High Yield Fund
|Total Net Assets:||$208.63 Million (6/30/20)|
|Category:||High Yield Bond|
|Benchmark:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q2 2020
PM Commentary Q2 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 623 High Yield Bond funds as of 8/31/20.
|As of 8/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||7.72||2.07||5.55||4.41||4.54||5.71||5.84||6.47||6.89|
|BUFFALO HIGH YIELD FUND - Institutional||7.71||2.22||5.77||4.55||4.69||5.86||6.00||6.62||7.05|
|ICE BofAML U.S. High Yield Index||6.84||0.75||3.71||4.51||6.28||6.70||6.95||7.02||7.06|
|Lipper High Yield Bond Funds Index||6.47||-0.93||2.24||3.68||5.09||6.05||5.77||5.53||5.79|
|Morningstar High Yield Bond Category||6.21||-0.12||2.60||3.46||4.91||5.70||5.73||5.83||5.78|
|As of 6/30/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||10.00||-3.77||0.24||2.54||3.11||5.26||5.52||6.31||6.69|
|BUFFALO HIGH YIELD FUND - Institutional||10.09||-3.67||0.34||2.67||3.25||5.41||5.67||6.47||6.84|
|ICE BofAML U.S. High Yield Index||9.61||-4.78||-1.10||2.94||4.58||6.48||6.68||6.80||6.87|
|Lipper High Yield Bond Funds Index||9.27||-6.34||-2.70||2.17||3.48||5.82||5.52||5.27||5.60|
|Morningstar High Yield Bond Category||8.62||-5.17||-1.89||2.04||3.38||5.49||5.50||5.61||5.61|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 6/30/20)|
Hypothetical Growth of $10,000
Record Date: October 19, 2020 | Payable Date: October 20, 2020
Record Date: November 17, 2020 | Payable Date: November 18, 2020
Record Date: December 17, 2020 | Payable Date: December 18, 2020
|(As of 6/30/20)|| |
|# of Holdings||136|
|3-Yr Annualized Turnover Ratio||31.83%|
|Average Duration||3.17 years|
|Average Maturity||6.30 years|
|30-day SEC Yield||4.65%|
Top 10 Holdings
|Name of Holding||% of Net|
|Cerence (Term Loan B, 9/30/24)||2.83%|
|Consolidated Communications (6.500%, 10/1/22)||2.35%|
|MacDonald Dettwiler (Term Loan B, 10/4/24)||2.25%|
|Builders FirstSource (5.000%, 3/1/30)||1.93%|
|Brunswick (7.375%, 9/1/23)||1.92%|
|Nuance Communications (1.500% , 11/1/35)||1.87%|
|Quad Graphics (7.000%, 5/1/22)||1.77%|
|Phillips Van Heusen (7.750%, 11/15/23)||1.73%|
|Treehouse Foods (6.000%, 2/15/24)||1.60%|
|Cogent Communications (5.625%, 4/15/21)||1.59%|
|TOP 10 HOLDINGS TOTAL||19.84%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
CAPITAL MARKET OVERVIEW
(As of 6/30/20) — After suffering a massive correction in the 1st quarter, driven by the COVID-19 outbreak and plunging crude oil prices, the U.S. high yield sector delivered a substantial rally in the 2nd quarter — the strongest since the 3rd quarter of 2009. While not fully recapturing the losses of the 1st quarter, aggressive monetary and fiscal stimulus implemented in April and May fueled the rebound in high yield bonds from the March low point. The 10-year Treasury Bond returned 0.68% during the quarter while common stocks, as measured by the S&P 500 Index, logged a return of 20.54%.
Following $16.7 billion in outflows from a flight to quality during the preceding quarter, high yield funds saw a record cash inflow of $47.3 billion in the June quarter. Recognizing the influx of capital, high yield issuers brought a record $145.5 billion in high yield new issuance, easily exceeding the previous record of $121.2 billion set in the 2nd quarter of 2014. In the first six months of 2020, new issuance volume totaled $218.4 billion, up 55% from the $140.5 billion in the first six months of 2019. According to JP Morgan, BB-rated issues accounted for the bulk of activity (58%), and tilted heavily toward sectors impacted by the virus. The heaviest volume in period came from Gaming/Leisure and Lodging ($21.6 billion, 15%), Autos ($13.3 billion, 9%), and Energy ($12.0 billion, 8%).
During the quarter, the 10-year Treasury bond yield was essentially flat at 0.66% following the 125 basis point (bps) contraction in the 1st quarter, and remains near record lows. Excluding transportation, every industry and sector in the U.S. high yield universe and every credit rating silo produced positive returns. According to data from JP Morgan, the lower quality end of the high yield credit spectrum (i.e., CCC and non-rated) performed better than the higher end of the quality spectrum. The non-rated segment produced the largest gain of 13.81% and the higher-rated split BBB segment was the worst performer, but still produced a solid 7.36% gain.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 722 bps, 227 bps tighter than the preceding quarter and 111 bps wider than its 20-year historical average of 611 bps. The yield to worst for the high yield market at quarter end was 7.57%, below the 20-year average of 8.64%, and below the yield of 10.00% at the end of the 1st quarter.
(As of 6/30/20) — The Buffalo High Yield Fund (BUFHX) advanced10.00% over the quarter and outperformed the ICE BofAML U.S. High Yield Index, which gained 9.61%. The Fund also outperformed the peer group Lipper High Yield Bond Funds Index return of 9.27%.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 2Q20|
|Unweighted Return||Contribution to Return|
All but a handful of securities delivered positive returns during the period, with the three top contributors being Cerence 3.000% convertible bonds, MPLX 6.875% corporate bonds, and Nuance Communications 1.500% convertible bonds. The Fund participated in the new issuance of the Cerence 3.000% convertible bonds, which increased over 25% in their first week of trading. MPLX bonds, one of the Fund’s worst performers in the preceding quarter, recovered significantly in the 2nd quarter as crude oil prices recovered and the energy sector as a whole rebounded. Nuance Communications convertible bonds rallied on the back of the common stock, which increased 51% during the quarter as investors favored the technology sector.
Specific securities that detracted the most from performance include Brunswick 7.375% corporate bonds, Townsquare Media 6.500% corporate bonds, and J2 Global 1.750% convertible bonds. Brunswick bonds were one of the Fund’s best performers in the 1st quarter as higher quality issues were safe havens for investors, but the bonds experienced some selling pressure this period as capital was redirected into riskier securities that had been punished starting the year. Townsquare Media declined due to the negative economic impact of the pandemic resulting in the pull back of radio advertising. This has caused leverage to increase and may require the company to get a waiver on its revolver covenants. The company also took a non-cash impairment charge due to an accounting error. J2 Global was negatively-impacted by a hedge fund short-sell report released in June. In response, management issued a firm rebuttal addressing the assertions and pointed out multiple inaccuracies in the report.
(As of 6/30/20) — Until March, the United States had been enjoying a growing economy with modest inflation that created a favorable environment for risky assets. However, by 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 3-year high of 3.54% in March, an increase of 91 bps from the December 2019 level, and slightly above the long-term average of 3.44%. Unfortunately, the trend continued during the 2nd quarter with the default rate increasing to 6.61%, a 10-year high. During the quarter, 47 companies defaulted on a record-breaking $82.2 billion of debt.
We are concerned first and foremost about the ongoing COVID-19 pandemic and the fallout on global economies. Previous concerns such as trade talks with China and the upcoming presidential election have become a secondary focus. We are managing the Fund cautiously yet actively, focusing on high-quality issuers with defensive business models and manageable credit metrics. We ended the quarter with 136 positions, unchanged from the previous quarter’s level (excluding cash). 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 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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