High Yield Fund
May 19, 1995
Total Fund Assets
$244.16 Million (9/30/17)
BofA Merrill Lynch HY Master II
Overall Morningstar™ rating out of 612 High Yield Bond funds as of 11/30/17 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure).
RISK VS CATEGORY
The Morningstar™ Risk vs Category rating is an assessment of the variations in a fund’s monthly returns, with an emphasis on downside variations, in comparison to the 612 funds in the High Yield Bond category, as of 11/30/17.
High Yield Fund News
Conservative positioning could be key — We now believe the high yield market offers more risk than reward. While we are not forecasting an imminent recession, numerous factors could result in wider credit spreads down the road.
International Fund #4
Discovery Fund #7
Flexible Income Fund #15
Using techniques identified in the article, a few income funds are highlighted (including the Buffalo High Yield Fund) that pay regular dividends and preserved investors’ capital during the period before and through the Great Recession.
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
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.
Download our recent white paper
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.
|As of 11/30/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo High Yield Fund||1.19||5.59||6.58||4.40||5.21||6.47||6.89||7.20|
|BofA Merrill Lynch HY Master II||1.02||7.17||9.28||5.76||6.08||7.89||8.92||7.38|
|Lipper High Yield Bond Funds Index||1.08||7.14||9.10||4.77||5.47||6.44||7.70||6.06|
|Morningstar High Yield Bond||0.83||6.07||7.92||4.18||4.83||6.40||7.52||6.08|
|As of 9/30/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo High Yield Fund||1.45||5.36||6.02||4.76||5.31||6.33||7.20||7.25|
|BofA Merrill Lynch HY Master II||2.04||7.05||9.06||5.87||6.38||7.72||9.29||7.43|
|Lipper High Yield Bond Funds Index||2.07||6.88||8.90||4.86||5.77||6.28||8.04||6.10|
|Morningstar High Yield Bond||1.79||5.94||7.77||4.17||5.14||6.24||7.85||6.12|
|Year||Buffalo High Yield Fund||BofA Merrill Lynch HY Master II Index||Morningstar High Yield Bond Category|
|vs BofA Merrill Lynch HY Master II|
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.
Growth of $10k
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.
|# of Holdings||134|
|3-Yr Annualized Turnover Ratio||40.94%|
|Average Duration||3.07 years|
|Average Maturity||5.98 years|
|30-day SEC Yield||3.83%|
|Name of Holding||% of Net Assets|
|Bankrate Inc Del (144A 6.125%)||2.52%|
|Akorn Inc TLB||2.49%|
|Lions Gate Entertainment Cv (1.25%)||2.21%|
|DigitalGlobe TLB (12/16)||2.08%|
|KCG Holdings (144A 6.875%)||1.95%|
|Endo Finance (144A 5.75%)||1.70%|
|Consolidated Communications (6.5%)||1.67%|
|Triumph Group Inc New (4.875%)||1.67%|
|Valeant Pharmaceuticals TLF1||1.61%|
|Tutor Perini (7.625%)||1.58%|
|TOP 10 HOLDINGS TOTAL||19.48%|
As of 6/30/17. Top 10 Holdings for the quarter are not disclosed until 60 days after quarter end. Those listed are for the previous quarter. Fund holdings are subject to change and are not recommendations to buy or sell any securities.
Buffalo publishes this listing of securities held as of the most recent calendar-quarter end, with a 30 or 60 day lag depending on the portfolio. Buffalo may exclude any portion of holdings from publication when deemed in the best interest of the portfolio.
The portfolio data and its presentation here may differ from the complete schedules of investments in regulatory filings due to differing accounting and reporting requirements.
As of 6/30/17. 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.
As of 6/30/17. Allocation percentages may not equal 100% due to rounding.
|Duration Breakout (%)*|
|Quality Breakout (%)|
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. All ratings are as of 9/30/17.
CAPITAL MARKET OVERVIEW
After producing positive returns in the previous quarter, the U.S. high yield sector continued to generate favorable results in the period, but with returns decelerating on a sequential quarterly basis (Q1 ‘17 2.47%, Q2 ‘17 2.06%, and Q3 ‘17 2.04%).
The market’s performance was driven by:
- Continued, albeit modest, economic growth of the U.S. gross domestic product;
- Optimism regarding the potential release of a corporate-friendly tax plan;
- The Federal Reserve maintaining the Fed Funds rate target at 1.25%;
- The equity market indexes continuing to reach record highs;
- Strength in crude oil supporting energy bonds.
Investors bought risky assets given these favorable market conditions. The 10-year Treasury bond produced a return of 0.30% during the quarter while stocks, as measured by the S&P 500 Index, produced a return of 4.48%.
According to data from JP Morgan, high yield funds experienced outflows during the period of about $530 million compared to outflows of $1.3 billion in the previous quarter. The high yield new issuance calendar in the 3rd quarter remained healthy, increasing sequentially to $80 billion from $77 billion in the June 2017 quarter and on par with the $79 billion in the 3rd quarter of 2016.
During the quarter, the yield on the 10-year Treasury Note only increased by 2 bps from 2.31% to 2.33%. The stability in Treasury yields aided the returns of investment grade and BBB crossover issues that are more sensitive to the movement in interest rates, while strength in energy pricing positively impacted energy issues and lower credit quality CCC credits. This led to a somewhat unusual situation where the two ends of the credit spectrum both outperformed the middle (single B) fixed income products during the period.
According to data from JP Morgan, the BB-rated segment returned 2.2% and the non-rated/defaulted segments returned 2.7%, outpacing the B-rated segment which returned 1.7% for the quarter. The Fund’s straight bond segment continues to be biased toward higher-quality, non-investment grade securities of relatively short duration, which contributed to the Fund’s underperformance during the quarter. The Fund’s underweight to the energy and utilities sectors was also detrimental to relative results as the two industries were the strongest performers in the period with energy and utilities up 4.1% and 4.4% respectively. The fund is underexposed to the energy sector by roughly 580 bps and to the utilities sector by roughly 200 bps.
According to data from JP Morgan, the U.S. high yield market’s spread to worst at the end of the period was 415 bps, 26 bps lower than the preceding quarter and 200 bps below its 20-year historical average of 615 bps. The yield to worst for the high yield market at quarter-end was 5.90%, below the 20-year average of 9.18%, and below the yield of 6.27% at the end of the previous quarter.
The Fund’s cash balance decreased during the period as new security purchases exceeded the holdings in the fund that were called away or sold outright.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in Q3 ‘17|
|Unweighted Return||Contribution to Return|
Specific securities that contributed most positively to performance included Live Nation 2.500% convertible bonds, LionsGate 1.250% convertible bonds, and Wildhorse Resources 6.875% straight corporates bonds. Live Nation rallied on continued strong underlying fundamentals as the live entertainment growth trends continue. LionsGate advanced on a solid earnings report that was driven by better than expected performance in several of their film releases. Wildhorse Resources rose on the back of improving crude prices, stronger than expected production, and announced acquisitions of attractive acreage adjacent to its existing acreage.
Specific securities that detracted most from performance included Allergan 5.500% convertible preferreds, PRA Group 3.500% convertible bonds, and Monitronics 9.125% straight corporate bonds. Despite beating earnings estimates, Allergan declined early in the quarter due to its 10% stake in drugmaker Teva Pharmaceutical, which plunged on multiple analyst downgrades. PRA Group declined on disappointing quarterly earnings, and Monitronics also traded lower due to weaker than expected quarterly earnings as it goes through a rebranding process.
The market for high yield securities remains well-bid as yields and spreads bounce around cycle lows. A growing economy with modest inflation has created a favorable environment for risky assets. The slowdown in new issuance activity has reduced the supply of bonds available for purchase, while slowing default rates have reduced investor’s risk premium requirements. However, several risk factors could negatively influence the favorable environment. Our concerns include: the Federal Reserve taking a more aggressive tightening policy stance; fiscal stimulus policy not coming to fruition; continued energy price declines; geopolitical issues escalate such as with North Korea; and increasing protectionism.
Within this environment of low spreads and yields, we are managing the Fund cautiously yet actively. We ended the quarter with 135 positions compared to the previous quarter’s level of 130 holdings (excluding cash) invested in 106 issuers.
We are managing the Fund with an emphasis on higher-quality, non-investment grade 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. We believe bank loans offer a compelling opportunity as they offer senior positioning in the capital structure and floating interest rates, and we remain constructive in regards to convertible bonds and preferred issues.
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. Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security. Diversification does not assure a profit, nor does it protect against a loss in a declining market. Earnings growth is not representative of the fund’s future performance.
|General Account Forms|
|New Account Application|
|Change or Add Account Details|
|Power of Attorney|
|Individual Retirement Account (IRA) Forms|
|IRA Account Application|
|IRA Beneficiary Addition / Change Form|
|IRA / Qualified Plan Distribution Request Form|
|IRA Transfer Form|
|Coverdell Education Savings Accounts (ESA) Forms|
|Coverdell ESA Application|
|Coverdell ESA Distribution Request|
|Coverdell ESA Transfer Form|
|Retirement Savings Options for Individuals|
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.
Sign Up for Automatic Updates
Stay up-to-date with the most recent media coverage and press releases about the Buffalo Funds.
FOR FINANCIAL PROFESSIONALS
FOR INDIVIDUAL INVESTORS
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 3 stars among 612 for the three-year, 3 stars among 494 for the five-year, and 3 stars among 324 High Yield Bond funds for the ten-year period ending 11/30/17.
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.
©2017 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.
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.