High Yield Fund
|Total Net Assets:||$197.41 Million (7/1/19)|
|Category:||High Yield Bond|
|Benchmark:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q2 2019
PM Commentary Q2 2019
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 613 High Yield Bond funds as of 7/31/19.
|As of 7/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||1.45||8.41||5.40||4.55||4.05||6.83||5.82||6.96|
|BUFFALO HIGH YIELD FUND - Institutional||1.39||8.40||5.46||4.68||4.19||6.98||5.97||7.12|
|ICE BofAML U.S. High Yield Index||1.67||10.72||6.94||6.83||5.08||8.62||7.42||7.21|
|Lipper High Yield Bond Funds Index||1.68||10.55||6.26||6.48||4.34||7.89||6.33||5.95|
|Morningstar High Yield Bond Category||1.41||9.23||5.58||5.67||3.78||7.36||6.23||5.92|
|As of 6/30/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||2.42||7.83||5.42||5.09||3.79||7.25||5.80||6.96|
|BUFFALO HIGH YIELD FUND - Institutional||2.46||7.91||5.58||5.25||3.95||7.41||5.95||7.12|
|ICE BofAML U.S. High Yield Index||2.57||10.16||7.58||7.54||4.70||9.22||7.48||7.22|
|Lipper High Yield Bond Funds Index||2.80||10.02||6.90||7.17||3.97||8.50||6.35||5.96|
|Morningstar High Yield Bond Category||2.28||8.79||6.19||6.31||3.47||7.95||6.27||5.93|
For performance prior to 7/1/19 (Inception Date of Institutional Class), performance of the Investor Class shares is used and includes expenses not applicable and lower than those of Investor Class shares.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
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 6/30/19)|
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: 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 6/30/19)|| |
|# of Holdings||126|
|3-Yr Annualized Turnover Ratio||30.27%|
|Average Duration||2.29 years|
|Average Maturity||5.27 years|
|30-day SEC Yield||4.31%|
Top 10 Holdings
|Name of Holding||% of Net|
|Consolidated Communications (6.500%, 10/1/22)||2.20%|
|Quad Graphics (7.000%, 5/1/22)||2.08%|
|MacDonald Dettwiler (Term Loan B, 7/5/24)||2.05%|
|Triumph Group (4.875%, 4/1/21)||2.03%|
|Andeavor Logistics (6.875%, 8/15/23)||1.82%|
|Phillips Van Heusen (7.750%, 11/15/23)||1.81%|
|8x8 (0.500%, 2/1/24)||1.74%|
|Brunswick (7.375%, 9/1/23)||1.69%|
|Live Nation Entertainment (5.375%, 6/15/22)||1.62%|
|Treehouse Foods (6.000%, 2/15/24)||1.61%|
|TOP 10 HOLDINGS TOTAL||18.65%|
Percentages of Total Assets as of 6/30/19. Allocation percentages may not equal 100% due to rounding.
As of 6/30/19. 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.
|Duration Breakout (%)*|
|Quality Breakout (%)|
|A & Above||0.00|
All ratings are as of 6/30/19. 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 6/30/19) — After producing robust positive returns in the 1st quarter of 2019, the U.S. high yield sector continued to push higher, generating positive performance again this period, although to a lesser extent than the previous quarter. The market’s performance was driven by: (i) continued modest economic growth of U.S Gross Domestic Product (GDP); (ii) a more dovish sentiment from the Federal Reserve (The Fed), which signaled a potential reversal in monetary policy from interest rates increases to actually considering cuts; (iii) a healthy labor market with additional job gains and an unemployment rate near cycle lows; and (iv) the equity market indexes continuing their climb higher. The Fed’s pause and resulting drop in the level of short-term interest rates – 3 Month LIBOR declined 28 basis points (bps) to 2.32% – encouraged investors to buy risky assets. High quality also performed well as the 10-year Treasury bond returned 4.30% during the quarter, matching the S&P 500 stock index’s 4.30% return.
Despite decreased market volatility and the anticipation of a potentially longer credit cycle, high yield mutual funds experienced negative cash outflows during the June quarter of about $600 million. However, the preceding March quarter inflow of $12.6 billion was the largest quarterly inflow in the last five years and may have sucked some of the air out of the June quarter. The nearly $75 billion in high yield new issuance during the quarter was an increase both sequentially ($65 billion in the March quarter) as well as year-over-year ($54 billion June 2018 quarter).
During the quarter, the 10-year Treasury bond’s yield dropped by 50 bps from 2.50% to 2.00%. High yield issues across all ratings segments and sectors, with the exception of energy, followed suit with positive returns and lower yields. The energy sector was hampered by plunging crude oil prices during the quarter. According to data from JP Morgan, the heart of the ratings curve outperformed slightly with the BB-rated segment producing the highest return at 2.99% and split B-rated being the worst performer at 0.76%.
According to data from JP Morgan, the U.S. high yield market’s spread-to-worst for the period was 461 bps, 55 bps wider than the preceding quarter of 2018 but still 150 bps below its 20-year historical average of 611 bps. The yield-to-worst for the high yield market at quarter-end was 6.46%, below the 8.89% 20-year average, and below the 6.72% from the end of the previous quarter.
The market for high yield securities held steady following a very solid first three months of the calendar year, as spread-to-worst widened just 9 bps and yield-to-worst shrank by 37 bps. This has been one of the strongest first halves of a calendar year on record for the high yield asset class. The U.S. high yield default rate has declined 37 bps year-to-date to 1.46%. This represents a decline of 52 bps from 1.98% as of June 2018, and remains below the 3.46% long-term average. New issuance activity steadily increased each month during the quarter – $18.1 billion in April, $28.1 billion in May and $28.5 billion in June. This compares to the $18.2 billion monthly average over the last 18 months and June monthly volumes of $21.6 billion since 2010.
(As of 6/30/19) — The Buffalo High Yield Fund increased 2.42% during the 2nd quarter, slightly underperforming the ICE BofAML High Yield Index (the “Index”) by 15 bps, which returned 2.57% during the same period. The Fund also underperformed the Lipper High Yield Bond Funds Index by 38 bps, but outperformed the Morningstar High Yield Bond Category by 14 bps.
The Fund’s cash balance increased about 0.50% from the 1st quarter’s levels, as the holdings in the Fund that were either called by the issuers or sold outright exceeded new security purchases.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 2Q19|
|Unweighted Return||Contribution to Return|
Specific securities that contributed most positively to performance include Maxar Technology bank debt, 8×8 0.5% convertible bonds, and Medicines Company 2.75% convertible bonds.
After being one of the worst performers in the preceding quarter, Maxar advanced, as the new CEO stated publicly that the company would be able to stay within its debt covenants. The company also received payments from two insurance settlements and won a new significant contract from the National Aeronautics and Space Administration (NASA).
The 8×8 convertible bonds rallied on the back of the common stock, which rose 20% during the quarter, driven by bullish sell-side recommendations and Steven Cohen’s Point72 firm increasing its stake to 5%.
Medicines Company convertible bonds rose due to favorable study results for its new cholesterol-lowering medication.
Specific securities that detracted most from performance include LSC Communications 8.75% corporate bonds, Lions Gate common stock, and Internap bank debt.
The LSC bonds declined after the Department of Justice (DoJ) announced it was blocking the acquisition of LSC by Quad Graphics. The bonds jumped roughly 10 points in October 2018 when the deal was announced and the retreated to pre-deal levels this quarter.
Lions Gate declined on earnings coming in below expectations and the continued sluggish environment at the movie theater box office.
Meanwhile, Fund management decided to liquidate its position in the Internap term loan and, unfortunately, low trading liquidity forced a haircut on the mark-to-market during the sale.
(As of 6/30/19) — We continue to be concerned about the late stages of this economic cycle, geopolitical tensions, in particular the trade tensions with China, and increasing protectionism positioning from the White House. Given the potential late stages of the economic cycle, we find ourselves confronted with relatively low spread and yield levels. We are managing the fund cautiously yet actively. We ended the quarter with 126 positions compared to the previous quarter’s level of 122 positions (excluding cash).
We are 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 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 preferred securities.
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 (BUFHX) received 2 stars among 613 for the 3-year, 3 stars among 530 for the 5-year, and 2 stars among 343 High Yield Bond funds for the 10-year period ending 7/31/19.
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. ©2019 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.