High Yield Fund
|Total Net Assets:||$215.67 Million (12/31/19)|
|Category:||High Yield Bond|
|Benchmark:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q4 2019
PM Commentary Q4 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.
Jeff Sitzmann, Portfolio Manager
Overall Morningstar Rating™ of BUFHX based on risk-adjusted returns among 621 High Yield Bond funds as of 2/29/20.
|As of 2/29/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||0.38||-0.98||6.41||4.07||4.11||5.88||5.67||6.56||6.90|
|BUFFALO HIGH YIELD FUND - Institutional||0.42||-0.96||6.48||4.20||4.25||6.03||5.82||6.71||7.06|
|ICE BofAML U.S. High Yield Index||0.51||-1.55||5.91||4.76||5.16||7.15||6.91||6.93||7.11|
|Lipper High Yield Bond Funds Index||0.30||-1.86||5.65||4.36||4.39||6.56||5.80||5.40||5.87|
|Morningstar High Yield Bond Category||0.23||-1.52||5.09||3.93||4.07||6.12||5.72||5.75||5.84|
|As of 12/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||2.90||12.32||12.32||5.18||4.78||6.11||5.69||6.60||6.99|
|BUFFALO HIGH YIELD FUND - Institutional||2.85||12.40||12.40||5.31||4.92||6.26||5.84||6.75||7.15|
|ICE BofAML U.S. High Yield Index||2.61||14.41||14.41||6.32||6.13||7.50||7.11||7.01||7.23|
|Lipper High Yield Bond Funds Index||2.93||14.46||14.46||6.09||5.41||6.93||6.03||5.52||6.00|
|Morningstar High Yield Bond Category||2.31||12.48||12.48||5.16||4.78||6.26||5.50||5.62||5.95|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 12/31/19)|
Hypothetical Growth of $10,000
Record Date: April 17, 2020 | Payable Date: April 20, 2020
Record Date: May 18, 2020 | Payable Date: May 19, 2020
Record Date: June 17, 2020 | Payable Date: June 18, 2020
Record Date: July 17, 2020 | Payable Date: July 20, 2020
Record Date: August 17, 2020 | Payable Date: August 18, 2020
Record Date: September 17, 2020 | Payable Date: September 18, 2020
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 12/31/19)|| |
|# of Holdings||136|
|3-Yr Annualized Turnover Ratio||36.95%|
|Average Duration||2.32 years|
|Average Maturity||5.95 years|
|30-day SEC Yield||2.98%|
Top 10 Holdings
|Name of Holding||% of Net|
|MacDonald Dettwiler (Term Loan B, 7/5/24)||2.19%|
|Consolidated Communications (6.500%, 10/1/22)||2.10%|
|Quad Graphics (7.000%, 5/1/22)||1.75%|
|Phillips Van Heusen (7.750%, 11/15/23)||1.70%|
|MPLX (6.875%, 8/15/23)||1.64%|
|Nuance Communications (1.500% , 11/1/35)||1.63%|
|Brunswick (7.375%, 9/1/23)||1.59%|
|Performance Food Group Escrow Corp (5.500% , 10/15/27)||1.49%|
|Cardtronics (1.000%, 12/1/20)||1.49%|
|Treehouse Foods (6.000%, 2/15/24)||1.44%|
|TOP 10 HOLDINGS TOTAL||15.53%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
|A & Above||0.00|
CAPITAL MARKET OVERVIEW
(As of 12/31/19) — After producing positive returns in the previous two quarters, the U.S. high yield sector continued to push higher in the 4th quarter, albeit to a lesser extent. The market’s performance was impacted by: (i) continued modest U.S. gross domestic product (GDP) growth; (ii) a widely-anticipated interest rate cut from the U.S. Federal Reserve (the Fed); (iii) volatile movements in crude oil prices that affected the energy space; and (iv) the equity markets continuing to climb higher. The Fed’s rate cut and the resulting decline in short-term interest rates (3Month LIBOR down 18bps to 1.91%) encouraged investors to buy risky assets. The safe haven 10-year Treasury bond returned -1.74% during the quarter while the S&P 500 Index produced a return of 9.07%. The 10-year Treasury bond’s yield increased by 25 basis points (bps) from 1.67% to 1.92% during the period.
High yield mutual funds experienced cash inflows of about $3.6 billion during the quarter. This follows $3.8 billion in cash inflows during the prior quarter and a flat second quarter. The $78.6 billion in high yield new issuance during the quarter was up from $67.7 billion during the 3rd quarter. On a year-over-year basis, new issuance was significantly higher than the $19 billion that came to market in the 4th quarter of 2018, which happened to be the lowest quarterly issuance volume in 10 years.
The U.S. high yield universe as a whole produced positive returns in every sector and credit rating silo during the period. According to data from JP Morgan, the lower quality end of the credit spectrum (i.e., single B-rated issues and below) outperformed higher-rated issues. This comes after underperforming higher-rated issuers in the previous two quarters. The non-rated segment produced the highest return of 4.43% while the higher quality split BB-rated tranche was the worst performer at 2.22%.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 424bps, which was 143bps tighter than a year ago (December 2018,) and 185bps below its 20-year historical average of 609bps. The yield to worst for the high yield market was 5.91% at quarter end, below the 20-year average of 8.76%, and below the yield of 8.23% from one year ago (December 2018). The U.S. high yield default rate increased to 2.63% in December, up 11bps from 2.52% in the previous quarter, but still below the long-term average of 3.44%.
(As of 12/31/19) — The Buffalo High Yield Fund produced a return of 2.90% for the quarter, which outperformed the ICE BofAML U.S. High Yield Index return of 2.61%. The Fund’s result was in-line with the Lipper High Yield Bond Funds Index return of 2.93% during the period.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 4Q19|
|Unweighted Return||Contribution to Return|
Specific securities that contributed most positively to performance included Medicines Company 2.75% convertible bonds, Teva Pharmaceuticals 6.75% corporate bonds, and Maxar Technology bank debt. Medicines Company convertible bonds rose due to favorable study results for its new cholesterol-lowering medication along with an announcement that the company was being acquired by Novartis. Teva’s bonds rallied significantly following favorable court settlements that relieved investor concern over the company’s exposure to opioid litigation. Maxar Technology’s term loans improved after announcing asset sales that would be used to pay down debt.
Securities that detracted from performance included 8×8 Inc. 0.5% convertible bonds, US Silica bank debt, and Quad Graphics 7% corporate bonds. 8×8 Inc. convertible notes declined as the underlying common stock was negatively-impacted by a sell-off in the Technology sector in early December. US Silica bank debt declined due to a weak earnings report and declining sand prices. Quad Graphics bonds declined following disappointing earnings announcement in late October.
(As of 12/31/19) — Looking ahead, a growing economy with modest inflation presents a favorable environment for risk assets; however, market participants are becoming increasingly concerned about trade wars, political uncertainty in Washington, and escalating tension in the Middle East.
Given that we are likely in the later stages of the economic cycle we find ourselves confronted with relatively-low spread and yield levels and are therefore managing the Fund cautiously, yet actively. We ended the quarter with 136 positions (excluding cash) compared to 131 positions in the previous quarter. We continue to focus on high-quality issuers with defensive business models and manageable credit metrics, and 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 preferreds.
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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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