Shareholder Letter

January 25, 2019

Dear Shareholder,

During the fourth quarter of 2018, the Osterweis Total Return Fund (the Fund) generated a total return of 0.23%, compared to 1.64% 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 December 31, 2018 were 1.33% and 3.34%, respectively, compared to 0.01% and 1.76% 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.

The fourth quarter featured an abrupt reversal of trends observed in the third quarter. Specifically, interest rates declined as market jitters permeated risk markets, sending equities lower and credit spreads wider. The 10-year Treasury yield initially rose from 3.06% at the end of the third quarter to a high of 3.23% on October 5, and then declined sharply to finish the quarter at 2.69%. In December alone, the 10-year yield fell 30 basis points (0.30%). For a more detailed recap of 2018 as well as our views on the investment grade market, please see our outlook.

The return of the BC Agg for the quarter was 1.64%, recouping losses from the prior three quarters. Dispersion continued to be a theme, albeit in reverse from previous quarters – the Bloomberg Barclays U.S. Treasury Index returned 2.57%, and the Bloomberg Barclays U.S. Mortgage Backed Securities Index returned 2.08%, while the Bloomberg Barclays U.S. Corporate Bond Index returned -0.18%. Indeed, corporate spread widening completely wiped out the return related to interest rates.

For the quarter, the Fund trailed the benchmark due to its shorter duration profile and underweight in Treasuries. Further, its Treasury exposure was primarily held in TIPS (Treasury Inflation Protected Securities), which trailed Treasuries in concert with the underperformance of spread products but also due to the decline in oil prices (which have a profound impact on inflation expectations). Still, the Fund outperformed the benchmark over the full year due to a combination of duration management, sector rotation and security selection during the first three quarters.

Looking ahead, we believe the market disruption in the fourth quarter provided a great opportunity to reposition the portfolio. We reduced our exposure to mortgage backed securities and added to our corporate position in December as we believe the sentiment shift away from credit risk was an overreaction. Corporate bonds now comprise the largest allocation in the Fund. While headline risk remains high as the U.S.-China trade standoff and the government shutdown continue, we believe these risks are fully priced into the corporate bond market at this point. Inflationary pressures appear to have eased, but we do not believe they are completely resolved as the Underlying Inflation Gauge (UIG) still points to forward inflation projections near 3% – even after accounting for the precipitous decline in oil prices. We expect two Fed funds target rate hikes in 2019 – probably one in June, and the other in December, and that the yield curve will flatten and potentially invert. As we have stated previously, we do not believe the inversion itself is a precursor to recession. We remain somewhat defensive against rising rates, as we are anticipating more Fed hikes than are currently priced into the market.

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. [37368]

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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