Shareholder Letter

July 22, 2019

Dear Shareholder,

During the second quarter of 2019, the Osterweis Total Return Fund (the Fund) generated a total return of 0.51%, compared to 3.08% 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 June 30, 2019 were 4.97% and 3.93%, respectively, compared to 7.87% and 3.84% 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 0.68% as of March 31, 2019. The Adviser has contractually agreed to waive fees through June 30, 2020.

The first quarter Treasury rally continued during the second quarter, intensifying in late May and bringing yields across the curve to multi-year lows by the end of June. Yields fell by 30-55 basis points (bps), with the 2-year and 3-year leading the way. For the quarter, the 10-year Treasury yield fell about 40 bps, closing around 2%. By quarter’s end, nearly 100 bps in easing was priced into the federal funds curve.

The rally was bolstered by several narratives:

1) The continued impasse between the U.S. and China with regards to trade.

2) Continued deterioration of the global economy, especially in Europe.

3) Softening of economic data domestically – in particular, manufacturing survey data.

4) Softening inflation, both on a spot and forward basis.

Corporate bonds also rallied during the second quarter, but they did so with a bit more trepidation. The narratives roiling the Treasury market, particularly weaker economic data, cast a pall that was offset by increased hopes for central bank action – both domestically and abroad. By quarter end, spreads had tightened slightly from where they started. Predictably, mortgages underperformed as lower interest rates portended higher refinance rates and increased supply.

During the second quarter the portfolio struggled relative to its benchmark, mostly due to our defensive duration. Going forward, we have slightly increased our interest rate exposure, but we remain relatively defensive as we do not believe we will see 100 bps in rate cuts over the next year. Rather, we expect to see one “insurance cut,” probably of 25 bps in July. We continue to feel that the domestic economy is healthy, but given that a significant portion of global debt “pays” negative yields, it seems as though an ease is the most likely Fed move. However, we believe inflation may have troughed here and that the domestic economy is still in good shape. We also think this weak patch in some survey data is offset by the observation that consumer confidence remains high, earnings have continued to rise, and the labor market continues to be relatively tight, with unemployment firmly below 4%.

Given our economic outlook, we favor Treasury Inflation-Protected Securities over nominal Treasuries and believe any intermediate Treasury with a yield below 2% is probably a poor longer-term investment. That said, we will take our cue from the risk markets (equities and corporate bond spreads) and monitor economic data, adjusting our portfolio’s interest rate exposure accordingly. We will likely maintain an overweight to corporate bonds and higher coupon mortgage-backed securities.

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.

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

 

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.

 

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. [40523]

Investment Team

Account Access

Email Update

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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