High Yield Fund
Quick Facts
| Investor | Institutional | |
| Ticker: | BUFHX | BUIHX |
| Daily Pricing: | ||
| As of 2/7/2023 | ||
| NAV: | $10.35 | $10.34 |
| $ Change: | $-0.01 | $-0.01 |
| % Change: |
-0.10% | -0.10% |
| YTD: |
2.81% | 2.82% |
| Inception Date: | 5/19/1995 | 7/1/2019 |
| Expense Ratio: | 1.02% | 0.87% |
| Total Net Assets: | $288.36 Million (12/31/22) | |
| Morningstar Category: | High Yield Bond | |
| Benchmark Index: | ICE BofA U.S. High Yield | |
| Dividend Distribution: | Monthly | |
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Related Material: Fund Fact Sheet Q4 2022 PM Commentary Q4 2022 Summary Prospectus |
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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.
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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
Morningstar Rating
Overall Morningstar Rating™ of BUFHX based on risk-adjusted returns among 625 High Yield Bond funds as of 12/31/22.
Performance (%)
| As of 1/31/23 | 3 MO | YTD | 1 YR | 3 YR | 5 YR | 10 YR | 15 YR | 20 YR | Since Inception |
|---|---|---|---|---|---|---|---|---|---|
| BUFFALO HIGH YIELD FUND - Investor | 4.22 | 2.61 | -2.01 | 3.72 | 4.08 | 4.50 | 5.79 | 6.19 | 6.62 |
| BUFFALO HIGH YIELD FUND - Institutional | 4.16 | 2.62 | -1.87 | 3.88 | 4.22 | 4.65 | 5.94 | 6.34 | 6.77 |
| ICE BofA U.S. High Yield Index | 5.08 | 3.91 | -5.08 | 1.07 | 2.79 | 4.21 | 6.30 | 7.17 | 6.52 |
| Lipper High Yield Bond Funds Index | 5.12 | 3.80 | -4.62 | 1.12 | 2.59 | 3.83 | 5.36 | 6.29 | 5.43 |
| Morningstar High Yield Bond Category | 5.11 | 3.58 | -4.81 | 0.93 | 2.33 | 3.43 | 5.18 | 6.11 | 5.35 |
| 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 |
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 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 12/31/22) | |
|---|---|
| Upside Capture | 89.69 |
| Downside Capture | 71.87 |
| Alpha | 3.04 |
| Beta | 0.83 |
| Sharpe Ratio | 0.23 |
Hypothetical Growth of $10,000
Distributions
| Record Date | Payable Date | Distribution NAV | Net Investment Income | Short-Term Capital Gains | Long-Term Capital Gains | Distribution Total |
|---|---|---|---|---|---|---|
| 1/17/23 | 1/18/23 | $10.31 (Inv) $10.30 (Inst) | - - | - - | $0.01288989 $0.0141153 | $0.01288989 $0.0141153 |
Net Investment Income, if any – Record Date (2/17/23); Payment Date (2/21/23)
Net Investment Income, if any – Record Date (3/17/23); Payment Date (3/20/23)
Net Investment Income, if any – Record Date (4/17/23); Payment Date (4/18/23)
Net Investment Income, if any – Record Date (5/17/23); Payment Date (5/18/23)
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)
Portfolio
Portfolio Characteristics
| (As of 12/31/22) | |
|---|---|
| # of Holdings | 128 |
| 3-Yr Annualized Turnover Ratio | 43.72% |
| Average Duration | 3.21 years |
| Average Maturity | 7.30 years |
| 30-day SEC Yield | 7.59% |
Top 10 Holdings
| Name of Holding | Maturity Date | % of Net Assets |
|---|---|---|
| MPLX | 3 Month LIBOR +4.652%, 8/15/23 | 3.20% |
| Northern Oil & Gas | 8.125%, 3/1/28 | 3.14% |
| DirecTV Financing | 1 Month LIBOR + 5.000%, 8/2/27 | 3.06% |
| Talos Production | 12.000%, 1/15/26 | 2.30% |
| Consol Energy | 11.000%, 11/15/25 | 2.27% |
| Penn Virginia Escrow | 9.250%, 8/15/26 | 2.25% |
| Portillo's | 1st Lien Term Loan, 9/6/24 | 2.20% |
| CoreCivic | 8.250%, 4/15/26 | 2.20% |
| Matador Resources | 5.875%, 9/15/26 | 1.95% |
| Maxar Technologies | 1 Month SOFR + 4.250% | 1.73% |
| TOP 10 HOLDINGS TOTAL | 24.30% |
Asset Allocation
Sector Weighting
Duration
| Duration Breakout (%)* | |
|---|---|
| 10+ Years | 0.00 |
| 7-10 Years | 0.04 |
| 5-7 Years | 7.84 |
| 3-5 Years | 29.20 |
| 1-3 Years | 33.10 |
| 0-1 Years | 9.81 |
Credit Quality
| Quality Breakout (%) | |
|---|---|
| Baa | 2.00 |
| Ba | 27.55 |
| B | 61.09 |
| Caa | 4.71 |
| Unassigned | 4.65 |
Management
Commentary
CAPITAL MARKET OVERVIEW
(As of 12/31/22) — The U.S. high yield sector recorded its first positive quarter after three consecutive losing quarters as investors became more optimistic that the previous aggressive Federal Reserve (the “Fed”) actions were taming inflation more quickly than expected. Softer than expected economic data in October and November gave investors hope that the Fed could slow its pace of tightening. In addition, the high yield sector saw strong retail inflows, but very little new issuance, which drove demand for outstanding issues and lifted prices. December reversed course, albeit much more muted, driven by outflows and commentary from Fed officials that was more hawkish than many expected. The JP Morgan Domestic High Yield Index ended the quarter at a yield to worst of 9.23%, down 63 basis points (bps) from the beginning of the quarter, but well above the record low of 4.22% in July 2021. The 10-year Treasury yield rose 6 bps to 3.88% and produced a positive return of 0.56% during the quarter while the S&P 500 Index posted a gain of 7.56%.
High yield funds snapped a streak of quarterly cash outflows that began in the 1st quarter of 2021, posting $7.3 billion of inflows in the 4th quarter. For calendar year 2022, high yield fund outflows were a record -$47 billion, compared to -$13.2 billion of outflows in 2021. Not surprisingly, high yield new issuance remained muted during the quarter with only $16.6 billion, which was the lightest volume since the March 2009 quarter and compares to the quarterly average of $117 billion over the last two years. According to JP Morgan, the Energy sector saw the largest issuance accounting for 19%, followed by Gaming/Lodging/Leisure (14.7%), and Transportation (12.7%).
As mentioned previously, the 10-year Treasury bond yield only rose 6bps from 3.82% to 3.88%, compounding the 80bps increase in the 3rd quarter. According to data from JP Morgan, the -0.94% loss for the CCC credit tier was the only negative return amongst the credit quality silos and underperformed the rest of the credit spectrum, with split BB-rated bonds performing the best (+4.81%) for the quarter. Returns by industrial sector in the U.S. high yield universe were nearly all positive during the 4th quarter. According to data from JP Morgan, the Metals/Mining sector was the best performer with a positive 7.94% return, and Broadcasting was the only sector to deliver negative returns of -0.23%.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 511bps, 63bps tighter than the 3rd quarter and 55bps tighter than the 20-year historical average of 566 bps. The yield to worst for the high yield market at quarter end was 9.23%, above the 20-year average of 7.84%, and well above the 4.71% yield at the end of the December 2021 quarter.
PERFORMANCE COMMENTARY
(As of 12/31/22) — The Buffalo High Yield Fund (BUFHX) produced a return of 3.98% for the quarter, a result that was almost in-line with the ICE BofA US High Yield Index which gained 4.01% and slightly ahead of the Lipper High Yield Bond Funds Index which gained 3.91%.
| Fund Composition by Asset Class | |||||
|---|---|---|---|---|---|
| 12/31/21 | 3/31/22 | 6/30/22 | 9/30/22 | 12/31/22 | |
| Straight Corporates | 67.8% | 68.3% | 69.4% | 69.6% | 68.4% |
| Convertibles | 7.1% | 6.3% | 4.6% | 4.3% | 3.4% |
| Bank Loans | 16.7% | 18.5% | 18.9% | 19.1% | 19.1% |
| Preferred Stock | 2.6% | 2.7% | 2.9% | 2.5% | 2.2% |
| Convertible Preferred | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% |
| Common Stocks | 1.3% | 0.0% | 0.0% | 0.0% | 0.0% |
| Cash | 4.5% | 4.1% | 4.1% | 4.6% | 6.9% |
| Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 4Q22 | |
|---|---|
| Contribution to Return | |
| Straight Corporates | 3.20% |
| Convertibles | 0.18% |
| Bank Loans | 0.73% |
| Preferred Stocks | 0.06% |
| Convertible Preferred | N/A |
| Common Stocks | N/A |
| Total | 3.98% |
TOP CONTRIBUTORS
During the quarter, the Fund’s three top contributors were the DirecTV term loan, the Ranger Oil 9.25% ’26 corporate bonds, and the Tutor Perini 6.875% ’25 corporate bonds. As with most leveraged loans, the DirecTV term loan held up well during the quarter due to its higher quality and higher floating rate coupon. Ranger Oil bonds performed well due to its reported strong free cash flows driven by higher oil prices. Tutor Perini, which is a major commercial construction company, benefited from strong cash collections on previously disputed contracts as well as announcing several new major contracts during the quarter.
TOP DETRACTORS
The Mastec 6.625% ’29 corporate bonds, Lions Gate 5.50% ’29 corporate bonds, and the Stride Inc. 1.125% ’27 convertible bonds were the worst performers during the quarter. Mastec declined in early October after completing the acquisition of Infrastructure & Energy Alternatives. Lions Gate reported disappointing earnings during the quarter, and questions around the spin-off of Starz network weighed on the bonds. Stride convertible notes declined in conjunction with the underlying common stock after reporting weaker than expected results in late October.
OUTLOOK
Literature
| Buffalo High Yield Fund Documents | Last Updated |
|---|---|
| Fact Sheet | 12/31/22 |
| Quarterly Commentary | 12/31/22 |
| Full Fund Holdings | 6/30/22 |
| Summary Prospectus | 7/29/22 |
| Prospectus | 7/29/22 |
| Statement of Additional Information | 7/29/22 |
| Annual Report | 3/31/22 |
| Semi-Annual Report | 9/30/22 |
| Tax Guide - 2022 | 1/8/23 |
Fundamental Approach
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.
Proprietary Philosophy
We construct our portfolios based on our own proprietary investment strategy.
Disciplined Investing
Sticking to our disciplined investment strategy ensures we maintain a consistent, balanced approach.
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