High Yield Fund
Ticker
BUFHX
Inception Date
May 19, 1995
Total Fund Assets
$231.27 Million (3/31/18)
Expense Ratio
1.03%
Benchmark Index
ICE BofA ML HY Master II
MORNINGSTAR RATING
Overall Morningstar™ rating out of 588 High Yield Bond funds as of 3/31/18 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure).
RISK VS CATEGORY
| Low | High |
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 588 funds in the High Yield Bond category, as of 3/31/18.
High Yield Fund News
“Outlook on High Yield Markets”
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.
U.S. News “Best Mutual Funds in 2016” List Includes Several Buffalo Funds
International Fund #4
Discovery Fund #7
Flexible Income Fund #15
Income Investing Strategies to Preserve Principal
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
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Investment Strategy
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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Performance (%)
| As of 3/31/18 | 3 MO | YTD | 1 YR | 3 YR | 5 YR | 10 YR | 15 YR | Since Inception (5/19/95) |
|---|---|---|---|---|---|---|---|---|
| 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 |
| As of 3/31/18 | 3 MO | YTD | 1 YR | 3 YR | 5 YR | 10 YR | 15 YR | Since Inception (5/19/95) |
|---|---|---|---|---|---|---|---|---|
| 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 |
|---|---|---|---|
| 2017 | 5.98 | 7.48 | 6.47 |
| 2016 | 6.65 | 17.49 | 13.30 |
| 2015 | 1.80 | -4.64 | -4.01 |
| 2014 | 1.96 | 2.50 | 1.11 |
| 2013 | 9.40 | 7.42 | 6.90 |
| 2012 | 10.35 | 15.58 | 14.67 |
| 2011 | 3.54 | 4.38 | 2.83 |
| 2010 | 12.45 | 15.19 | 14.24 |
| 2009 | 44.01 | 57.51 | 46.70 |
| 2008 | -21.30 | -26.39 | -26.41 |
| vs BofA Merrill Lynch HY Master II | |
|---|---|
| Upside Capture | 53.48 |
| Downside Capture | 42.02 |
| Alpha | 1.07 |
| Beta | 0.49 |
| Sharpe Ratio | 1.01 |
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.
Portfolio
| # of Holdings | 144 |
| 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 (%)* | |
|---|---|
| 7-10 Years | 2.17 |
| 5-7 Years | 9.26 |
| 3-5 Years | 35.56 |
| 1-3 Years | 23.74 |
| 0-1 Years | 10.75 |
| Quality Breakout (%) | |
|---|---|
| BBB | 4.72 |
| BB | 33.14 |
| B | 48.47 |
| CCC | 1.85 |
| Non Rated | 11.82 |
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
Commentary for Q1 2018 (As of 3/31/18)
CAPITAL MARKET OVERVIEW
(As of 12/31/17) — After producing positive returns greater than 2% in each of the three previous quarters, the U.S. high yield sector continued to generate favorable results in the period, but at a considerably slower pace.
The market’s performance was driven by:
- Continued, albeit modest, economic growth of the U.S. gross domestic product;
- Optimism regarding the release of a corporate friendly tax plan;
- The Federal Reserve raising the Fed Funds rate target by an anticipated 25 bps to 1.50;
- The equity market indexes continuing to reach record highs;
- Multi-year high in crude oil prices which supported energy bonds.
Investors continued to invest in risky assets given these favorable market conditions. The 10-year Treasury bond produced a negative return of -0.29% during the quarter while stocks, as measured by the S&P 500 Index, produced a return of 6.64%.
According to data from JP Morgan, high yield funds experienced outflows during the quarter of about $11.6 billion compared to outflows of $530 million in the previous quarter. The high yield new issuance calendar remained healthy in the 4th quarter, up 40% from the 4th quarter 2016 to $73 billion but down sequentially from $80 billion in the 4th quarter 2017.
During the quarter, the yield on the 10-year Treasury bond increased by 7 bps from 2.33% to 2.40% but the U.S. high yield spread-to-worst declined by 11 bps to 404 bps reflecting investors willingness to hold on to risk assets. Once again, the lower end of the credit quality spectrum outperformed higher quality as investors moved into lower duration issues in anticipation of eventual rising interest rates. According to data from JP Morgan, the CCC/non-rated segments returned 1.7% outpacing the B-rated segment’s 0.86% and BB-rated segment’s 0.36% for the quarter.
As mentioned above, the U.S. high yield market’s spread-to-worst at the end of 2017 was 404 bps, 11 bps lower than the preceding quarter and 212 bps below its 20-year historical average of 616 bps. The yield-to-worst for the high yield market at quarter-end was 6.10%, below the 20-year average of 9.14%, but higher than the yield of 5.90% at the end of the previous quarter.
PERFORMANCE COMMENTARY
(As of 12/31/17) — The Buffalo High Yield Fund gained 0.59% for the quarter, outperforming the ICE Bank of America Merrill Lynch High Yield Master II Index by 18 basis points (bps), which rose 0.41% during the period.
The fund’s cash balance increased during the period as the holdings in the fund that were called away or sold outright exceeded purchases. The fund’s composition by asset class at quarter-end was as follows:
| Fund Composition by Asset Class | |||||
|---|---|---|---|---|---|
| 12/31/16 | 3/31/17 | 6/30/17 | 9/30/17 | 12/31/17 | |
| Straight Corporates | 65.5% | 63.6% | 62.9% | 60.5% | 62.6% |
| Convertibles | 13.8% | 13.1% | 13.7% | 13.3% | 12.8% |
| Bank Loans | 11.5% | 12.5% | 13.9% | 18.6% | 17.8% |
| Preferred Stock | 0.0% | 0.0% | 1.0% | 1.5% | 0.5% |
| Convertible Preferred | 1.6% | 0.9% | 0.9% | 1.2% | 0.5% |
| Common Stocks | 0.0% | 0.5% | 0.6% | 0.7% | 0.7% |
| Cash | 7.6% | 9.3% | 7.0% | 4.3% | 5.2% |
| Total | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
| Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in Q3 ‘17 | ||
|---|---|---|
| Total | 0.58% | 0.58% |
| Unweighted Return | Contribution to Return | |
| Straight Corporates | 0.7% | 0.44% |
| Convertibles | 1.8% | 0.24% |
| Bank Loans | 1.2% | 0.22% |
| Preferred Stock | -2.2% | -0.02% |
| Convertible Preferred | -7.6% | -0.07% |
| Common Stocks | 0.5% | 0.00% |
| Cash | 0.0% | 0.0% |
The fund’s bias towards higher-quality, non-investment grade securities continued to be a headwind for performance relative to its benchmark on a year-to-date basis. The fund’s underweight to the energy and utilities sectors also continued to be detrimental to relative results as the two industries were the strongest performers in the quarter with energy and utilities advancing 2.6% and 2.1%, respectively.
The fund is underexposed to the energy sector by roughly 400 bps and to the utilities sector by roughly 180 bps. However, the fund has exposure to convertible bonds, the benchmark does not, and 4 of those convertible bond issues were the fund’s top performing positions in the 4th quarter, resulting in the fund’s overall relative outperformance.
TOP CONTRIBUTORS
Specific securities that contributed most positively to performance included Insulet Corp 2% convertible bonds, Greenbrier 3.5% convertible bonds, and Neurocrine Biosciences 2.25% convertible bonds. Insulet rallied in November on exceptionally strong reported earnings that were driven by greater than expected top-line and margin growth in all three of its business segments. Greenbrier advanced on a solid earnings report and better-than-expected outlook for 2018, along with the added benefit from the new tax bill. Neurocrine blew past earnings expectations in November driven by sales of its Ingrezza drug, which were four times consensus estimates.
TOP DETRACTORS
Specific securities that detracted most from performance included Consolidated Communications 6.5% straight corporate bonds, Allergan 5.5% convertible preferred bonds, and Medicines Company 2.75% convertible bonds. Despite meeting earnings estimates, Consolidated declined during the quarter along with the rest of the regional wired telecom space, as concerns around intense competition and required capital expenditures to compete weighed on the group. Allergan stock, and thus the convertible bonds, continued to struggle among concerns over expiring drug patents and new competition for some of its drugs. Medicines Company fell as investors lost patience with the restructuring of company’s business model, as management has chosen to pursue drug studies independently rather than sell the firm.
OUTLOOK
(As of 12/31/17) — Similar to last quarter, the market for high yield securities remains well bid as yields and spreads bounce around cycle lows. A growing economy with modest inflation has created a favorable environment for risky assets. The slowdown in new issuance activity has reduced the supply of bonds available for purchase, while muted default rates have reduced investor’s risk premium requirements. However, several risk factors could negatively influence the favorable environment. Our concerns from last quarter remain and include: the Federal Reserve taking a more aggressive tightening policy stance; fiscal stimulus policy not coming to fruition; escalating geopolitical issues such as with North Korea; and increasing protectionism.
Within this environment of low spreads and yields, we are managing the fund cautiously yet actively. We ended the quarter with 144 positions compared to the previous quarter’s level of 135 holdings (excluding cash) invested in 109 issuers.
We are managing the fund with an emphasis on higher-quality, non-investment grade issuers with defensive business models and manageable credit metrics. We will continue to 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. We believe bank loans offer a compelling opportunity as they offer senior positioning in the capital structure and floating interest rates, and we remain constructive in regards to convertible bonds and preferred issues.
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.
Literature
| Document | Last Updated |
|---|---|
| Fact Sheet | 3/31/18 |
| Quarterly Commentary | 3/31/18 |
| Prospectus | 11/17/17 |
| Full Fund Holdings | 9/30/17 |
| Annual Report | 3/31/17 |
| Semi-Annual Report | 9/30/17 |
| Statement of Additional Information | 1/2/18 |
| Tax Guide - 2017 | 1/10/18 |
| 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 Information |
| Retirement Savings Options for Individuals |
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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 3 stars among 588 for the three-year, 4 stars among 488 for the five-year, and 3 stars among 319 High Yield Bond funds for the ten-year period ending 3/31/18.
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.
©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.