High Yield Fund
|Total Net Assets:||$243.81 Million (9/30/20)|
|Category:||High Yield Bond|
|Benchmark:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q3 2020
PM Commentary Q3 2020
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 10/31/20.
|As of 10/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||2.75||2.20||4.81||4.12||4.48||5.28||5.97||6.56||6.85|
|BUFFALO HIGH YIELD FUND - Institutional||2.70||2.29||4.93||4.24||4.61||5.43||6.12||6.72||7.00|
|ICE BofAML U.S. High Yield Index||0.40||0.17||2.54||3.86||6.14||6.07||7.03||7.21||6.99|
|Lipper High Yield Bond Funds Index||0.91||-1.18||1.38||3.15||5.12||5.41||5.86||5.77||5.74|
|Morningstar High Yield Bond Category||0.51||-0.70||1.43||2.87||4.78||5.06||5.81||6.06||5.71|
|As of 9/30/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||5.58||1.60||4.54||3.91||4.78||5.39||5.87||6.42||6.85|
|BUFFALO HIGH YIELD FUND - Institutional||5.54||1.67||4.57||4.02||4.91||5.54||6.02||6.57||7.00|
|ICE BofAML U.S. High Yield Index||4.71||-0.30||2.30||3.83||6.61||6.28||6.95||7.01||7.00|
|Lipper High Yield Bond Funds Index||4.19||-2.41||0.29||2.87||5.35||5.57||5.71||5.52||5.71|
|Morningstar High Yield Bond Category||4.32||-0.99||1.33||2.89||5.18||5.29||5.72||5.87||5.72|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 9/30/20)|
Hypothetical Growth of $10,000
Record Date: December 17, 2020 | Payable Date: December 18, 2020
|(As of 9/30/20)|| |
|# of Holdings||137|
|3-Yr Annualized Turnover Ratio||32.79%|
|Average Duration||2.96 years|
|Average Maturity||6.66 years|
|30-day SEC Yield||3.88%|
Top 10 Holdings
|Name of Holding||% of Net|
|Consolidated Communications (6.500%, 10/1/22)||2.21%|
|Nuance Communications (1.500% , 11/1/35)||2.06%|
|Cerence (Term Loan B, 9/30/24)||1.90%|
|Builders FirstSource (5.000%, 3/1/30)||1.81%|
|Quad Graphics (7.000%, 5/1/22)||1.67%|
|MacDonald Dettwiler (Term Loan B, 10/4/24)||1.67%|
|Phillips Van Heusen (7.750%, 11/15/23)||1.63%|
|Brunswick (7.375%, 9/1/23)||1.58%|
|Diebold Nixdorf (8.500%, 4/15/24)||1.53%|
|MPLX (6.875%, 8/15/23)||1.51%|
|TOP 10 HOLDINGS TOTAL||17.57%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
CAPITAL MARKET OVERVIEW
(As of 9/30/20) — After posting its strongest performance since Q3 2009 in Q2 2020, the U.S. high yield sector continued its rally into the 3rd quarter of this year. High yield bond prices continued their recovery through July and August before reversing course in September. The first two months advanced on positive vaccine news, better-than-expected earnings and a dovish stance from the Federal Reserve. The high yield market declined in September amid uncertainty over a new economic stimulus package, the pending U.S. elections, and rising cases of COVID-19 in Europe. The 10-year Treasury Bond returned 0.08% during the quarter, while the S&P 500 Index advanced 8.93%.
Following a record $47.3 billion inflow in the 2nd quarter, high yield funds saw $10.7 billion of cash inflows in the 3rd quarter. While July and August continued the trend of inflows, September posted the first monthly outflows (-$4.3 billion) since the mass exodus in March of this year. During the quarter, high yield issuers brought $131.9 billion in new bonds to market, driven primarily by refinancing. In the first nine months of 2020, new issuance volume totaled $350.3 billion, up 68% from the $208.2 billion in the first nine months of 2019. According to JP Morgan, BB-rated issues accounted for the bulk of activity in the quarter (47%) with the heaviest volume coming from Energy (13.2%), Technology (9.4%), and Healthcare (8.6%).
During the quarter, the 10-year Treasury bond yield increased only two basis points (bps) to 0.68%, following what was essentially unchanged 0.66% during the June quarter and remains near record lows. Every industrial sector in the U.S. high yield universe and every credit rating silo produced positive returns during the 3rd quarter. According to data from JP Morgan, the lower quality end of the high yield credit spectrum (i.e., split B/CCC, non-rated, and defaulted issues) performed better than the higher end of the quality spectrum. The defaulted segment produced the largest gain of 11.82% and the BB segment was the worst performer with a still solid 4.24% gain.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 603 bps, 119 bps tighter than the preceding quarter and 6 bps tighter than its 20-year historical average of 609 bps. The yield to worst for the high yield market at quarter end was 6.32%, below the 20-year average of 8.55%, and below the yield of 7.57% at the end of the June 2020 quarter.
(As of 9/30/20) — The Buffalo High Yield Fund (BUFHX) increased 5.58% for the quarter and outperformed the ICE BofAML U.S. High Yield Index, which gained 4.71% for the period. The Fund also outperformed the Lipper High Yield Bond Funds Index return of 4.19%.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 3Q20|
|Unweighted Return||Contribution to Return|
During the quarter, 124 out of the 137 issues in the Buffalo High Yield Fund produced positive returns. The three top contributors were Nuance Communications 1.500% convertible bonds, Cerence 3.00% convertible bonds, and Zillow Group 2.750% convertible bonds. All three companies are technology-driven enterprises that reported better-than-expected earnings or guidance during the quarter, and the underlying stocks benefited from the strong demand from investors to own the Technology sector.
Securities that detracted the most from performance included Energy Transfer common stock, K12 Inc. 1.125% convertible bonds, and MPLX 6.875% corporate bonds. Energy Transfer declined with the rest of the Energy sector stocks over concern for fossil fuel demand. K12 Inc. convertible bonds declined in September after Miami-Dade school board decided to stop using K12’s services. The contract was 1% of revenue and not related to the company’s core online business, but the stock sold off regardless. Similar to Energy Transfer, MPLX 6.875% bonds declined during the month of September amid fossil fuel demand concerns.
(As of 9/30/20) — Until March 2020, the United States had been enjoying a growing economy with modest inflation that had created a favorable environment for risky assets. However, near the end of February and early March, the COVID-19 pandemic and plummeting crude oil prices wreaked havoc on the markets. The U.S. high yield default rate increased to a three-year high of 3.54% in March, which was up 91 bps from the 2.63% level in December 2019, and above the 3.44% long-term average. The trend continued through July, peaking around 6.2% before declining to 5.8% through August and September. During the quarter, 26 companies defaulted on $19.3 billion of debt.
We are concerned first and foremost about the ongoing COVID-19 pandemic and the fallout on global economies, with the upcoming presidential election being a secondary focus. We are managing the Fund cautiously yet actively, focusing on higher-quality, non-investment grade 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. Finally, we continue to look for opportunities in convertible bonds and preferred stocks. We ended the quarter with 137 positions, essentially unchanged from the previous quarter’s level (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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