High Yield Fund
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™ based on risk-adjusted returns among 608 High Yield Bond funds as of 5/31/19.
|As of 5/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO HIGH YIELD FUND||1.86||6.46||4.60||4.61||3.73||7.37||5.78||6.93|
|ICE BofAML U.S. High Yield Index||1.09||7.52||5.37||7.06||4.37||9.30||7.41||7.13|
|Lipper High Yield Bond Funds Index||1.38||7.63||4.81||6.64||3.69||8.62||6.30||5.88|
|Morningstar High Yield Bond Category||1.03||6.58||4.20||5.84||3.21||8.00||6.20||5.86|
|As of 3/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO HIGH YIELD FUND||5.28||5.28||3.46||4.98||3.60||8.68||5.67||6.93|
|ICE BofAML U.S. High Yield Index||7.40||7.40||5.94||8.69||4.70||11.24||7.25||7.18|
|Lipper High Yield Bond Funds Index||7.02||7.02||4.72||7.79||3.87||10.19||6.13||5.90|
|Morningstar High Yield Bond Category||6.35||6.35||4.33||6.97||3.45||9.49||6.02||5.89|
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
|vs ICE BofAML U.S. High Yield Index (As of 3/31/19)|
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: June 17 | Payable Date: June 18
Record Date: July 17 | Payable Date: July 18
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 3/31/19)|| |
|# of Holdings||123|
|3-Yr Annualized Turnover Ratio||34.47%|
|Average Duration||2.94 years|
|Average Maturity||5.35 years|
|30-day SEC Yield||4.20%|
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%|
As of 3/31/19. 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.
Percentages of Total Assets as of 3/31/19. Allocation percentages may not equal 100% due to rounding.
|Duration Breakout (%)*|
|Quality Breakout (%)|
|A & Above||3.59|
All ratings are as of 12/31/18. 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 3/31/19) — After producing negative returns in final quarter of 2018, the U.S. high yield sector reversed course and generated positive performance in the 1st quarter of 2019, with bond prices rallying in all three months. The market’s performance was driven by: (i) continued, albeit modest, economic growth of U.S. Gross Domestic Product (GDP); (ii) a more dovish sentiment from the Federal Reserve (Fed), signaling a pause in raising interest rates and timing of plans to reduce their balance sheet; (iii) a healthy labor market with additional jobs added and the unemployment rate near cycle lows; and (iv) the equity market indexes bouncing back after dismal performance to end last year. The Fed’s pause, and the resulting decline in the level of short-term interest rates (3-Month LIBOR ended the period down 20bps to 2.60%), encouraged investors to buy risky assets. The 10-year Treasury bond produced a return of 3.07% during the quarter while the S&P 500 Index returned a positive 13.65%.
Anticipation of a potentially longer credit cycle and decreased market volatility resulted in positive cash inflows for the high yield asset class during the quarter of about $12.2 billion compared to outflows of $19.2 billion for the year ago quarter ending March 31, 2018 (source: JP Morgan). The $65.4 billion in new issuance of high yield bonds during the quarter increased sequentially from $19.1 billion in the 4th quarter of 2018 quarter, but was down year-over-year compared to the $72.7 billion during the 1st quarter of 2018.
During the period, the 10-year Treasury bond yield dropped by 18 basis points (bps) from 2.69% to 2.41%. High yield issues across all ratings segments and industry sectors followed suit with positive returns and lower yields. According to data from JP Morgan, the heart of the ratings curve outperformed slightly with the single B rated bond segment producing the highest return at +7.38% and bank loans being the worst performer at +4.65%.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 452bps, 42bps wider than the preceding quarter of 2018 but still 160 basis points below its 20-year historical average of 612 basis points. The yield to worst for the high yield market at quarter end was 6.83%, below the 8.95% 20-year average, and above the yield of 6.56% at the end of the last March 2018 quarter.
The market for high yield securities showed signs of life during the quarter as spread to worst tightened over 100bps and yield to worst shrank by 140bps. This is the strongest start to a calendar year on record for the high yield asset class, as a growing economy with modest inflation and a more dovish Fed stance toward monetary policy has created an increased appetite for risk assets. The U.S. high yield default rate of 0.94% was down 87bps from January 1, 2019 and down 133bps compared to the March 31, 2018 default rate of 2.21%, and still well below the 3.5% long-term average. New issuance activity steadily increased each month during the quarter, satiating some of the demand driven by $12.2 billion of inflows into high yield mutual funds.
(As of 3/31/19) — The Buffalo High Yield Fund posted a return of 5.28% for the quarter, underperforming the ICE BofAML High Yield Index return of 7.40% during the same period.
The Fund’s cash balance increased 332bps compared to December 31st as some holdings were either called by the issuers or sold outright and exceeded our new security purchases.
We ended the quarter with 122 positions compared to the previous quarter’s level of 124 positions (excluding cash).
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 1Q19|
|Unweighted Return||Contribution to Return|
As shown in the table above, all of the Fund’s asset classes with the exception of common stocks produced positive returns. The Fund’s convertible bonds and convertible preferreds outperformed the Index total return, while corporates, bank loans, and common stocks underperformed the Index total return.
Specific securities that contributed most positively to performance include LiveNation 2.500% convertible bonds, Andeavor Logistics 6.875% corporate bonds, and Triumph Group 4.875% corporate bonds. LiveNation advanced on better than expected earnings and sell-side speculation that the company is an attractive acquisition target. Andeavor bounced back after a dismal December as investors were bailing out of perpetual maturity issues. Triumph Group rose as the company continued to improve the business by selling assets, cutting costs, and focusing on higher margin businesses.
Specific securities that detracted most from performance include Maxar Technologies bank debt, Greenbrier common stock, and Weight Watchers bank debt. The Maxar term loan declined on worse than expected earnings and management’s decision to cut the dividend which made debt holders wary. Greenbrier declined on earnings coming in below expectations, and the continued sluggish environment for railcar orders forced management to lower expectations for 2019. The Weight Watchers term loan was hurt by declining revenue concerns and increasing leverage.
(As of 3/31/19) — Given that we are possibly in the late stages of the economic cycle, we find ourselves confronted with relatively low spread and yield levels. We continue to be concerned about inflation growth acceleration, geopolitical tensions – specifically the trade tensions with China, and increasing protectionism efforts from the White House.
We are managing the Fund cautiously yet actively, focusing on high-quality 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 trade-off 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.
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 received 2 stars among 608 for the three-year, 4 stars among 525 for the five-year, and 2 stars among 338 High Yield Bond funds for the ten-year period ending 5/31/19.
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. ©2018 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.