High Yield Fund
|As of 6/24/2022|
|Total Net Assets:||$296.53 Million (3/31/22)|
|Morningstar Category:||High Yield Bond|
|Benchmark Index:||ICE BofAML U.S. High Yield|
Fund Fact Sheet Q1 2022
PM Commentary Q1 2022
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 5/31/22.
|As of 5/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||-3.72||-5.17||-3.06||4.88||4.24||4.94||5.49||6.26||6.70|
|BUFFALO HIGH YIELD FUND - Institutional||-3.69||-5.11||-2.92||5.01||4.37||5.08||5.64||6.41||6.86|
|ICE BofAML U.S. High Yield Index||-4.29||-7.76||-5.00||3.16||3.42||5.36||6.02||7.08||6.69|
|Lipper High Yield Bond Funds Index||-3.84||-7.04||-4.39||3.07||3.26||4.96||5.01||6.25||5.56|
|Morningstar High Yield Bond Category||-4.21||-7.25||-5.13||2.62||2.78||4.47||4.86||6.08||5.47|
|As of 3/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO HIGH YIELD FUND - Investor||-1.70||-1.70||1.97||6.54||5.25||5.28||5.90||6.43||6.89|
|BUFFALO HIGH YIELD FUND - Institutional||-1.66||-1.66||2.12||6.67||5.39||5.43||6.06||6.58||7.04|
|ICE BofAML U.S. High Yield Index||-4.51||-4.51||-0.29||4.40||4.56||5.70||6.41||7.31||6.87|
|Lipper High Yield Bond Funds Index||-3.84||-3.84||0.31||4.44||4.36||5.23||5.40||6.43||5.73|
|Morningstar High Yield Bond Category||-3.96||-3.96||-0.39||3.90||3.87||4.76||5.27||6.29||5.65|
|BUFFALO HIGH YIELD FUND - Investor||10.35||9.40||1.96||1.80||6.65||5.98||-2.26||12.32||9.27||5.53|
|BUFFALO HIGH YIELD FUND - Institutional||10.52||9.56||2.11||1.95||6.81||6.14||-2.12||12.40||9.43||5.69|
|ICE BofAML U.S. High Yield Index||15.58||7.42||2.50||-4.64||17.49||7.48||-2.26||14.41||6.17||5.36|
3 Year Risk Metrics
|BUFHX vs ICE BofAML U.S. High Yield Index (As of 12/31/21)|
Hypothetical Growth of $10,000
Net Investment Income, if any – Record Date (7/18/22); Payment Date (7/19/22)
Net Investment Income, if any – Record Date (8/17/22); Payment Date (8/18/22)
Net Investment Income, if any – Record Date (9/19/22); Payment Date (9/20/22)
Net Investment Income, if any – Record Date (10/17/22); Payment Date (10/18/22)
Net Investment Income, if any – Record Date (11/17/22); Payment Date (11/18/22)
Capital Gains, if any – Record Date (12/2/22); Payment Date (12/5/22)
Net Investment Income, if any – Record Date (12/19/22); Payment Date (12/20/22)
|(As of 3/31/22)||
|# of Holdings||138|
|3-Yr Annualized Turnover Ratio||48.10%|
|Average Duration||3.09 years|
|Average Maturity||7.58 years|
|30-day SEC Yield||4.89%|
Top 10 Holdings
|Name of Holding||Maturity Date||% of Net
|Northern Oil & Gas||8.125%, 3/1/28||3.01%|
|DirecTV Financing||1 Month LIBOR + 5.000%, 8/2/27||2.66%|
|MPLX||3 Month LIBOR +4.652%, 8/15/23||2.34%|
|Penn Virginia Escrow||9.250%, 8/15/26||2.07%|
|Consol Energy||11.000%, 11/15/25||2.06%|
|Matador Resources||5.875%, 9/15/26||1.88%|
|Energy Transfer||7.125%, perpetual preferred||1.69%|
|PetIQ||3 Month LIBOR +4.250%, 4/7/28||1.65%|
|Magnite||6 Month LIBOR +5.000%, 4/3/28||1.48%|
|Talos Production||12.000%, 1/15/26||1.43%|
|TOP 10 HOLDINGS TOTAL||20.27%|
|Duration Breakout (%)*|
|Quality Breakout (%)|
CAPITAL MARKET OVERVIEW
(As of 3/31/22) — The U.S. high yield sector ended its streak of seven consecutive positive quarters, as inflation fears and the Russia/Ukraine conflict weighed on investor sentiment. Hawkish commentary from the Federal Reserve (the “Fed”) caused significant upward pressure on Treasury yields, and commodity prices soared as the Ukraine invasion escalated. High yield bonds ended the quarter at a yield to worst of 6.31%, up 160 basis points (bps) from the beginning of the quarter and an increase of 209 bps compared to the record low of 4.22% in July 2021. The yield on the 10-year Treasury Bond rose 83 bps and produced a negative return of -6.82% during the quarter, while the S&P 500 Index posted a loss of -4.60%.
High yield funds saw cash flows of -$25.3 billion in the quarter following -$1.1 billion in outflows in the final quarter of 2021. Over the past 12 months, high yield funds experienced outflows of -$27.8 billion. Meanwhile, the $46.5 billion of high yield new issuance in the quarter was muted by the volatility of interest rates and geopolitical instability. In fact, it was the lightest quarterly new issuance since December 2018. According to JP Morgan, the middle and upper credit quality tiers (B < split BBB rated issues) accounted for 77% of the new issue activity in the quarter, led by Gaming/Lodging/Leisure (19.9%), Healthcare (14.7%), and Cable & Satellite (12.3%).
As mentioned previously, the 10-year Treasury Bond yield rose 83 bps from 1.51% at the end of December to 2.34% after the Fed pivoted to more hawkish rhetoric. Every credit rating silo produced negative returns during the quarter. According to data from JP Morgan, the heart of the high yield credit spectrum outperformed the lower and upper tiers with the split B and single B segments losing -2.91% and -3.23%, respectively. The higher credit quality silos, which tend to have higher duration (sensitivity to interest rate movements), and the lower credit quality silos were the worst performers, with BB issues declining -4.92% and CCCs returning -4.34% in the quarter. The Energy sector was the top performer during the quarter declining -1.89%, which was not surprising given the significant increase in crude oil and natural gas prices. Metals/Mining, which also saw soaring commodity prices, declined by -2.43%. The -6.28% loss in the Housing sector was the worst performing area, as investors anticipated rising interest rates potentially crimping demand.
According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 399 bps, 24 bps wider than the preceding quarter, but still 181 bps tighter than the 20-year historical average of 580 bps. As mentioned earlier, the yield to worst for the high yield market at quarter end was 6.31%, still well below the 20-year average yield to worst of 7.98%.
|Fund Composition by Asset Class|
|Approximate Rate and Contribution of Return from the Fund’s Various Asset Classes in 1Q22|
|Contribution to Return|
The three top contributors during the quarter were Athabasca Oil 9.75% corporate bonds, Talos Production 12% corporate bonds, and Penn Virginia 9.25% corporate bonds. All three issuers are energy exploration and production (E&P) companies, albeit from three different regions of North America. Athabasca is a Canadian operation, Penn Virginia (now known as Ranger Oil) primarily operates in the Permian basin of Texas, and Talos is an offshore producer in the Gulf of Mexico. All three benefited from the spike in crude oil and natural gas prices during the quarter.
The TreeHouse 4.0% corporate bonds, JoAnn Stores bank debt, and the Etsy 0.25% convertible bonds were the worst performers during the quarter. TreeHouse’s announcement that it would not put itself up for sale, combined with investor concerns regarding the company’s ability to pass along increasing input costs, and the longer duration of this particular bond issue weighed it down. JoAnn Stores bank debt declined like many retailers, as investors worried about continued supply chain issues and rising input and labor costs. Etsy convertible notes were negatively-impacted, as the underlying common stock declined throughout the quarter, driven by rising interest rates which negatively impacts valuation multiples of high growth stocks.
(As of 3/31/22) — We are paying particular attention to the Federal Reserve’s balancing act between taming inflation while attempting to avoid a recession. Continued supply chain disruptions and the geopolitical uncertainty caused by the tragic conflict in Ukraine are also areas to watch. 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 and less interest rate sensitivity due to their floating rate structures. Finally, we continue to look for opportunities in convertible bonds and preferred stocks. We ended the quarter with 138 positions, down slightly from the previous quarter’s level of 142 (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.
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.
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. ©2021 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. The Morningstar Style Box™ reveals a fund’s investment strategy by showing its investment style and market capitalization based on the fund’s portfolio holdings.