Shareholder Letter

October 24, 2018

Dear Shareholder,

During the third quarter of 2018, the Osterweis Total Return Fund (the Fund) generated a total return of 1.58%, compared to 0.02% for the Bloomberg Barclays U.S. Aggregate Bond Index (the BC Agg). The Fund’s annualized total returns over the one year and since inception (12/30/2016) periods ending September 30, 2018 were 1.81% and 3.70%, respectively, compared to -1.22% and 1.07% for the index 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 0.71% and net expense ratio was 0.76% as of March 31, 2018. The Adviser has contractually agreed to waive fees through June 30, 2019. The net expense ratio is applicable to investors. The net expense ratio is higher than the gross expense ratio based on recoupment of previously waived fees.

Interest rates marched higher during the third quarter. The 10-year Treasury yield started the quarter at 2.83% and tested the 3% mark in August before finally breaking through in mid-September, closing the quarter at 3.06%. Yields in all other maturities rose about 20-30 basis points, with the 2-year rising 0.29% to 2.82%, the 5-year rising 0.27% to 2.95% and the 30-year rising 0.21% to 3.20%.

While the BC Agg was essentially flat for the quarter, returning 0.02%, there was substantial dispersion among the various sectors of the index. Corporate spreads narrowed sharply and the Bloomberg Barclays U.S. Corporate Bond Index posted a return of +0.97% despite the rise in interest rates. However, the Bloomberg Barclays U.S. Mortgage Backed Securities Index posted a return of -0.12%, and the Bloomberg Barclays U.S. Treasury Index posted a return of -0.59%.

For the quarter, the Fund outperformed the benchmark due to several factors. First, its allocation to corporate bonds increased during the third quarter and consequently the Fund benefited from the outperformance of corporates versus the other investment grade sectors. Secondly, interest rate hedges added significant value as we judiciously maintained a flat or negative overall duration for a good portion of the quarter. Finally, security selection in both corporates and mortgages added to the return of the Fund. A significant portion of the corporate portfolio was invested in floating rate notes that performed particularly well as interest rates rose. The mortgage portfolio benefited from slowing prepayment rates in its mortgage derivative positions.

Looking ahead, we believe the economic expansion will continue, although it appears to be more limited to domestic markets. One potential threat is the global trade dispute, which remains unresolved, though it seems to be having a greater impact abroad, particularly in China, than here in the U.S. There is heightened focus on the impact of higher rates on the economy, but interest rates remain relatively accommodative. It appears that the Federal Reserve will continue its trajectory of quarterly rate hikes, which would place the federal funds rate at 3% in June 2019. We believe the Treasury curve will flatten and potentially invert, but later and at higher interest rates than the market had previously expected – and we do not believe the inversion itself is a precursor to recession. Should interest rates rise toward 4%, we would consider that restrictive, thus increasing the potential for recession independent of the shape of the curve itself. In the meantime, we may employ higher durations tactically, but overall remain quite defensive against rising interest rates.

We thank you for your continued support.

Best regards,

Eddy Vataru
John Sheehan
Daniel Oh

___________________________________

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.

Mutual Fund investing involves risk. Principal loss is possible. The Osterweis Total Return Fund may invest 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.

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. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility and financial issuers.

The Bloomberg Barclays U.S. Mortgage Backed Securities Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.

The Bloomberg Barclays U.S. Treasury Index consists of public obligations of the U.S. Treasury with a remaining maturity of one year or more.

A basis point is a unit that is equal to 1/100th of 1%.

 

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.

 

A mortgage-backed security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.

 

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 osterweis.com. Please read the prospectus carefully before investing to ensure the Fund is appropriate for your goals and risk tolerance.

 

Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [35687]

Investment Team

Account Access

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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 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.

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