High Yield Fund
(As of 3/31/17)
May 19th, 1995
Total Fund Assets
BofA Merrill Lynch HY Master II
Overall Morningstar™ rating out of 599 High Yield Bond funds as of 4-30-2017 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure, if applicable).
RISK VS CATEGORY
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.
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.
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.
~ Jeffrey Sitzman, Portfolio Manager
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 4/30/17)||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo High Yield||2.05||3.13||7.53||4.12||5.36||6.25||6.84||7.28|
|BofA Merrill Lynch HY Master II||2.50||3.87||13.66||4.77||6.87||7.32||8.21||7.43|
|Lipper High Yield Bond Funds Index||2.33||3.87||12.90||3.82||6.15||5.89||7.13||6.08|
|Morningstar High Yield Bond||2.07||3.34||11.40||3.32||5.61||5.85||7.02||-|
|(As of 3/31/17)||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo High Yield||2.14||2.14||8.37||3.79||5.32||6.24||6.83||7.27|
|BofA Merrill Lynch HY Master II||2.71||2.71||16.88||4.62||6.85||7.34||8.25||7.40|
|Lipper High Yield Bond Funds Index||2.77||2.77||15.25||3.62||6.11||5.93||7.13||6.05|
|Morningstar High Yield Bond||2.31||2.31||13.52||3.15||5.56||5.86||7.01||-|
|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.
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||122|
|3-Yr Annualized Turnover Ratio||34.20%|
|30-day SEC Yield||4.08%|
|Average Duration||3.24 years|
|Average Maturity||5.42 years|
|Holding||% of Portfolio|
|Bankrate Inc Del 144A 6.125%||2.65%|
|Akorn Inc Tlb||2.62%|
|Lions Gate Entmt Cv 1.25%||2.28%|
|Digitalglobe T/L B (12/16)||2.20%|
|Kcg Hldgs 144A 6.875%||1.97%|
|Tutor Perini 7.625%||1.96%|
|Endo Fin Llc / Endo Finco 144A 5.75%||1.74%|
|Consolid Comms 6.5%||1.74%|
|Fti Consult 6%||1.65%|
|Triump Grp Inc New 4.875%||1.64%|
|TOP 10 HOLDINGS TOTAL||20.45%|
As of 12/31/16. 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 3/31/17. 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 3/31/17. Allocation percentages may not equal 100% due to rounding.
|Duration Breakout (%)*|
|Quality Breakout (%)|
|A & Above||0.73|
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 3/31/17.
CAPITAL MARKET OVERVIEW
The Buffalo High Yield Fund posted a total return of 2.14% for the quarter ending March 31, 2017 underperforming the Bank of America Merrill Lynch High Yield Master II Index (the “Index”) which returned 2.71% during the same period.
The high yield market generated a return of 2.71% during the quarter while the yield on the U.S. 10-Year Treasury Note declined only 6 basis points (bps) and the Federal Reserve increased its target Fed Funds rate by another 25 bps in March. We believe the returns reflected the following events: (i) the failed repeal/replace of the Affordable Care Act (ii) continued improvement in the U.S. economy (with unemployment rates near cycle lows), and (iii) the Federal Reserve’s reassurance that a measured and gradual set of rate hikes through 2018 is still the game plan.
According to data from JP Morgan, high yield mutual funds experienced negative outflows during the first quarter of about $7.4 billion compared to inflows of roughly $600 million in the prior quarter. The high yield new issuance calendar totaled $98.7 billion in the quarter which was up significantly from the prior quarter’s $52 billion.
During the quarter, the yield on the 10-Year Treasury Note decreased slightly from 2.45% to 2.39% while high yield spreads compressed 20 basis points to 456 bps over the 10 Year-Treasury according to JP Morgan. As mentioned above, bullish sentiment on the U.S. economy parlayed with a fairly dovish stance from the Fed, gave investors confidence that high yield was still a relatively attractive asset class. According to data from JP Morgan, the best performing sector during the quarter was Healthcare (+4.33%) due to the failed House vote on the Affordable Care Act (Obamacare) repeal/replace in March. Also, the best performing sectors in the high yield market during the quarter continued to be the lower quality securities as the CCC segment returned 4.28% followed by the single B segment return of 2.33% and the BB return of 2.02%. The Fund’s high yield bond allocation is focused on the higher credit quality segments of the market which is mostly comprised of the BB and B segments. This quality bias largely explains our underperformance during the quarter.
The U.S. high yield market’s spread to worst as of March 31, 2017 was 456 bps which was 20 bps tighter than the preceding quarter and 297 bps below the same time last year. The yield to worst for the high yield market at 3/31/17 was approximately 6.24% versus 8.80% last year at this time.
The fund’s cash balance at the end of the quarter was 9.3% which is up from the prior quarter of 7.6% due to called bonds and selling activity by our management team. The funds composition by asset class at quarter end and over the previous four quarters was as follows:
The approximate rate and contribution of return from the various asset classes in BUFHX during the quarter was as follows:
|Unweighted Return||Contribution to Return|
The table above provides returns by asset class. Convertible preferreds were the best performing asset class and straight corporates were the largest contributor to the Fund’s quarterly returns. Specific securities that positively contributed the most to performance within this asset class during the quarter included the Medicines Company 2.500% and 2.750% convertible bonds as well CEB 5.625% straight corporate bonds which increased in price due to better underlying fundamentals. Within the straight corporate debt category, CEB, Valeant Pharma and KCG Holdings were the best performers. CEB increased in value due to a takeout, while Valeant and KCG improved due to better earnings. Bank loans that contributed the most to performance during the quarter include Valeant and Digital Globe. Securities that detracted most from performance during the quarter included Horizon Global 2.750% convertible bonds, Consolidated Communications 6.500% senior notes and Wildhorse Resources 6.875% senior notes. Horizon Global and Consolidated Communications decreased in value due to disappointing quarterly earnings and Wildhorse Re-sources was lower due to lower crude oil prices.
As noted above, high yield performance remained strong with yields and spreads compressing throughout the past year. High yield spreads are now approaching their lowest level in the past few years and below the 30 year historical average as an improving economy has boosted fundamentals and default rates remain muted. As a result, we believe high yield returns going forward will likely be lower than those in 2016 and may experience more volatility given current prices and spreads. The positives for high yield securities are the same as they were at the end of 2016: overall are the improving economy, a new President that is focused on fiscal stimulus and reduced regulations, and lower default rates. The potential risks to high yield assets are the prospects for interest rates to rise faster than expected, geopolitics, and protectionism.
The portfolio remains well diversified with over 122 individual positions. We continue to manage the fund in a conservative manner and are focused on higher quality credits with shorter durations. Additionally, we also believe that bank loans offer a compelling opportunity as they are senior in the capital structure and increase in value as rates increase. Lastly, we remain opportunistic as it relates to convertible bonds.
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.
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The Buffalo High Yield Fund received 4 stars among 599 for the three-year, 3 stars among 474 for the five-year, and 4 stars among 323 High Yield Bond category funds for the ten-year period ended 4/30/17.
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.