High Yield Fund
|Total Net Assets:||$266.14 Million (12/31/20)|
|Category:||High Yield Bond|
|Benchmark:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q4 2020
PM Commentary Q4 2020
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™ of BUFHX based on risk-adjusted returns among 631 High Yield Bond funds as of 1/31/21.
|As of 1/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||7.37||0.42||9.55||6.24||6.65||5.73||6.29||6.65||7.07|
|BUFFALO HIGH YIELD FUND - Institutional||7.46||0.44||9.71||6.37||6.80||5.88||6.44||6.80||7.23|
|ICE BofAML U.S. High Yield Index||6.39||0.38||6.57||5.79||8.86||6.44||7.26||7.30||7.18|
|Lipper High Yield Bond Funds Index||6.49||0.41||5.31||5.00||7.90||5.76||6.09||5.98||5.94|
|Morningstar High Yield Bond Category||5.92||0.25||5.19||4.60||7.12||5.34||6.00||6.16||5.89|
|As of 12/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||7.55||9.27||9.27||6.25||6.28||5.81||6.38||6.84||7.08|
|BUFFALO HIGH YIELD FUND - Institutional||7.64||9.43||9.43||6.38||6.42||5.96||6.53||6.99||7.24|
|ICE BofAML U.S. High Yield Index||6.48||6.17||6.17||5.89||8.43||6.62||7.35||7.61||7.19|
|Lipper High Yield Bond Funds Index||6.44||4.81||4.81||5.14||7.44||5.93||6.15||6.30||5.95|
|Morningstar High Yield Bond Category||5.97||4.91||4.91||4.74||6.75||5.55||6.10||6.47||5.90|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 12/31/20)|
Hypothetical Growth of $10,000
— Record Date (3/17/21); Payment Date (3/18/21) – Ordinary Income & Capital Gains, if any
— Record Date (4/19/21); Payment Date (4/20/21) – Ordinary Income & Capital Gains, if any
— Record Date (5/17/21); Payment Date (5/18/21) – Ordinary Income & Capital Gains, if any
— Record Date (6/17/21); Payment Date (6/18/21) – Ordinary Income & Capital Gains, if any
— Record Date (7/19/21); Payment Date (7/20/21) – Ordinary Income & Capital Gains, if any
— Record Date (8/17/21); Payment Date (8/18/21) – Ordinary Income & Capital Gains, if any
— Record Date (9/17/21); Payment Date (9/20/21) – Ordinary Income & Capital Gains, if any
— Record Date (10/18/21); Payment Date (10/19/21) – Ordinary Income & Capital Gains, if any
— Record Date (11/17/21); Payment Date (11/18/21) – Ordinary Income & Capital Gains, if any
— Record Date (12/2/21); Payment Date (12/3/21) – Capital Gains, if any
— Record Date (12/17/21); Payment Date (12/20/21) – Ordinary Income, if any
|(As of 12/31/20)|| |
|# of Holdings||138|
|3-Yr Annualized Turnover Ratio||36.78%|
|Average Duration||2.61 years|
|Average Maturity||6.82 years|
|30-day SEC Yield||2.80%|
Top 10 Holdings
|Name of Holding||% of Net|
|Open Lending (1 mo LIBOR + 6.500%, 3/11/27)||2.84%|
|Nuance Communications (1.500% , 11/1/35)||2.24%|
|Consolidated Communications (6.500%, 10/1/22)||2.05%|
|MPLX (6.875%, 8/15/23)||1.86%|
|Michaels Stores (8.000%, 7/15/27)||1.72%|
|Builders FirstSource (5.000%, 3/1/30)||1.70%|
|Treehouse Foods (4.000%, 9/1/28)||1.66%|
|J2 Global (1.750%, 11/1/26)||1.55%|
|Cerence (Term Loan B, 9/30/24)||1.52%|
|Diebold Nixdorf (8.500%, 4/15/24)||1.50%|
|TOP 10 HOLDINGS TOTAL||18.64%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
CAPITAL MARKET OVERVIEW
(As of 12/31/20) — The U.S. high yield sector continued its rally in the quarter, driving bond yields to record lows. Amid stimulus and vaccine optimism, high yield bond prices continued their recovery from the COVID-19 sell-off in March. The high yield market posted positive returns in each month of the quarter (+0.51% in October, +3.93% in November, +2.04% in December) pushing yields to a record low of 4.71%. The 10-year Treasury Bond returned -1.82% during the quarter, while the S&P 500 Index logged a return of 12.15%.
Following a record $47.3 billion inflow in the 2nd quarter of 2020 and a $10.7 billion inflow in the 3rd quarter, high yield funds reversed course, experiencing $3.4 billion of cash outflows in the December quarter. Interestingly, in the months from April to August, high yield funds posted five consecutive months of inflows totaling $59.1 billion, which included the two largest inflows ever recorded in May ($20.5 billion) and April ($17.1 billion). High yield new issuance volume was $99 billion during the quarter, after posting record-setting levels in both the 1st and 3rd quarters of $145.5 billion and $131.9 billion, respectively. Refinancing continued to be the primary use of proceeds, accounting for ~68% of transaction volume in 2020. According to JP Morgan, split BB or B rated issues accounted for the bulk of activity in the quarter (48%) with the heaviest volume coming from Energy (12.7%), Healthcare (12.7%), and Financial (8.8%).
During the quarter, the yield on the 10-year Treasury Bond increased 24 basis points (bps) from 0.68% to 0.92%. Every sector in the U.S. high yield universe and every credit rating silo produced positive returns during the 4th quarter. According to data from JP Morgan, the lower quality end of the high yield credit spectrum (i.e., split B/CCC, non-rated, and defaulted issues) performed better than the higher end of the quality spectrum. The split B/CCC segment produced the largest gain of 9.10% and the BB segment was the worst performer, with a still solid 2.56% gain.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 444 bps, 159 bps tighter than the preceding quarter and 161 bps tighter than its 20-year historical average of 605 bps. The yield to worst for the high yield market at quarter-end was 4.71%, below the 20-year average of 8.45%, and below the yield of 6.32% at the end of the 3rd quarter.
(As of 12/31/20) — The Buffalo High Yield Fund (BUFHX) increased 7.55% for the quarter, beating out the ICE BofAML U.S. High Yield Index, which gained 6.48% for the period. The Fund also outperformed the Lipper High Yield Bond Funds Index return of 6.44%.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 4Q20|
|Unweighted Return||Contribution to Return|
During the quarter, 137 out of the 138 issues in the Fund produced positive returns. The top three contributors were Cerence 3% convertible bonds, Nuance Communications 1.5% convertible bonds, and MPLX 6.875% corporate bonds. Cerence and Nuance are both technology-driven enterprises that reported better-than-expected earnings or guidance during the quarter, and the underlying stocks benefited from the strong demand from investors to own the technology sector. MPLX is a mid-stream energy operator that benefited from a rally in the entire high yield energy sector throughout the quarter.
The K12 Inc. 1.125% convertible bond position was the only security with negative performance during the quarter. Although the company reported strong quarterly results, the convertible bonds were under pressure due to on-going concerns about the sustainability of enrollment trends (boosted by COVID-19) and a few operating challenges (a lost contract and a cyber-attack).
(As of 12/31/20) — Until March 2020, the United States had been enjoying a growing economy with modest inflation that had created a favorable environment for risky assets. However, near the end of February and early March, the COVID-19 pandemic and plummeting crude oil prices wreaked havoc on the markets. The U.S. high yield default rate increased to 3.54% in March, which was up 91 bps from the 2.63% level in December 2019. The trend continued through July, peaking around 6.2% before declining to 5.8% through August and September, before return to peak level of 6.2% during the December quarter. Overall, 88 companies defaulted on $129.6 billion of bonds and loans in 2020.
We are concerned first and foremost about the ongoing COVID-19 pandemic and the fallout on global economies, with the transition to the Biden administration being a secondary focus. 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 tradeoff, with a bias toward shorter durations and less levered credits. Additionally, we believe bank loans offer a more defensive position as they provide senior positioning in the capital structure. Finally, we continue to look for opportunities in convertible bonds and preferred stocks. We ended the quarter with 138 positions, unchanged from the previous quarter’s level (excluding cash).
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.
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