April 14, 2020
During the first quarter of 2020, the Osterweis Strategic Income Fund (the Fund) generated a total return of -7.17% compared to 3.15% for the Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg). The Fund’s annualized total returns over the one-year, five-year and ten-year periods ending March 31, 2020 were -5.63%, 2.11% and 3.99%, respectively, compared to 8.93%, 3.36% and 3.88% for the BC Agg over the same periods.
Performance data quoted represent 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 higher or lower than the performance quoted. Performance data current to the most recent month end may be obtained by calling (866) 236-0050. An investment should not be made solely on returns. The Fund’s gross expense ratio was 0.85% as of March 31, 2019.
The Covid-19 pandemic profoundly disrupted markets during the first quarter. High yield bonds were hit particularly hard, with spreads crossing 1,000 basis points (bps) on March 20. During the quarter, the Fund took its share of mark-to-market hits, but we expect to recoup those losses as our bonds mature and pay back in full.
Although the selloff was severe, we take some comfort in the fact that historically the high yield market has recovered quickly following price dislocations of this magnitude. According to a recent blog post by Barclays, anytime spreads have exceeded 900 bps, “the median annualized return over the next 12, 24, and 36 months is 36.9%, 25.5%, and 20.8%. In fact, with a horizon of a year or more, an investor has never lost money, historically, in 25 examples buying HY bonds as spreads cross 900 bps."
We have deliberately maintained a healthy cash balance for the past few years as we have not been seeing significant value in the market, and our patience has finally paid off (both literally and figuratively). We have been able to deploy our cash during this correction to purchase high quality issues at exceptional prices. Moreover, we have purchased longer dated assets, as we want to lock in higher yields for as long as is practical, considering we are still operating in a low yield environment. Although we hope the worst is behind us, we are well positioned to take advantages of any opportunities created by market volatility.
We thank you for your continued confidence in our management.
This commentary contains the current opinions of the authors as of the date above, which are subject to change at any time. This commentary has been distributed for informational purposes only and is not a recommendation or offer of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.
The Bloomberg Barclays U.S. Aggregate Bond Index (BC Agg) is an unmanaged index which is widely regarded as the standard for measuring U.S. investment grade bond market performance. This index does not incur expenses and is not available for investment. The index includes reinvestment of dividends and/or interest income.
A basis point is a unit that is equal to 1/100th of 1%.
The Osterweis Funds are available by prospectus only. The Funds’ investment objectives, risks, charges and expenses must be considered carefully before investing. The summary and statutory prospectuses contain this and other important information about the Funds. You may obtain a summary or statutory prospectus by calling toll free at (866) 236-0050, or by visiting www.osterweis.com/statpro. Please read the prospectus carefully before investing to ensure the Fund is appropriate for your goals and risk tolerance.
Mutual fund investing involves risk. Principal loss is possible.
The Osterweis Strategic Income Fund may invest in debt securities that are un-rated or rated below investment grade. Lower-rated securities may present an increased possibility of default, price volatility or illiquidity compared to higher-rated securities. The Fund may invest in foreign and emerging market securities, which involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Small- and mid-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Higher turnover rates may result in increased transaction costs, which could impact performance. From time to time, the Fund may have concentrated positions in one or more sectors subjecting the Fund to sector emphasis risk. The Fund may invest in municipal securities which are subject to the risk of default.
While the fund is no-load, management fees and other expenses still apply. Please refer to the prospectus for more information.
Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC.