Shareholder Letter

April 16, 2020

Dear Shareholder,

During the first quarter of 2020, the Osterweis Total Return Fund (the Fund) generated a total return of -1.06% compared to 3.15% for the Bloomberg Barclays U.S. Aggregate Bond Index (the BC Agg).

Returns as of March 31, 2020

  QTD YTD 1 YR 3 YR INCEP
(12/30/2016)
 
OSTRX -1.06% -1.06% 2.74% 3.12% 3.71%
 
Bloomberg Barclays U.S. Aggregate Bond Index 3.15 3.15 8.93 4.82 4.71
 
Bloomberg Barclays U.S. Aggregate 1-3 Year Index 1.79 1.79 4.63 2.63 2.55
 
ICE BofA 3 Month Treasury Bill 0.57 0.57 2.25 1.83 1.72

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 expense ratio was 0.68% as of March 31, 2019.

The global spread of Covid-19 sent shockwaves through the markets during the first quarter. Treasuries rallied in a classic flight to quality, but corporates struggled as their spreads widened substantially. Economic activity ground to a halt almost overnight, and much of the country (and the world) remains on lockdown. The good news is that we are beginning to see signs the so-called “curve” is flattening, but it is too early to declare victory and we expect continued economic weakness in the second quarter. Governmental stimulus and extensive action from the Federal Reserve (“Fed”) have helped limit the damage, and markets have started to stabilize.

During the first quarter, the Fund underperformed the BC Agg as we were underweight Treasuries and modestly overweight corporates (although our corporate bonds outperformed the corporate sector in the index). In addition, our interest rate hedges reduced our duration during the Treasury rally and our higher coupon mortgage backed securities (MBS) underperformed due to their shorter duration and higher prepayment risk.

We took the following actions during the first quarter to better position the portfolio going forward:

  • Moved from overweight MBS to very overweight MBS as the Fed’s quantitative easing program took hold. Mortgages have recovered much more quickly than corporates.
  • Moved from overweight corporates to a more neutral weighting before the crisis fears mounted in early March.
  • As the corporate market stabilized, sold some of the MBS that had reclaimed losses to buy high quality corporate bonds at extremely attractive valuations.
  • Increased duration of the portfolio – largely through buying longer maturity corporates and MBS without hedging. We’ve also opportunistically added some Treasuries on weakness in the rates market.

We expect volatility to persist and will actively pursue those parts of the investment grade market that offer the most value. To the extent that markets are liquid and available for trading, we look to take advantage of this volatility to add returns to the portfolio.

We thank you for your continued confidence in our management, and we welcome any questions or comments you may have.

Best regards,

Eddy Vataru
John Sheehan
Daniel Oh

Investment Team

Eddy Vataru

Chief Investment Officer – Total Return

Eddy Vataru

Chief Investment Officer – Total Return

Eddy Vataru graduated from California Institute of Technology (B.S. Chemistry & Economics) and from Olin Business School at Washington University in St. Louis (M.B.A.). Mr. Vataru holds the Chartered Financial Analyst designation.

Prior to joining Osterweis Capital Management in 2016, Mr. Vataru worked in senior management positions at Incapture, LLC and Citadel, LLC. Before that he spent over 11 years at BlackRock (formerly Barclays Global Investors), where his last position was as Managing Director and Head of U.S. Rates and Mortgages. While in this role, BGI worked with the U.S. Treasury in implementing its Agency MBS Purchase Program, buying mortgages for the U.S. government from 2008-2009.

Over the course of his career as a fixed income investor, Mr. Vataru has developed extensive experience in managing passive, active and hedge fund portfolios.

Mr. Vataru is a principal of the firm and the lead Portfolio Manager for the total return fixed income strategy. He is also a Portfolio Manager for the flexible balanced strategy.

John Sheehan

Vice President & Portfolio Manager

John Sheehan

Vice President & Portfolio Manager

John Sheehan graduated from Georgetown University (B.A. Economics). Mr. Sheehan holds the Chartered Financial Analyst designation.

Prior to joining Osterweis Capital Management in 2018, Mr. Sheehan spent more than 20 years working at Citigroup, first as Managing Director responsible for Investment Grade Syndicate in New York City, where he advised issuers on accessing funding in the corporate bond market. Later at Citigroup, he was Managing Director in charge of West Coast Investment Grade Sales in San Francisco, where he covered several of the largest U.S. investment grade credit investors.

Mr. Sheehan is a principal of the firm and a Portfolio Manager for the total return fixed income strategy.

Daniel Oh

Vice President & Portfolio Manager

Daniel Oh

Vice President & Portfolio Manager

Daniel Oh graduated from Columbia University (B.A. Economics/Political Science) and from the Stephen M. Ross School of Business at the University of Michigan (M.B.A.).

Prior to joining Osterweis Capital Management in 2018, Mr. Oh spent over eight years as a Director at Estabrook Capital Management in New York City and was the lead Portfolio Manager of the Estabrook Investment Grade Fixed Income Fund. Before that he was at Merrill Lynch & Co. as an Associate in Prime/Alt-A-Non-Agency Mortgage Trading. Prior to that he held positions at Seneca Financial Group and Morgan Stanley.

Mr. Oh’s professional history includes experience in investment grade corporate credit, whole loan mortgages, structured finance and distressed investments.

Mr. Oh is a principal of the firm and a Portfolio Manager for the total return fixed income strategy.

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.

The Bloomberg Barclays U.S. Aggregate Bond 1 – 3 Year Index is the 1-3 Year segment of the Bloomberg Barclays U.S. Aggregate Bond Index. It is not possible to invest in an index.

The ICE Bank of America 3-month Treasury Bill Index is an unmanaged, monthly-rebalanced index which consists of a single Treasury Bill issue that matures closest to, but not beyond, three months. It is not possible to invest in an index.

A spread is the difference between the bid and the ask price of a security or asset. It can also refer to an options position established by purchasing one option and selling another option of the same class but of a different series.

Duration measures the potential volatility of the price of a debt security, or the aggregate market value of a portfolio of debt securities, prior to maturity. Securities with longer durations generally have more volatile prices than securities of comparable quality with shorter durations.

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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 Total Return Fund may invest in fixed income securities which are subject to credit, default, extension, interest rate and prepayment risks. It may also make investments in derivatives that may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. The Fund may invest in 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 foreign and emerging market securities involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks may increase for emerging markets. Leverage may cause the effect of 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 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. It may also make investments in derivatives that may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. 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.