High Yield Fund
May 19, 1995
Total Fund Assets
$231.27 Million (3/31/18)
ICE BofA ML HY Master II
Overall Morningstar™ rating out of 583 High Yield Bond funds as of 4/30/18 (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 583 funds in the High Yield Bond category, as of 4/30/18.
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.
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.
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.
Download our recent white paper
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 4/30/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|Buffalo High Yield Fund||-1.04||-0.59||2.16||3.46||4.06||6.56||6.36||7.06|
|ICE BofA Merrill Lynch HY Master II||-0.89||-0.25||3.21||4.99||4.76||7.75||7.91||7.24|
|Lipper High Yield Bond Funds Index||-1.11||-0.32||3.19||4.06||4.13||6.42||6.86||5.95|
|Morningstar High Yield Bond||-1.10||-0.50||2.63||3.61||3.57||6.32||6.73||5.96|
|As of 3/31/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|Buffalo High Yield Fund||-0.54||-0.54||3.20||3.66||4.33||6.73||6.64||7.08|
|ICE BofA Merrill Lynch HY Master II||-0.91||-0.91||3.69||5.18||5.01||8.12||8.27||7.23|
|Lipper High Yield Bond Funds Index||-0.85||-0.85||3.75||4.28||4.41||6.76||7.17||5.95|
|Morningstar High Yield Bond||-0.97||-0.97||3.20||3.88||3.82||6.66||7.03||5.96|
|Year||Buffalo High Yield Fund||ICE 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. 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||145|
|3-Yr Annualized Turnover Ratio||41.89%|
|Average Duration||3.35 years|
|Average Maturity||6.21 years|
|30-day SEC Yield||3.88%|
|Name of Holding||% of Net Assets|
|Akorn (Term Loan B, 4/16/21)||2.46%|
|Lions Gate Entertainment (1.250%, 4/15/18)||2.34%|
|MacDonald Dettwiler (Term Loan B, 7/5/24)||2.08%|
|Quad Graphics (7.000%, 5/1/22)||1.72%|
|Triumph Group (4.875%, 4/1/21)||1.64%|
|Phillips Van Heusen (7.750%, 11/15/23)||1.56%|
|FTI Consulting (6.000%, 11/15/22)||1.55%|
|Consolidated Communications (6.500%, 10/1/22)||1.50%|
|Wildhorse Resource Dev (6.875%, 2/1/25)||1.49%|
|Brunswick (7.375%, 9/1/23)||1.44%|
|TOP 10 HOLDINGS TOTAL||17.78%|
As of 12/31/17. 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 3/31/18. 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 3/31/18. 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 9/30/17.
Commentary for Q1 2018 (As of 3/31/18)
CAPITAL MARKET OVERVIEW
(As of 3/31/18) — After producing positive returns in the 4th quarter of 2017, the U.S. high yield sector reversed course generating negative performance in the 1st quarter of 2018, with bond prices retreating in February and March after reaching all-time peak levels in January.
The market’s performance was driven by:
- continued, albeit modest, economic growth of the U.S. gross domestic product;
- 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;
- the equity market indexes trading off from record levels and increased level market volatility (as measured by the Cboe Volatility Index);
- concerns regarding disruptions in international trade on proposals for tariffs on selected imported products;
- and evolving geopolitical landscape and risks.
Uncertain market conditions and rising short-term interest rates encouraged investors to sell risky assets. The 10-year Treasury bond experienced a -2.40% return during the quarter while the S&P 500 stock index declined 0.76%. The rising interest rate environment and increased market volatility contributed to cash outflows for the non-investment grade sector during the quarter of about $19.2 billion compared to outflows of $8.2 billion in the previous year-over-year quarter ending March 31, 2017, according to data from JP Morgan. The high yield new issuance calendar of $72.7 billion during the quarter was flat sequentially ($72.5 billion in the 4th quarter of 2017) and down year-over-year ($98.7 billion in the 1st quarter of 2017).
During the 1st quarter of 2018, the 10-year Treasury bond yield increased by 34 basis points (bps) from 2.40% to 2.74%. The increase in Treasury yields mirrored the returns of investment grade and BBB crossover issues, which are sensitive to movement in interest rates, while lower rated CCC-rated bonds had slightly positive returns (primarily due to 800 bps of Treasury spread insulating their sensitivity to interest rate movements). This led to relative outperformance in lower quality fixed income products in 1Q18. According to data from JP Morgan, the BB-rated segment returned -1.74%, underperforming both the B-rated segment return of -0.14% and the CCC-rated segment return of +0.74% during the period. The Fund was underexposed to the CCC sector with a weighting of about 2% compared to the JP Morgan CCC weighting of 12%.
According to data from JP Morgan, the U.S. high yield market’s spread-to-worst for the period ended 3/31/18 was 410 bps, 6 bps wider from the preceding quarter of 2017 and 206 bps below its 20-year historical average of 616 bps. The yield-to-worst for the high yield market at quarter end was 6.56%, below the 9.10% 20-year average, and above the yield of 6.10% at the end of 2017.
(As of 3/31/18) — The Buffalo High Yield Fund retreated 0.54% for the quarter ending March 31, 2018, but outperformed the ICE BofA Merrill Lynch High Yield Master II Index (the “Index”) by 37 bps, which declined 0.91% during the period. The Fund also outperformed the Lipper High Yield Bond Funds Index and Morningstar High Yield Bond Group by 31 bps and 43 bps, respectively.
The Fund’s cash balance at the end of the 1st quarter was 4.3% of Fund assets, decreased 90 bps from the 4th quarter of 2017, as new security purchases exceeded the holdings in the Fund that were either called by the issuers or sold outright, events that will raise the Funds cash balance. 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 Q3 ‘17|
|Unweighted Return||Contribution to Return|
As shown in the table above, all of the Fund’s asset classes with the exception of Bank Loans produced negative returns. The Fund’s Bank Loans, Straight Corporates, and Convertible Preferred outperformed the Index total return, while Convertibles, Preferred Stock, and Common Stocks underperformed the Index total return.
Specific securities that contributed most positively to performance include PRA Group 3.50% convertible bonds, The Medicines Co. 2.75% convertible bonds, and Envestnet 1.75% convertible bonds. PRA advanced on better than expected earnings and improved underlying fundamentals. The Medicines Co. improved on favorable progress on drug study enrollments, asset sales, and company restructuring. Envestnet rose on financial results exceeding expectations.
Specific securities that detracted most from performance include Lions Gate 1.25% convertible bonds, Lions Gate common stock, and Greenbrier Cos. convertible bonds. The Lions Gate securities were down on guidance from management that earnings growth in the near term will be limited due to investment content for Starz and the timing of film releases. Greenbrier declined on earnings coming in below expectations and the sluggish environment for railcar orders.
(As of 3/31/18) — The market for high yield securities started to show signs of weariness as yields/spreads bounced around cycle lows, while yields have risen slightly as short-term interest rates have increased. A growing economy with modest inflation has created 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 of 2.21% was up 93 bps year-to-date and up 31 bps from 1.90% in March 2017, 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.
We continue to be concerned about:
- the Federal Reserve taking a more aggressive tightening policy stance;
- inflation growth acceleration;
- geopolitical issues such as North Korea or tensions in the Middle East escalating;
- and increasing protectionism efforts from the White House.
Given that we may be in the later stages of the economic cycle, we still find ourselves confronted with relatively low spread and yield levels historically. As a result, we are managing the Fund cautiously yet actively. We ended the quarter with 145 investment positions compared to the previous quarter’s level of 144 positions (excluding cash).
We are managing the Fund with a focus on higher-quality, non-investment grade issuers with defensive business models and manageable credit metrics, by our analysis. We will continue to deploy the Fund’s cash in opportunities that we believe offer the most appealing risk/reward trade-offs 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 selectively.
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.
|General Account Forms|
|New Account Application|
|Change or Add Account Details|
|Power of Attorney|
|Individual Retirement Account (IRA) Forms|
|IRA Account Application|
|IRA Beneficiary Addition / Change Form|
|IRA / Qualified Plan Distribution Request Form|
|IRA Transfer Form|
|Coverdell Education Savings Accounts (ESA) Forms|
|Coverdell ESA Application|
|Coverdell ESA Distribution Request|
|Coverdell ESA Transfer Form|
|Retirement Savings Options for Individuals|
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.
Sign Up for Automatic Updates
Stay up-to-date with the most recent media coverage and press releases about the Buffalo Funds.
FOR FINANCIAL PROFESSIONALS
FOR INDIVIDUAL INVESTORS
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 3 stars among 583 for the three-year, 4 stars among 489 for the five-year, and 4 stars among 318 High Yield Bond funds for the ten-year period ending 4/30/18.
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.
©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.
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.