High Yield Fund

(As of 3/31/20) — After producing positive returns in the past three consecutive quarters of 2019, the U.S. high yield sector suffered a significant correction during the period, driven by the
COVID-19 outbreak and plunging crude oil prices. The Saudi-Russian power struggle over oil output and the virus pandemic overshadowed everything in the month of March. The U.S Federal Reserve (the “Fed”) enacted extraordinary measures including slashing interest rates, removing the caps on the size of asset purchases, and restarting the Term Asset-Backed Securities Loan Facility (TALF). Congress passed a $2+ trillion
economic relief package in concert with the Fed’s moves, but in spite of these efforts, the flight to quality ensued quickly and painfully. The 10-year Treasury bond returned 12.09% during the quarter, while the S&P 500 Index logged a return of -19.60%.

The flight to quality along with increased market volatility resulted in high yield mutual funds experiencing cash outflows of about $16.7 billion during the quarter. In fact, the $13 billion outflow in the month of March was the second largest monthly outflow for high yield, trailing only the $13.6 billion outflow in June 2013. This follows a $3 billion inflow in the previous quarter and a $3.2 billion inflow in the 3rd quarter of 2019. The
$73 billion in high yield new issuance during the quarter was essentially all brought to market in January and February as demand vanished in March. In fact, only five bonds, totaling $4.2 billion, priced during the month of March compared to March 2019’s volume total of $26.6 billion.

During the quarter, the yield on the 10-year U.S. Treasury Bond declined from 1.92% to 0.67% as investors scrambled to safety. The U.S. high yield universe as a whole was on the opposite side of that flight to quality, with negative returns in every industry, sector, and credit rating silo. According to data from JP Morgan, the highest quality end of the high yield credit spectrum (i.e., split BBB and BB), suffered less than the lower
end of the quality spectrum. The split BBB segment produced the smallest loss at -8.35% and split B was the worst performer with a -24.56% loss.

According to data from JP Morgan, the U.S. high yield market’s spread to worst for the period was 9.49%, which was 525 basis points (bps) wider than at year-end and 339 bps wider than the 20-year historical average of 610 bps. The yield to worst for the high yield market at quarter end was 10.00%, above the 20-year average of 8.70%, and above the yield of 6.84% as of December 31st.

(As of 3/31/20) — The Buffalo High Yield Fund (BUFHX) decreased -12.52% for the quarter, compared to a decline of -13.12% for the ICE BofAML U.S. High Yield Index. The Fund also declined less than the Lipper High Yield Bond Funds Index, which produced a return of -14.28%
for the quarter.

TOP CONTRIBUTORS

There were only a handful of securities that delivered positive returns for the Fund, with the three top contributors being Brunswick 7.375% corporate bonds, Dermira 3.000%
convertible notes, and Holly Energy Partners 6.000% corporate notes. Brunswick is an investment grade credit with a high coupon and a relatively short maturity date of 2023, which protected it somewhat from the downturn. Dermira was acquired by Eli Lilly in March, and the notes were converted at a small premium to par. Holly Energy Partner notes were called by the company in February at a premium.

TOP DETRACTORS

Specific securities that detracted the most from performance include MPLX 6.875% corporate bonds, Energy Transfer common equity, and US Silica bank debt. All three
companies are directly exposed to the energy exploration and production (E&P) sector, which was significantly hurt by plummeting crude prices.

(As of 3/31/20) — Until March, 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 a three-year high of 3.54% in March, which was up 91 bps from the 2.63% level in December 2019, and above the 3.44% long-term average.

We are concerned first and foremost about the ongoing COVID-19 pandemic and the fallout on global economies, while previous issues such as China trade talks and the upcoming presidential election become 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 ended the quarter with 136 positions unchanged from the previous quarter’s level (excluding cash). We will continue to deploy the Fund’s 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 preferreds.