High Yield Fund
|As of 9/29/2022|
|Total Net Assets:||$269.31 Million (6/30/22)|
|Morningstar Category:||High Yield Bond|
|Benchmark Index:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q2 2022
PM Commentary Q2 2022
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 630 High Yield Bond funds as of 8/31/22.
|As of 8/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||-1.76||-6.83||-6.11||3.57||3.68||4.46||5.52||6.21||6.57|
|BUFFALO HIGH YIELD FUND - Institutional||-1.72||-6.75||-5.98||3.73||3.81||4.61||5.68||6.37||6.72|
|ICE BofA U.S. High Yield Index||-3.54||-11.02||-10.41||0.81||2.43||4.44||6.03||7.40||6.48|
|Lipper High Yield Bond Funds Index||-3.34||-10.14||-9.47||0.95||2.32||4.09||5.05||6.46||5.38|
|Morningstar High Yield Bond Category||-3.23||-10.19||-9.74||0.59||1.88||3.62||4.88||6.24||5.29|
|As of 6/30/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||-7.98||-9.54||-8.48||2.81||3.16||4.33||5.27||6.08||6.49|
|BUFFALO HIGH YIELD FUND - Institutional||-7.86||-9.39||-8.26||2.96||3.32||4.49||5.42||6.24||6.65|
|ICE BofAML U.S. High Yield Index||-9.97||-14.04||-12.66||-0.04||1.95||4.41||5.64||7.14||6.39|
|Lipper High Yield Bond Funds Index||-9.55||-13.03||-11.71||0.08||1.90||4.07||4.66||6.20||5.29|
|Morningstar High Yield Bond Category||-9.32||-12.84||-11.80||-0.21||1.46||3.59||4.51||5.97||5.21|
|BUFFALO HIGH YIELD FUND - Investor||10.35||9.40||1.96||1.80||6.65||5.98||-2.26||12.32||9.27||5.53|
|BUFFALO HIGH YIELD FUND - Institutional||10.52||9.56||2.11||1.95||6.81||6.14||-2.12||12.40||9.43||5.69|
|ICE BofAML U.S. High Yield Index||15.58||7.42||2.50||-4.64||17.49||7.48||-2.26||14.41||6.17||5.36|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 6/30/22)|
Hypothetical Growth of $10,000
Net Investment Income, if any – Record Date (10/17/22); Payment Date (10/18/22)
Net Investment Income, if any – Record Date (11/17/22); Payment Date (11/18/22)
Capital Gains, if any – Record Date (12/2/22); Payment Date (12/5/22)
Net Investment Income, if any – Record Date (12/19/22); Payment Date (12/20/22)
|(As of 6/30/22)||
|# of Holdings||128|
|3-Yr Annualized Turnover Ratio||47.75%|
|Average Duration||3.31 years|
|Average Maturity||7.76 years|
|30-day SEC Yield||6.62%|
Top 10 Holdings
|Name of Holding||Maturity Date||% of Net
|Northern Oil & Gas||8.125%, 3/1/28||3.01%|
|DirecTV Financing||1 Month LIBOR + 5.000%, 8/2/27||2.96%|
|MPLX||3 Month LIBOR +4.652%, 8/15/23||2.48%|
|Penn Virginia Escrow||9.250%, 8/15/26||2.31%|
|Talos Production||12.000%, 1/15/26||2.18%|
|Consol Energy||11.000%, 11/15/25||2.11%|
|Matador Resources||5.875%, 9/15/26||1.88%|
|Energy Transfer||7.125%, perpetual preferred||1.82%|
|PetIQ||3 Month LIBOR +4.250%, 4/7/28||1.66%|
|Magnite||6 Month LIBOR +5.000%, 4/3/28||1.49%|
|TOP 10 HOLDINGS TOTAL||21.90%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
CAPITAL MARKET OVERVIEW
(As of 6/30/22) — The U.S. high yield sector posted consecutive losing quarters as inflation fears and the economic fallout from the ongoing Russia/Ukraine conflict continued to weigh on investor sentiment. A 75-basis point (bps) increase in the Federal Funds rate, accompanied by hawkish commentary from the Federal Reserve, caused significant upward pressure on Treasury yields during the period. Commodity prices also remained elevated as the Ukraine invasion persisted. High yield bonds ended the quarter at a yield to worst of 9.21%, up 290 bps from the beginning of the quarter, finishing significantly higher than the record low of 4.22% achieved in July 2021. The 10-year Treasury yield rose 68 bps and produced a negative return of -5.00% during the quarter, while the S&P 500 Index posted a loss of -16.10% over the same period.
High yield funds continued its streak of monthly cash outflows that began in January 2022. High yield funds experienced $15.3 billion in outflows in the quarter. The current stretch of high yield outflows is the largest six-month period of outflows on record. Unsurprisingly, high yield new issuance was only $24.6 billion, which was the lightest volume since the December 2018 quarter and compares to the quarterly average of $117 billion over the last two years. According to JP Morgan, split BBB and BB-rated credits accounted for the bulk of the new issue activity in the 2nd quarter (53%), and was heavily tilted toward Energy (21.8%), Automotive (13.3%), and Metals/Mining (11.2%).
As mentioned previously, the 10-year Treasury Bond’s yield rose 68 bps from 2.34% to 3.02%, compounding the 83 bps increase in the previous quarter ending March 31st. Every credit rating silo produced negative returns during the 2nd quarter. According to data from JP Morgan, the highest quality split BBB credit tier declined -6.93% and outperformed the rest of the credit spectrum. CCC-rated bonds performed the worst, producing a return of -14.05% for the quarter. Similarly, every sector within U.S. high yield market produced negative returns during the quarter. According to data from JP Morgan, the Diversified Media sector was the best performing industry, declining -5.30% while Broadcasting’s decline of -14.60% was the worst.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 620bps, 221bps wider than the previous quarter and 43bps tighter than its 20-year historical average of 577 basis points. The yield to worst for the high yield market at quarter end was 9.21%, above the 20-year average of 7.93%, and higher than the 6.31% yield at the end of the March 2022 quarter.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 2Q22|
|Contribution to Return|
The three top contributors for the Fund in the period were NuStar Energy 9.00% preferred stock, Maxar Technologies term loan, and Consol Energy term loan. NuStar Energy transports and stores crude oil and refined products and benefited from strong demand for crude and refined products during the quarter. Maxar Technologies term loan was refinanced during the quarter resulting in a recovery from its market price to its par value. Consol Energy provides coal mining services and experienced significant improvement in operating metrics, driven by European natural gas shortages and thus rising coal prices.
The Northern Oil & Gas 8.125% corporate bonds, Entercom Media 6.750% corporate bonds, and the Diebold Nixdorf 8.500% corporate bonds were the worst performers during the quarter. In mid-June, Northern Oil & Gas announced the acquisition of assets in the Williston Basin. Despite the low-priced accretive deal and debt/preferred repurchases, bonds came under pressure. Entercom (now called Audacy) sold off with the rest of the broadcasting sector over concerns a slowing economy would lead to less ad spending. Diebold Nixdorf reported weaker than expected earnings, and the Fund liquidated its position during the quarter.
(As of 6/30/22) — We are focused first and foremost on the Federal Reserve’s balancing act between taming inflation while avoiding a recession. We are also mindful of continued supply chain disruptions and the geopolitical uncertainty caused by the tragic conflict in Ukraine. It should come as no surprise that we are managing the Fund cautiously yet actively, focusing on high-quality 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 quarter with 128 positions, down 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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