High Yield Fund
May 19, 1995
Total Fund Assets
$221.46 Million (6/30/18)
ICE BofAML U.S. High Yield
Overall Morningstar™ rating out of 590 High Yield Bond funds as of 8/31/18 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure).
RISK VS CATEGORY
The Morningstar™ Risk vs Category rating is an assessment of the variations in a fund’s monthly returns, with an emphasis on downside variations, in comparison to the 590 funds in the High Yield Bond category, as of 8/31/18.
High Yield Fund News
Conservative positioning could be key — We now believe the high yield market offers more risk than reward. While we are not forecasting an imminent recession, numerous factors could result in wider credit spreads down the road.
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Discovery Fund #7
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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.
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
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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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 8/31/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO HIGH YIELD FUND||1.90||1.37||2.96||4.14||4.17||6.82||6.10||7.04|
|ICE BofAML U.S. High Yield Index||2.20||1.93||3.26||7.04||5.63||8.37||7.79||7.23|
|Lipper High Yield Bond Funds Index||1.93||1.56||3.04||5.83||4.93||6.97||6.68||5.95|
|Morningstar High Yield Bond Category||1.72||1.36||2.67||5.45||4.44||6.81||6.56||5.94|
|As of 6/30/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO HIGH YIELD FUND||0.51||-0.03||2.01||3.32||4.29||6.90||6.06||7.03|
|ICE BofAML U.S. High Yield Index||1.00||0.08||2.53||5.55||5.51||8.03||7.66||7.20|
|Lipper High Yield Bond Funds Index||0.71||-0.14||2.54||4.49||4.84||6.67||6.60||5.91|
|Morningstar High Yield Bond Category||0.56||-0.16||2.23||4.20||4.36||6.51||6.46||5.92|
|vs ICE 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. Each Morningstar category average represents a universe of funds with similar objectives.
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||140|
|3-Yr Annualized Turnover Ratio||36.56%|
|Average Duration||3.37 years|
|Average Maturity||5.83 years|
|30-day SEC Yield||4.18%|
|Name of Holding||% of Net Assets|
|MacDonald Dettwiler (Term Loan B, 7/5/24)||2.25%|
|Consolidated Communications (6.500%, 10/1/22)||1.91%|
|Quad Graphics (7.000%, 5/1/22)||1.85%|
|Triumph Group (4.875%, 4/1/21)||1.75%|
|FTI Consulting (6.000%, 11/15/22)||1.68%|
|Phillips Van Heusen (7.750%, 11/15/23)||1.65%|
|Wildhorse Resource Dev (6.875%, 2/1/25)||1.62%|
|Andeavor Logistics (6.875%, 8/15/23)||1.57%|
|Brunswick (7.375%, 9/1/23)||1.55%|
|Live Nation Entertainment (5.375%, 6/15/22)||1.43%|
|TOP 10 HOLDINGS TOTAL||17.26%|
As of 6/30/18. 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.
Percentage of Net Assets as of 6/30/18. 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 6/30/18. Allocation percentages may not equal 100% due to rounding.
|Duration Breakout (%)*|
|Quality Breakout (%)|
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 6/30/18.
CAPITAL MARKET OVERVIEW
(As of 6/30/18) — After producing negative returns in the 1st quarter of 2018, the U.S. high yield sector reversed course, generating positive performance with bond prices improving in April and June. The market’s performance was driven by:
- continued, albeit modest, economic growth of U.S. Gross Domestic Product (GDP);
- a healthy labor market with additional jobs added and the unemployment rate near cycle lows;
- the Federal Reserve maintaining a gradual pace of increasing interest rates and timing of plans to reduce their balance sheet;
- an unseasonably quiet new issue market which provided support for secondary pricing;
- concerns regarding disruptions in international trade on proposals for tariffs on selected imported products;
- evolving geopolitical landscape and risks.
Despite uncertain market conditions, equity and high yield markets performed well during the period. The level of short-term interest rates remained steady, as the 3 Month LIBOR (London Interbank Offered Rate) increased 2 basis points (bps) to 2.33% and investors continued to gravitate towards higher risk assets. The 10-year Treasury bond returned -31bps during the quarter, while the S&P 500 stock index returned +343bps.
The rising interest rate environment and increased market volatility resulted in negative cash outflows for the sector during the quarter of about $3.8 billion, according to data from JP Morgan. This follows outflows of $19.2 billion in the previous quarter. High yield new issuance declined sequentially in all three months of the quarter, with $21 billion in April, $17 billion in May, and $16 billion in June for a total of $54 billion, down from $73 billion in the previous quarter and down year-over-year from $74 billion in the 2nd quarter of 2017.
During the quarter, the yield on the 10-year Treasury bond rose 13bps from 2.73% to 2.86%. With the increase in Treasury yields, spreads on higher rated issues (> BB rated) increased due to their inherent interest rate sensitivity, while the spreads on lower rated CCC-rated bonds tightened 67bps, primarily due to 800bps of spread insulating their sensitivity to interest rate movements. This led to outperformance in lower quality fixed income products in the quarter. According to data from JP Morgan, the BB-rated segment returned 0.18%, underperforming the B-rated segment and CCC-rated segments, which returned 1.40% and 2.22% respectively. The Fund was underexposed to the CCC sector with a weighting of about 2% compared to the JP Morgan CCC weighting of 11.6%.
The U.S. high yield market’s spread to worst ended the period at 406bps, 4bps tighter than the preceding quarter and 211 bps below its 20-year historical average of 617 bps. The yield to worst for the high yield market ended at 6.72%, which was below the 20-year average of 9.08%, but higher than the yield of 6.56% in the 1st quarter of 2018.
(As of 6/30/18) — The Buffalo High Yield Fund generated a total return of 0.51% for the quarter ending June 30, 2018, a result that lagged the ICE BofA Merrill Lynch High Yield Master II Index (the “Index”) return of 1.00% during the period.
The Fund’s cash balance closed the period at about 3.5% of assets and decreased 86bps from March as sales of existing positions were exceeded by new security purchases combined with cash outflows from the Fund. The Fund’s composition by asset class at quarter end was as follows:
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 2Q18|
|Unweighted Return||Contribution to Return|
Specific securities that contributed most positively to performance included Consolidated Communications 6.5% ’22 notes, Live Nation 2.5% ’19 convertible notes, and Wildhorse Resource Development 6.875% ’25 notes. Consolidated advanced throughout the quarter on better than expected earnings and several sell-side research pieces that were bullish on the credit. Live Nation improved after beating earnings estimates for the 1st quarter and giving stronger than expected guidance for the rest of 2018, based on ticket sales year to date. Wildhorse rose on financial results that exceeded expectations along with stronger than expected well production.
Specific securities that detracted most from performance included Akorn’s bank loan, Nuance Communications 1.5% convertible notes, and Compass Diversified 7.25% perpetual preferred stock. The Akorn bank loan declined after Fresenius’ announcement in late April that it was canceling its bid to acquire the company. Nuance declined on disappointing earnings results and lower guidance for 2018. Meanwhile, Compass Diversified was also negatively impacted by a disappointing earnings announcement.
(As of 6/30/18) — A growing economy with modest inflation has supported a favorable environment for risky assets; however, market participants are becoming increasingly concerned about potential trade wars with China and physical confrontations with North Korea and Russia/Syria. The U.S. high yield default rate has increased to 1.98%, up 70bps year to date. By comparison the default rate was 1.50% in June 2017 and therefore currently 48bps higher than 12 months ago, but still below the 3.0-3.5% long-term average. On the positive side, the slowdown in new issuance activity has reduced the supply of bonds available for purchase, which has helped support bid levels.
Given that we believe the U.S. is in the later stages of the current economic cycle, we continue to find ourselves confronted with relatively low spread and yield levels. We are also concerned about the Federal Reserve taking a more aggressive tightening policy stance, inflation growth acceleration, geopolitical issues, and increasing protectionism efforts from the White House.
We ended the quarter with 140 positions compared to the previous quarter’s level of 145 positions (excluding cash). We are managing the Fund cautiously yet actively. We continue to focus on high-quality, non-investment grade issuers with defensive business models and manageable credit metrics. We will deploy the Fund’s 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 continue to 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 preferred securities.
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. 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 590 for the three-year, 3 stars among 494 for the five-year, and 3 stars among 331 High Yield Bond funds for the ten-year period ending 8/31/18.
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.
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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.