Published on October 19, 2021

If you were unable to join our quarterly webinar, watch the the replay to hear updates on the Osterweis Strategic Income Fund.

Transcript

Shawn Eubanks: Good morning everyone, and my name is Shawn Eubanks and I'm the Director of Business Development at Osterweis Capital Management. We'd like to thank you for joining our third quarter update for the Osterweis Strategic Income Fund. At this time, all participants are in listen only mode, and later we'll conduct a question and answer session that you can participate in via the online chat or through your computer. We'll hold all questions until the end, but if you would like to get in the queue, please raise your hand and enter the question into the Q&A. Please note that this webinar is being recorded. Let's get started. I'll be moderating a discussion with Carl Kaufman, Craig Manchuck and Bradley Kane. After our discussion, we'll open up the line for your questions. Carl, can I have you start by just providing a recap of what you saw happening in the bond market in the third quarter?

Carl Kaufman: Sure. It was a fairly benign quarter, some would call it a little sleepy. The Agg (Bloomberg U.S. Aggregate Index) basically stayed pretty much flat, and high yield returned less than 1%, if you remember, we had the Delta spike, which caused some uncertainty as to the economic recovery, and it seems we had a lot of things that investors were dealing with; inflation, stagflation. I think the most noteworthy thing about the quarter was clearly the Delta variant, but there were certainly no shortage of things to worry about, but the markets held in there pretty well.

I mean, to quote the great Eurythmics tune from the mid '80s, it seems like everyone was looking for something, and I think in our view, inflation and tapering were the two most significant issues of the quarter.

Shawn Eubanks: Great. Carl, speaking of inflation, it seems like everyone, including the Fed, is starting to accept that it could be with us longer than first anticipated. What's your take on the situation and what do you think are the implications if inflation does persist?

Carl Kaufman: Well, clearly it's impossible to think about the Fed without thinking about interest rates and inflation. We've talked about these, it feels like, in every outlook over the past few years, now we'll just continue that discussion here. Clearly, the Fed continues to provide a safety net that is enabling the equity markets to hit new highs, although they've turned over little bit recently and credit markets to approach all time tight spreads, because they've kept interest rates at historically low levels.

The question is, will Fed accommodation end? Your answer is probably yes, but we don't know when, they've hinted at November, and others are searching for a more accurate assessment of that. It's not so much important exactly when they will taper or start to normalize interest rates, we just know that hopefully they will do it at some point.

In terms of the stock and the bond market, we're looking for signals of shifting investor preferences, and we're getting some of that in terms of survey data. But we're in an interesting spot here, because just about every Wall Street economist is publishing their opinion on when the Fed will begin to taper and that seems to be the focus. What we'd rather do is understand, as you asked, how at the end of QE will impact our portfolio. Clearly there will be winners and losers.

Investors should look at companies that can do well without this ever-accommodative Fed quantitative easing, whatever you want to call it. Reduced Fed bond buying should lead to slightly higher interest rates, could cause equity valuations to fall due to multiple compression and could leave many investors that hold unhedged long duration fixed income assets nursing some unrealized losses if they weren't able to adjust ahead of the crowd.

We do feel that we have already seen the low in rates while markets have remained in risk-on mode through most of the year, a shift from offense to some measure of defense, we think is warranted, but for those of you who know us, we always think that, and with global rates in most developed countries still extremely low, and the U.S. remaining the safest market in the world, we do believe that any significant uptick in rates ought to attract global capital in search of yield, so while the taper will be in the headlines daily, and it may have adverse effects on asset prices, particularly those with longer duration, the likelihood of materially higher rates derailing economy and its recovery and sending us into a recession in protracted bear market appears very low to us.

So we welcome overdo corrections to let some air out of this balloon and give us the opportunity to put some money to work on a correction.

Shawn Eubanks: Thank you, Carl. I know you spoke a little bit about the impacts you think that a taper would potentially have on the market. Do you have anything else to add or should we switch gears?

Carl Kaufman: I think we can move on. We keep on beating this thing and everybody can see prices are going up everywhere but in the Fed's mind. So, hopefully they figure it out at some point.

Shawn Eubanks: Okay. Thank you. Switching topics a little, Craig, China has been in the news a lot lately because of the Evergrande situation; how big of a concern is it for U.S. fixed income investors?

Craig Manchuck: Good morning Shawn. Yes, it has been in the news quite a bit, and I think that is largely because the media likes to embellish and talk up a good story when they see one. There have been a lot of people who are trying to say, this is a Lehman moment for China, and I think that is a gross embellishment. We don't think that there's anywhere near the systemic impact that we saw back in the financial crisis that Lehman had.

Evergrande is the largest property developer in China, and their property sector has been a huge part of the local Chinese economy. There have not been other large developers that have gotten in trouble, but there've been other smaller developers who have shuttered operations over the last several years. So, there is definitely concern about the sector. However, it is fairly well-contained to China; the only areas where we can see some ripple effects are in the global commodities like copper, iron ore, steel, aluminum; they can all be impacted by sustained problems in the property sector, and historically, China has built, for the last 20 years, they've been building and building and building.

And so they have been the big buyers of those commodities and they have really pushed prices up. So here we are now in a period where commodity prices have been rising with inflation, and there is some concern that we could see the bottom fall out. I don't think that happens, but it definitely bears watching, however, it doesn't really affect our portfolio at all, and I think most fixed income investors in the U.S. have relatively small exposure, certainly to Evergrande and overall to the fixed income markets in China.

Some emerging markets funds and things may, but we have never been directly investing into China, we've just never felt comfortable with the transparency or lack thereof, and the disclosures, and it's just too far away from what we do. So, as far as we're concerned, we think this is nothing more than a little blip and markets will continue to go on and move past it once the media calms down.

Shawn Eubanks: Thanks Craig, that's great to hear. Brad, we've all been reading a lot about labor shortages and it seems like that's certainly a part of what's been driving the recent uptick in inflation. How significant of a problem do you think it is? And how do you see it getting resolved?

Bradley Kane: Thanks Shawn. I mean, there's no doubt there's been a shortage of labor over the last few quarters. I mean, we hear it on almost every earnings call and conversation we're having with management teams, it's hard to fill the job vacancies. The CARES Act that was signed into law in 2020 helped the unemployed replace, in some cases, more than replaced the income loss to Covid unemployment. So normally, unemployment benefits end after six months, but with the extension of benefits and the waving of federal taxes on unemployment, I think the government may have delayed the impetus for people to find new jobs.

We're also hearing, in some cases, that baby boomers may have retired early and therefore leave the workforce ahead of when that was expected, so that's all exacerbating the issue. And then one area we're really hearing a lack of workers and it's visible is in the trucking and distribution sector. And this has been a problem for a number of years, but Covid-19 really brought it to the forefront, and I think it's going to take some years to resolve.

You're seeing this directly at the ports where containers are being stacked for days or weeks longer, and it's really getting hard to move, and that's all due to the trucking losing workers over the years. Also, I think you're going to see wages increasing, and signing bonuses, and that may help attract and keep employees, but it's going to mean smaller profit margins and possibly higher prices for consumers.

We're paying close attention to it, we are listening to company reporting, and trying to figure out who has pricing power to push through the increase in costs and who can maintain the margins, but I have to say the fixes are not easy. I think higher wages will begin to help, businesses will figure out how to adapt. For example, in the trucking industry, they've been testing self-driving trucks for a number of years, I think that's going to come forward faster and I think that's going to help alleviate some of the labor issues there, and you'll see more automation.

But I will say on a positive note, the Quits Rate, which the Bureau of Labor Statistics tracks, and it represents employees quitting, which is typically a sign that they're confident they're going to find a new job quickly, it rose to a 20-year high. So, I think that's a sign that some of this labor disruption may actually be alleviating itself over the near term.

Shawn Eubanks: Thank you, Brad. Craig, can you talk about what you're seeing in the issuance in the high yield market? Have you seen any noteworthy changes lately in either supply or demand for new paper?

Craig Manchuck: Well, deals are coming fast and furious. Supply of new paper has been at record levels going back now to the second quarter of 2020. If you look back and you see in 2018 total high yield issuance was about 190 billion, in '19, it was up to 308, 441 in 2020, and we're right at 440 year-to-date in 2021, still with two and a half quarters to go. So, we will certainly eclipse 2020's number, but of course the first quarter of 2020 issuance was fairly light as we were in the throws of Covid.

So the run rates had been about the same, but there's still tremendous demand because it's very difficult to find yield anywhere. The concerns we just have are around the types of companies that are coming and we're seeing a deterioration, I think, in the quality of the issuers. We're also continuing to see some pretty poor structures overall.

So we are as vigilant as ever, and we are being more careful, I think, even than ever in selecting the companies in which we are investing. There are still opportunities that persist, and importantly, companies should be doing these deals. We're at a time where interest rates are at historically low levels, and the spreads, even though they are a few hundred basis points above those levels, still offer these companies a chance to finance themselves at very attractive rates, which is really good for their long-term health. So that's a positive.

And the other thing that we're seeing, which is really important, is even though absolute yields are lower than they have been for just about any time in history, leverage is also lower. So, the overall health of the market, and I hesitate to talk about a market or a market average, because we always talk about the universe as a market of bonds and not a bond market, but for purposes of the discussion, the overall health of the market is probably better than it's ever been.

Because two key items that are present right now are significantly stronger balance sheets because of the lower leverage, lower debt service and access to capital. The markets are wide open for finance. So, all those three things mean to us that defaults, as we look forward, should be extremely low and remain low for quite some time. The access to capital is there for all kinds of companies. And the companies are in really good shape, so they should be able to go out and do what it is that they do.

Having said that, look, there are opportunities and we take advantage of them when we can, I can't mention the name, but we were recently involved in a transaction where we were actually able to help structure it and put the kinds of protections in place that we used to be able to do on every transaction in the past. So we've had some other investors alongside of us who did some heavy lifting in structured covenants and so forth. So we're constantly searching for those opportunities where we can put great structures around really good companies, because that gives us a much better measure of comfort, but in the meantime, we've got a big opportunity set we're looking at out there and we're watching and waiting for some better entry points in a handful of those things as well.

Shawn Eubanks: Thanks Craig, that's a really good summary. Brad, can you talk about how the portfolio is positioned right now, given all these varied cross-currents in the market?

Bradley Kane: Sure thing. As Carl and Craig have talked about, I mean, we're pretty constructive on the economy and the health of companies and we continue to see many businesses slowly getting closer to normal operations, again. Obviously labor, as I mentioned before, is the big question mark. But overall I think we continue to be heavily invested in the high yield and convertible bond sectors, that hasn't changed much as we see those the best risk reward opportunities.

We have been bringing down some convertible exposure as we've had underlying stocks in some of our names have had good runs with the growing economy and the Fed stimulus, but as we've been cognizant of the Fed's eventual tapering and the widening impact that can have on rates, we've been continuing to maintain a shorter duration, so we can pivot when we need to. This year, as Craig mentioned, new issue volume has been, very, very, very large and with it, I think many of the issues that have come to market have been low coupons, long maturities and thus higher durations.

And we don't feel you're getting paid for the risks that you're taking in many of these deals. And so we've been watching a lot from the sidelines, we've been letting cash creep a little higher than usual, and waiting for price dislocations to be able to buy some of these bonds that are coming with low coupons when they do drop in price and they offer a better opportunity, I think that's when you'll see us start to pounce on them.

Shawn Eubanks: Great, thanks Brad. Carl, before we start the audience Q&A, can you give us your near-term economic outlook?

Carl Kaufman: Sure. Generally speaking, demand is stronger than supply right now, which is what's causing prices to go up. So, the economy is certainly not running at full capacity at this point because they don't have the manpower to do it. As a result, pricing is going up in many areas, companies are pushing through multiple price increases without any friction, which means that margins are being maintained.

The balance sheets, as Craig mentioned, are healthier than they've been in a long time. So from an economic perspective, we view the underpinnings as being fairly healthy. Now we did have a hiccup this summer due to Delta, which did slow some of the pace of growth, but I think that will pick up this quarter, but we'll still get the economic releases in the next month or so, from the third quarter, which will slower, so we'll see how investors react to that.

But looking forward, we see extremely low chance of a recession with the demand that we're seeing and the lack of supply. So, we're very constructive on the economy, we're being selective in terms of what industry we play, because we think some are extremely cyclical like energy, we've been underweight energy for a long time, you do have a large secular headwind there as people de-carbonized, but that will continue to be a cost that the economy will bear, because moving to green energy, we're finding out is not quite as easy as we'd like to believe.

So our dependence on carbon fuel will remain high, but we're still not going to be playing those credits. So constructive, hopeful that we fix some of the supply snags and labor shortages, and we get back to normal as fast as we can.

Shawn Eubanks: Thank you, Carl. We'll now begin the Q&A, and as noted on the slide, please ask a question through the Q&A window, or raise your hand to ask a question over computer audio or by phone. We did have a question that came in before the webinar. Can you share the team's thoughts on cryptocurrency? Do you think it's a good investment? Brad, do you want to take this one?

Bradley Kane: Sure. Sure. Thanks, Shawn. We've been avoiding crypto companies whose businesses are dependent on crypto for quite some time. I hesitate to use the word currency. Currencies are usually issued by governments and used as legal tender, and crypto has none of those qualities and pure speculation and seems to be a momentum trade. There isn't any way to put a fundamental value on it. Bitcoin, and there are a lot of other crypto tokens out there, and NFTs, the non-fungible tokens that we've talked about in previous outlooks, they're all unanalyzed as investments.

They need to be held electronically, and what I consider non-bank institutions, or in electronic wallets on a computer somewhere. We've seen the non-banks hacked, we've seen people scammed out of their crypto tokens, passwords for your wallet if it's lost, is almost impossible to retrieve. Hopefully people are gambling, which I consider this to be gambling, what they can afford to lose. We have seen companies issue high yield and convertible bonds with proceeds used to invest in crypto, but those companies aren't even analyzable because they're turning their business models into debt finance, crypto purchases.

And Coinbase, which has been in the news recently, just did an IPO, a large crypto exchange where, if you want to trade crypto, you open an account with them, even they have been hacked. So, the whole crypto phenomena, it continues to grow and it seems to attract capital, speculators are trying to be the next guy to find Bitcoin when it was very low in price. I think there's going to be a day of reckoning, I think you're going to see significant capital destruction for those who invested meaningful amounts of cash into it, but we do keep an eye on it, because it does seem to be a yard stick for measuring investor sentiment, risk appetites, and it's possible that if we see a change in the speculative zeal of this, it could mean that we're going to see a sentiment change in stock and bond markets.

So for us, it's a traffic signal, I don't think you're going to see us buying any of it, as we've always talked about, we're fundamental investors, but we definitely need to know what's going on out there.

Shawn Eubanks: Thanks Brad. I have a follow-up question regarding Evergrande; do you have a sense for who would have exposure to Evergrande? The question is, would it be the U.S. Treasury market? What are your thoughts about who has that potential risk in their portfolios?

Carl Kaufman: I'll take that one Shawn, this is Carl. There are certainly a lot of the debt is held in China by institutions there, but there is, I think I read somewhere, they listed the top 10 holders in the U.S. I think BlackRock has $400 million worth, a couple of other institutions have their holdings all public, but they're already trading when this... Actually it hasn't technically gone bankrupt yet, but they're missing payments until they're into their grace periods. I think that they were already trading at 25 cents on the dollar, so whatever values were reflected in the NAVs of funds that own that, already reflected it, which is typically the case in bankruptcies.

Craig Manchuck: Hey Shawn, just to add to that. As Carl said, the bonds are trading at around 20 to 25 cents, but at this point in time, a lot of the long-only funds have been selling out of these bonds, and you have a lot of hedge funds and distressed investors involved now, who are playing this to jockeying for position in a restructuring. It's expected that there will be some sort of restructuring; historically the Chinese government is not wanting to be seen as providing bailout money for them, but behind the scenes, they're probably going to be supportive of some restructuring that allows the company to equitize some of these debt obligations, which will then be owned by hedge funds, and there'll be a huge cross border ownership play here, which will be very tricky from a recovery standpoint.

It will be very complicated, but as far as the risks in the system, now, the guys that own it, I think largely are people that want to own it down here at 20 cents on the dollar, I think there'll be able to recover something or there'll be certain asset values that will support that level of the debt.

Shawn Eubanks: I have a question on, do you expect spreads to contract or stay range-bound?

Carl Kaufman: The words of a JP Morgan, "they will fluctuate." I think they will pretty much stay range-bound; the real unknown is what is the underlying rate at which they are spreading over, if we do get a tapering or rise in rates. But at about 300 over, is it a steal here? No. Is it historically low? No. That was in mid-07. But given that yield is in short supply, it still is fairly attractive, especially since rates and Treasuries have risen a little bit lately. I don't think they'll be too volatile. I guess the answer would be range-bound.

Shawn Eubanks: Thanks Carl. And can you talk a little bit about the character of any common stock in the fund?

Carl Kaufman: Sure. We have two equity positions that were the result of purposefully taking companies through bankruptcy and one of them is Southeastern Grocers and the other is Real Alloy. Southeastern Grocers is a very large grocery chain in the Southeast. They run Winn-Dixie, among other brands, and that has been one of our best performers in the fund. They have lowered their debt greatly during Covid as they've done better, they also have extremely low leverage, no union pension plans, and they're doing extremely well.

We have reduced our position a little bit, we also have collected a 10% dividend this year. The other one is Real Alloy, which is a recycler of aluminum. And as you know, aluminum is infinitely recyclable, and it uses about a third of the energy to recycle aluminum than it does to make virgin aluminum. So, their business is actually doing very, very well, and they're starting to receive some indications of interest in buying the company. So hopefully by next year, we won't be talking about either of them.

Shawn Eubanks: Thank you. So, I have a question here about any credit concerns or credit issues in the portfolio, and it's asking about busted converts, but I'm assuming that would not necessarily be the case in the convertibles that you own. So, maybe you can just talk about credit issues in the portfolio, whether there are any? And how you're looking at them?

Carl Kaufman: Sure. We don't have any credit concerns in the portfolio at the moment. We've scraped it pretty well over the years, and in terms of busted convertibles, just to touch on that, busted convertibles aren't what they used to be, but we occasionally will find some bonds that yield close the high yield with a free call on the common stock, and those are the ones that make up most part of our busted convertible portfolio. Keep in mind, our convertible portfolio is slightly less than 8% of the portfolio now and about a half and half busted in equity sensitive.

Shawn Eubanks: Thank you. I have a question for Brad, especially in an environment where people are concerned about rising interest rates, we tend to get a lot of questions from clients about floating-rate loans? Bank loans? How does the team look at that sector? And what do you find attractive or unattractive?

Bradley Kane: Thanks. We have continued to keep an eye on the floating-rate loan and floating-rate note market for quite a while, but we have not played in or invested in leveraged loans in much floating-rate. We have had in the past some floating-rate investment grade notes in the portfolio very short, typically two to three years, but in the high yield and leveraged loan market, the leveraged loans are issued with very low floating-rate coupons based off LIBOR or, in some cases now, SOFR, which typically, you'll get a spread off the SOFR/LIBOR rates.

SOFR's at five basis points right now, maybe you get 250 basis points plus five. So you're getting two and a half percent floating-rate, but they also are... So, your hope is that SOFR goes up and over time you get more coupon, but the problem is in order to get people incentivized to lend money in the loan market and buy these low SOFR-rated loans, what they'll do is they'll put a floor in.

And so they'll say that, until SOFR gets above... You'll get a minimum of, call it 75 or a hundred basis point floor as a representative of SOFR or LIBOR. And so, you need LIBOR and SOFR to actually move at some point above 75 or a hundred basis points for you to actually get any of that floating-rate benefit. In the short term, all you're essentially getting a fixed rate loan, you know your floor, and you know your spread so you know what you're getting, but these are typically still below the average spread that we're getting in the high yield bond.

So you're already giving up coupon up front to get into the loans; you need SOFR or LIBOR to rise significantly above your floor before you actually benefit from the floating-rate. And as we've talked about in previous calls and previous outlooks, a lot of the loan market right now is used to finance highly leveraged, private equity sponsored leveraged buyouts. Typically these companies have a lot more leverage than the typical we're buying, they have very loose covenants so that the private equity sponsors can find ways to take more capital out of the business, and floating-rate loans they don't have call protection, so if a company actually does improve, they'll refinance you out with a lower-costing loan.

And so for that reason, they typically don't trade much above par or 101, whereas high yield bonds with call protection can trade significantly above par. And so, you give up a lot of that upside for the idea that you're getting some interest rate protection, but I will also... And I'll finish up, but I will highlight that, in periods of rising interest rates in the past, leveraged loans have actually underperformed fixed rate. If you look at the '04 to '06 period where the Fed raised rates by 200 basis points, leveraged loans underperformed the high yield market. So, for those reasons we've kept an eye on it, but we've avoided to invest in it.

Shawn Eubanks: Thanks, Brad. That's really helpful. I have a question here. Let's see. Does the most recent regulatory crackdown on ed tech or large cap tech change your views on deploying capital to China? And how do you handicap the regulatory risk in countries like China?

Carl Kaufman: That's a really easy one, Shawn. No. It has not changed our view, we still don't invest in China.

Shawn Eubanks: Thank you, Carl. That does conclude our questions from the Q&A, so do you have any closing comments?

Carl Kaufman: I think we've covered most of it. If anybody has any further questions or wants to talk strategy, please feel free to reach out, I think you know how to get ahold of us. We're pretty easy. Thank you for attending.

Shawn Eubanks: Thank you gentlemen.


Opinions expressed are subject to change, are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.

The Bloomberg 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.

Fed is short for Federal Reserve.

Yield is the income return on an investment, such as the interest or dividends received from holding a particular security.

Spread is the difference in yield between a risk-free asset such as a U.S. Treasury bond and another security with the same maturity but of lesser quality.

Duration measures the sensitivity of a fixed income security’s price (or the aggregate market value of a portfolio of fixed income securities) to changes in interest rates. Fixed income securities with longer durations generally have more volatile prices than those of comparable quality with shorter durations.

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

Coupon is the interest rate stated on a bond when it’s issued. The coupon is typically paid semiannually.

A covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out. Covenants are put in place by lenders to protect themselves from borrowers defaulting on their obligations due to financial actions detrimental to themselves or the business.

IPO is Initial Public Offering.

The net asset value (NAV) represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities.

A busted convertible security is a convertible bond where the underlying stock trades far below its conversion price, causing it to act solely as a bond given that there is a very low probability that it will ever reach the convertible price before maturity.

Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period.

Call protection is a protective provision of a callable security prohibiting the issuer from calling back the security for a specified period of time.

A floating interest rate is an interest rate that moves up and down with the market or an index. 

Treasuries (including bonds, notes, and bills) are securities sold by the federal government to consumers and investors to fund its operations. They are all backed by “the full faith and credit of the United States government“ and thus are considered free of default risk.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System (FRS) that determines the direction of monetary policy specifically by directing open market operations (OMO).

The job openings and labor turnover survey (JOLTS) is a survey done by the United States Bureau of Labor Statistics (BLS) within the Department of Labor to help measure job vacancies.

Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.

The yield to worst (YTW) is the lowest potential yield that can be received on a bond, assuming there is no default.

Investment grade includes bonds with high and medium credit quality assigned by a rating agency.

Yield to maturity is the rate of return anticipated on a bond if it is held until the maturity date.

Treasury Inflation-Protected Security (TIPS) are a type of Treasury security issued by the U.S. government that is indexed to inflation in order to protect investors from a decline in the purchasing power of their money. As inflation rises, TIPS adjust in price to maintain its real value.

Investment grade and non-investment grade (high yield) categories are determined by credit ratings from Standard and Poor’s and Moody’s, which are private independent rating services that assign grades to bonds to represent their credit quality. The issues are evaluated based on such factors as the bond issuer’s financial strength, or its ability to pay a bond’s principal and interest in a timely fashion. Standard and Poor’s ratings are expressed as letters ranging from ‘AAA’, which is the highest grade, to ‘D’, which is the lowest grade. Moody’s ratings are expressed as letters and numbers ranging from ‘Aaa’, which is the highest grade, to ‘C’, which is the lowest grade. A Standard and Poor’s rating of BBB- or higher is considered investment grade. A Moody’s rating of Baa3 or higher is considered investment grade. A Standard and Poor’s rating below BBB- is considered non-investment grade. A Moody’s rating below Baa3 is considered non-investment grade. If an issue is rated by both agencies, the higher rating is used to determine the sector. Fund breakdown by credit ratings are based on Standard and Poor’s ratings. Not Rated Securities consists of securities not rated by either agency, including common stocks, if any.

The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.

The secured overnight financing rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the London interbank offered rate (LIBOR).

Performance data current to the most recent month end may be obtained by clicking here.

Fund holdings and sector allocations are subject to change at any time and should not be considered a recommendation to buy or sell any security.

The Fund’s top 10 holdings, credit quality exposure, and sector allocation may be viewed by clicking here.

One cannot invest directly in an index.

Click here to read the prospectus.

The Osterweis Strategic Income 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. 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. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Small- and mid-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies. Higher turnover rates may result in increased transaction costs, which could impact performance. 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 invest in municipal securities which are subject to the risk of default.

Osterweis Capital Management is the adviser to the Osterweis Funds, which are distributed by Quasar Distributors, LLC. [OSTE-20211012-0344]