April 23, 2020
During the first quarter of 2020, the Osterweis Strategic Investment Fund (the Fund) generated a total return of -14.12%, trailing the blended benchmark return of -10.88% (60% S&P 500 Index/40% Bloomberg Barclays U.S. Aggregate Bond Index (the “BC Agg”)). During the trailing twelve months our stocks outperformed the S&P 500, but our bonds lagged the BC Agg due to unrealized mark-to-market losses that we expect to recoup as prices recover. Further, we expect the fixed income exposure to bounce back nicely as we have been adding bonds during the selloff at very attractive yields.
Returns as of March 31, 2020
|QTD||YTD||1 YR||5 YR||INCEP
||60% S&P 500 Index/40% Bloomberg Barclays U.S. Aggregate Bond Index||-10.88%||-10.88%||-0.39%||5.63%||8.84%|
||S&P 500 Index||-19.60%||-19.60%||-6.98%||6.73%||12.18%|
||Bloomberg Barclays U.S. Aggregate Bond Index||3.15%||3.15%||8.93%||3.36%||3.43%|
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 the original investment. Current performance of the Fund may be lower or higher 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 1.20% as of March 31, 2019.
The coronavirus not only wreaked havoc on the markets during the first quarter, it has temporarily shut down large segments of the economy, transformed how we live, and most importantly, infected nearly 2 million people around the world. Social distancing, hand washing, and (increasingly) face masks have become the new normal. To limit the economic damage, the U.S. government has approved an unprecedented $2 trillion relief package and the Federal Reserve has deployed every tool in its toolbox. The measures appear to be working, as the markets have begun to stabilize (though it is still too early to know whether we have reached a bottom), and both businesses and consumers are starting to receive the help they need.
In our latest Outlook, we take a closer look at the impact Covid-19 has had on the markets, and we also discuss how the simultaneous collapse of crude oil prices has created additional stress in the economy. While we appreciate that the near term is fraught with uncertainty, we believe economic activity will recover at some point and we view the current correction as an excellent buying opportunity. As we explain in the outlook, we expect that strong companies will come out of this stronger, and weak ones will be even weaker. With that as our operating principle, we have been selectively purchasing shares in companies that we feel are well positioned to succeed in the long run, all of which have been selling at a substantial discount to their pre-Covid prices.
In fixed income, we are taking a very similar approach. It was a challenging quarter, as unrealized mark-to-market losses affected our returns, but we expect to see spreads normalize in the coming months. More importantly, the market volatility has created an opportunity for us to deploy some of our cash reserves and invest at unusually attractive yields. Bonds from issuers on our watchlist that were previously too dear suddenly became available at significantly reduced prices. We have also been extending the duration of the portfolio in an effort to lock in yields for the next several years. We believe that the combination of a recovering economy, a reversal of our mark-to-market losses, and our newly acquired positions will result in a nice bounce back for our fixed income portfolio, particularly relative to today’s low yield environment.
We thank you for your continued confidence in our management.
This commentary contains the current opinions of the author 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 S&P 500 Index is an unmanaged index that is widely regarded as the standard for measuring large-cap U.S. stock market performance. The index does not incur expenses, is not available for investment, and includes the reinvestment of dividends.
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.
These indices do not incur expenses and are not available for investment. These indices include reinvestment of dividends and/or interest income.
Duration measures the sensitivity of a bond’s price (or the aggregate market value of a portfolio of bonds) to changes in interest rates. Bonds with longer durations generally have more volatile prices than bonds of comparable quality with shorter durations. Effective Duration is a duration calculation for bonds with embedded options and takes into account that expected cash flows will fluctuate as interest rates change. Effective duration is calculated only on the Fund’s fixed income holdings and cash.
Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain and expand the company’s asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.
Earnings growth is not representative of the fund’s future performance.
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 Investment Fund may invest in small- and mid-capitalization companies, which tend to have limited liquidity and greater price volatility than large-capitalization companies. 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. The Fund may invest in Master Limited Partnerships, which involve risk related to energy prices, demand and changes in tax code. The 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. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. 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 also make investments in derivatives that may involve certain costs and risks such as those related to liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Leverage may cause an increase or decrease in the value of the portfolio securities to be magnified and the Fund to be more volatile than if leverage was not used. Investments in preferred securities typically have an inverse relationship with changes in the prevailing interest rate. Investments in asset-backed and mortgage-backed securities include additional risks that investors should be aware of such as credit risk, prepayment risk, possible illiquidity and default, as well as increased susceptibility to adverse economic developments.
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.