High Yield Fund
|As of 6/8/2023|
|Total Net Assets:||$309.29 Million (3/31/23)|
|Morningstar Category:||High Yield Bond|
|Benchmark Index:||ICE BofA U.S. High Yield|
Fund Fact Sheet Q1 2023
PM Commentary Q1 2023
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 619 High Yield Bond funds as of 4/30/23.
|As of 4/30/23||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||0.58||3.20||1.64||7.43||4.42||4.24||5.84||5.87||6.58|
|BUFFALO HIGH YIELD FUND - Institutional||0.61||3.25||1.79||7.59||4.56||4.39||5.99||6.03||6.74|
|ICE BofA U.S. High Yield Index||0.79||4.74||1.12||4.89||3.13||3.94||6.19||6.70||6.49|
|Lipper High Yield Bond Funds Index||0.50||4.32||0.63||5.27||2.93||3.53||5.24||5.86||5.40|
|Morningstar High Yield Bond Category||0.47||4.04||0.55||4.65||2.62||3.15||5.07||5.72||5.31|
|As of 12/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||3.98||-5.53||-5.53||2.89||3.64||4.38||5.51||6.08||6.54|
|BUFFALO HIGH YIELD FUND - Institutional||4.02||-5.39||-5.39||3.05||3.78||4.53||5.66||6.23||6.70|
|ICE BofA U.S. High Yield Index||4.01||-11.17||-11.17||-0.21||2.13||3.95||5.93||7.12||6.39|
|Lipper High Yield Bond Funds Index||3.91||-10.28||-10.28||-0.15||1.99||3.59||4.95||6.21||5.31|
|Morningstar High Yield Bond Category||3.91||-10.09||-10.09||-0.21||1.74||3.20||4.80||6.02||5.23|
|BUFFALO HIGH YIELD FUND - Investor||9.40||1.96||1.80||6.65||5.98||-2.26||12.32||9.27||5.53||-5.53|
|BUFFALO HIGH YIELD FUND - Institutional||9.56||2.11||1.95||6.81||6.14||-2.12||12.40||9.43||5.69||-5.39|
|ICE BofAML U.S. High Yield Index||7.42||2.50||-4.64||17.49||7.48||-2.26||14.41||6.17||5.36||-11.17|
3 Year Risk Metrics
|BUFHX vs ICE BofA U.S. High Yield Index (As of 3/31/23)|
Hypothetical Growth of $10,000
Net Investment Income, if any – Record Date (6/20/23); Payment Date (6/21/23)
Net Investment Income, if any – Record Date (7/17/23); Payment Date (7/18/23)
Net Investment Income, if any – Record Date (8/17/23); Payment Date (8/18/23)
Net Investment Income, if any – Record Date (9/18/23); Payment Date (9/19/23)
Net Investment Income, if any – Record Date (10/17/23); Payment Date (10/18/23)
Net Investment Income, if any – Record Date (11/17/23); Payment Date (11/20/23)
Capital Gains, if any – Record Date (12/4/23); Payment Date (12/5/23)
Net Investment Income, if any – Record Date (12/18/23); Payment Date (12/19/23)
|(As of 3/31/23)||
|# of Holdings||137|
|3-Yr Annualized Turnover Ratio||46.47%|
|Average Duration||2.86 years|
|Average Maturity||7.91 years|
|30-day SEC Yield||7.67%|
Top 10 Holdings
|Name of Holding||Maturity Date||% of Net
|MPLX||3 Month LIBOR +4.652%, 8/15/23||3.05%|
|Northern Oil & Gas||8.125%, 3/1/28||3.03%|
|DirecTV Financing||1 Month LIBOR + 5.000%, 8/2/27||2.94%|
|Talos Production||12.000%, 1/15/26||2.19%|
|Portillo's||1st Lien Term Loan, 9/6/24||2.07%|
|Penn Virginia Escrow||9.250%, 8/15/26||1.90%|
|Matador Resources||5.875%, 9/15/26||1.83%|
|The Geo Group||1 Month SOFR + 7.125%||1.74%|
|Maxar Technologies||1 Month SOFR + 4.250%||1.73%|
|TOP 10 HOLDINGS TOTAL||22.62%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
CAPITAL MARKET OVERVIEW
(As of 3/31/23) — The U.S. high yield sector generated its second consecutive positive quarter after posting three consecutive losing quarters. In January and February, investors became more optimistic that the previous aggressive US Federal Reserve actions were taming inflation more quickly than expected and lower rated credits outperformed. However, in March, the US regional bank turmoil caused a surge in spreads (drop in prices) in fixed income, which induced steady outflows of assets and stifled new issuance activity. Despite this volatility, March still produced positive returns for the high yield sector. According to JP Morgan, high yield bonds ended the quarter at a yield to worst of 8.76%, down 47 basis points (bps) from the beginning of the quarter and compared to the record low of 4.22% in July 2021. The 10-year Treasury yield declined 41 bps to 3.47% and produced a positive return of 3.50% during the quarter while the S&P 500 Index posted a gain of 7.50% over the same period.
High yield funds saw quarterly cash outflows of -$16.0 billion in the quarter which compares to -$27.2 billion of outflows during the first quarter of 2022. High yield new issuance for the quarter was $40.5 billion compared to $46.5 billion in the first quarter of 2022. Capital market conditions steadily improved in January amid a sharp decline in yields. Twenty-five high yield bonds priced in January totaling $20.5 billion, the heaviest activity since January 2022’s $27.9 billion. An average of $7.2 billion priced per month over the previous 11 months. February started out well but quickly tapered off due to rising yields, but still managed to produce eighteen deals for $14.4 billion. March was very quiet amid the banking turmoil and Fed rate decision with only $5.6 billion issued. New loan issuance was healthy in Jan ($13.7 billion), February was very active ($38.9 billion) and more in-line in March ($17.4 billion) for a total of $70.3 billion for the quarter.
According to JPMorgan, CCC rated bonds outperformed both B and BB rated issues during the quarter (CCC = 5.00%, B = 4.08%, BB = 3.80%), which helps to explain the index outperformance of the fund. Broadcasting and Telecom were the only two industries in the U.S. high yield universe that generated negative returns during the first quarter. According to data from JP Morgan, the Gaming/Leisure industry was the best performer with a positive 6.04% return and Broadcasting was the worst performing sector delivering negative returns of -1.09%.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 499bps, 12bps tighter than the fourth quarter of 2022 and 63bps tighter than its 20-year historical average of 562bps. The yield to worst for the high yield market at quarter end was 8.76%, above the 20-year average of 7.82%, but below the 9.23% yield at the end of the fourth quarter 2022.
(As of 3/31/23) — The Buffalo High Yield Fund advanced 2.36% for the quarter ending March 31, 2023, trailing the ICE BofA U.S. High Yield Index which gained 3.73% and under-performing the Lipper High Yield Bond Funds Index which gained 3.35% for the three-month period.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 1Q23|
|Contribution to Return|
The fund’s three top contributors were the Ranger Oil 9.25% 2026 corporate bonds, the Vista Outdoors 4.50% 2029 corporate bonds and the Northern Oil & Gas 8.125% 2028 corporate bonds. In February, Baytex Energy announced it was acquiring Ranger Oil for cash and stock. The bonds traded just under par prior to the announcement and promptly traded up to around $106 which is near its 106.94 call price on 8/15/23. These bonds will be redeemed when the acquisition is finalized. Vista Outdoors 4.50% was trading in the mid 70’s to start the year and caught a strong bid throughout January rallying over 6 points into the low $80’s. Vista is one of the largest manufacturers of small caliber ammunition (Remington) as well as outdoor recreational brands like Camelbak, Bell Helmets, and Bushnell. It is a BB credit that was trading at CCC-type yields because Environmental, social, and governance (ESG) mandates prevent some investors from owning ammunition. The bonds of Northern Oil & Gas 8.125% is the largest position in the fund and the bond price improved 3.5% during the quarter, in line with the ~3.7% return for the Energy sector.
The Tutor Perini 6.875% 2025 corporate bonds, the Consensus Cloud 6.0% 2026 corporate bonds, and the Scripps 5.375% 2031 corporate bonds were the worst performers during the quarter. Tutor Perini reported disappointing earnings in March citing canceled projects and an adverse legal ruling. The fund liquidated its position in the bonds during the quarter. Consensus Cloud sold off in late February after posting disappointing earnings compounded by the market selloff in early March. Scripps bonds also came under pressure after the company reported weaker than expected earnings in February compounded by the entire Broadcasting sector declining during the quarter.
|Buffalo High Yield Fund|
|Full Fund Holdings||12/31/22|
|Statement of Additional Information||3/8/23|
|Tax Guide - 2022||1/8/23|
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