 2.68%. Given the flight to quality, high yield spreads widened across the asset class. Higher rated issues held in better than lower rated issues across the credit quality spectrum. Spreads on the CCC-rated segment widened 345bps while the spreads on higher rated BB-rated bonds only widened 142bps. According to data from JP Morgan, the BB-rated segment returned -3.13%, which was better than the B-rated segment and considerably better than CCC-rated segment, which returned -3.50% and -8.30% respectively. The Fund was underexposed to the CCC sector with a weighting of about 3.5% compared to the JP Morgan CCC weighting of 11.3%.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the 4th quarter was 567bps, 163bps wider than the preceding 4th quarter but still 46bps below its 20-year historical average of 613. The yield to worst for the high yield market was 8.23% at quarter-end, below the 20-year average of 8.99%, but significantly above the yield of 6.10% a year ago December. These are the highest yields and spreads since April 2016 and December 2016.
(As of 12/31/18) — The Buffalo High Yield Fund declined -3.96% in the 4th quarter, outperforming the ICE Bank of America Merrill Lynch U.S. High Yield Index (the “Index”) by 71bps, which returned -4.67% during the same period.
The Fund’s cash balance decreased 44bps from the previous quarter’s levels as sales of existing positions were exceeded by new security purchases and investor withdrawals in the Fund. The Fund’s composition by asset class at quarter end was as follows:
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 4Q18|
|Unweighted Return||Contribution to Return|
Specific securities that contributed most positively to performance include LSC Communications 8.750% corporate bonds, Royal Caribbean Cruises 7.500% corporate bonds, and Townsquare Media 6.500% corporate bonds. LSC Communications announced it was being acquired by Quad Graphics and the bonds will be paid down post-merger. Royal Caribbean posted strong results in October, and it is a high grade credit, which benefited from the flight to quality in the quarter. Townsquare Media bonds coupon payment was more than enough to offset the slight decrease in price during the quarter.
Specific securities that detracted most from performance include Greenbrier common stock, Andeavor 6.875% corporate bonds, and Wildhorse Resources 6.875% corporate bonds. The Greenbrier stock and Andeavor bonds were both top performers in the preceding quarter and proceeded to “give back” those gains in the 4th quarter. Wildhorse declined after Chesapeake Energy announced in October that it was acquiring Wildhorse, and it is uncertain whether the lower-rated Chesapeake will be required to purchase the Wildhorse debt or leave the bonds outstanding. That uncertainty caused the bonds to sell off several points.
(As of 12/31/18) — Until this most recent quarter, a growing economy with modest inflation has created a favorable environment for risky assets. However, market participants are becoming increasingly concerned about where we are in the economic cycle, along with the trade dispute with China and lack of clarity regarding the Federal Reserve Board’s mindset going into 2019.
The U.S. high yield default rate was up 53bps from 1.28% in December 2017 to 1.81% but still well below the 3.5% long-term average. On the positive side, the slowdown in new issuance activity has reduced the supply of bonds available for purchase, which has helped support bid levels.
We continue to be concerned about the Federal Reserve taking a more aggressive tightening policy stance, inflation growth acceleration, geopolitical issues such as China or tensions in the Middle East escalating, and increasing protectionism efforts from the White House.
In spite of the potential late stages of the economic cycle, we continue to find ourselves confronted with relatively low spread and yield levels. With that perspective we are managing the Fund cautiously yet actively. We ended the quarter with 124 positions compared to the previous quarter’s level of 131 positions (excluding cash).
We are managing the Fund to focus on high-quality 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 tradeoff with a bias toward shorter durations and less levered credits. Additionally, we believe bank loans offer a compelling opportunity as they offer senior positioning in the capital structure and floating interest rates. Finally, we continue to look for opportunities in convertible bonds and preferreds.
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. Earnings growth is not representative of the fund’s future performance.
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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 1 stars among 607 for the three-year, 3 stars among 513 for the five-year, and 3 stars among 331 High Yield Bond funds for the ten-year period ending 1/31/19.
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. ©2018 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. The Morningstar Style Box™ reveals a fund’s investment strategy by showing its investment style and market capitalization based on the fund’s portfolio holdings.
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.