Published on October 13, 2020

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. My name is Shawn Eubanks and I'm the Director of Business Development at Osterweis Capital Management. We'd like to welcome you to our third quarter update for the Osterweis Strategic Income Fund. This quarter we'll be trying a new format, during which I'll moderate a discussion with Carl Kaufman, Bradley Kane and Craig Manchuck. After our discussion, we'll open the line to your questions. So let's begin. My first question is for Carl. Carl, can you spend a few minutes talking about the current market environment?

Carl Kaufman: Sure, Shawn. If you'll just follow me for a while, I'm going to use an analogy to describe what's going on in the markets. For those of you who don't follow professional golf, there's a golfer named Bryson DeChambeau who recently won the U.S. Open. Now the U.S. Open, it was unusual because it was only played before volunteers and officials, but it was unusual for other reasons. That tournament traditionally places a premium on precision, restraint, and control. Bryson is an iconoclast. He chose to develop his own swing based on the application of physics, which was his college major. And he has developed a swing that can best be described as unorthodox. Basically he gained 40 pounds during the Covid break, mostly muscle, in an effort to maximize the distance with each shot. So he has an all-in take-no-prisoners approach that works well in some tournaments and has not been the traditional recipe for success at the U.S. Open. His unlikely win has pundits questioning their assumptions about professional golf now and wondering a lot if this new aggressive approach might permanently change the way the game was played.

The markets have been a little bit... Investors that have done well have played the market a little bit like Bryson, throwing all caution into the wind, not looking at valuations. And the investment landscape, it is a little bit different given that the economy is still in recovery mode, has not caught up to traditional measures of where the market is trading today. And we ask ourselves the question: Does the valuations even matter anymore in this seemingly inflation-free near zero interest rate environment? So what we have now is a market that has recovered to new highs to have a little sell-offs since then. Certainly the bond markets have recovered to pre-Covid levels and we just have to ask ourselves the question, "Where do we go from here?" And I'll let some of my partners talk about that, Shawn.

Shawn Eubanks: Thank you, Carl. Craig, equity markets, as Carl just noted, and fixed income markets have rallied nearly continuously since the lows in March. What do you see over the next few quarters?

Craig Manchuck: Thanks Shawn. Good morning, everyone. The next few quarters I would expect we're going to see a little bit more volatility than we've seen here in the last two quarters coming out of the bottoming process that we had from the onset of Covid. We'll have some stops and starts in the economy. There's an awful lot of news that is coming out positively and for every one positive piece of news that comes out, there'll be one or two naysayers out there that will find something negative to say. So I think that just creates some uncertainty. We have an election coming up in a few weeks. We have a flu season. It's maybe a second wave of Covid and we're not really sure how that's going to play out, although given what we've seen recently, it does seem to us that the medical profession has a playbook by which they're able to treat people better and which should result in better outcomes.

So, we think that while there continues to be noise about the pandemic and it will take a while for it to play itself out, the mortality and the incidents of hospitalizations should continue to be softened somewhat here as it's better treated. But with that, I think people will be somewhat cautious. I think there are some companies that are doing very well and a lot of those are the companies that are benefiting from work-from-home. Home builders are doing extremely well because there's a movement out of cities and into suburbs. And a lot of people, while they're spending time at home, are working on projects and doing things. So the building supply companies are doing particularly well. But I think equity returns have been pulled forward from 2021 into 2020 by the magnitude of the fiscal stimulus that we had as well as the drop in rates.

As that fiscal stimulus is diminished, we could see long rates potentially start to drift a little bit higher as well here as the economy starts to turn the corner. So those things probably mitigate really aggressive equity market returns from this point forward. As far as credit is concerned, we think the background and backdrop for credit looks very, very positive. There's still a scarcity of yield globally. People are looking for yield. The credit markets have done very well and there's a lot of money around to be put to work as people look past the bottom, which is behind us and start to see significant improvement in the economy.

And remember that markets are discounting mechanisms, so as we get into early 2021, we would expect to see that the most heavily impacted sectors by Covid, the cruise lines and the travel and leisure areas, those businesses and these securities both in credit and inequity would start to do well as they start to discount much stronger recovery for those industries in the second half of 2021. So, I would say we're guardedly optimistic. We still see some bright spots out there, but we're also being careful and cautious at this point.

Shawn Eubanks: Thanks Craig. And Brad, speaking of some of those industries that have been most impacted by the pandemic, such as travel and leisure, what's your outlook for those? What are your expectations for those going forward?

Bradley Kane: Sure. Thank you, Shawn. Just following on what Craig said, immediately after the Covid shutdown, you saw airports, hotels, cruises, cruise lines, all ground to a halt. The last six months though, we've seen reasonably steady reopenings in hotels, airline load factors have been rising. In fact, this past weekend from a trusted source, we heard that the Charlotte Airport looked like it was as busy as Thanksgiving. So, things are slowly coming back. Cruise lines are beginning to sail again. We're hearing and seeing Europe and Asian cruises being set up and scheduled. We do believe all these industries are going to come back to full operations, but it's going to take time. And I think '21 is when you start to see that really pick up more. The one positive in that is that companies are taking this period to set some operations up, to be more profitable.

In fact, an example, Carnival Cruise Lines disposed of and mothballed some of their older, less efficient ships. So as they begin in the re-sail in the fourth quarter of this year, and, further ramp up in '21, I think you'll see improvements in margins over time and therefore profitability. And as we've discussed in previous calls, the capital markets opened extremely quickly in the spring. And some of the larger higher quality companies were some of the first to raise additional liquidity and actually capital for future growth. So I think you'll see in other industries the customers are coming back, it's slow, but it's steady. And as more industries reopen, I think travel and leisure will be beneficiaries as people angst to get out of the house and travel. I think right now, at least in the airline space, you're seeing more leisure travel than your business, but over 2021, I think you'll see business travel come back and that's going to help really accelerate the growth.

Shawn Eubanks: Great. That makes sense. Craig barring a vaccine, what do you perceive to be the biggest barriers to a full economic recovery?

Craig Manchuck: That's a good question. I think from my standpoint, I think new habits are probably one of the biggest barriers, because if you look back, there's a lot of published scientific research on this. It takes somewhere between nine and 10 weeks to establish new habits. And, we're now about six months in, so people are learning to do things differently and they're sort of accepting these changes that they've experienced over the last six months. And some of them are going to become permanent. And that change in behavior on the consumer side, I think is going to have to swing all the way back in the other direction for us to really get back to a more full recovery. But I don't see people going back to restaurants as quickly as they had in the past. And certainly the high risk groups would wisely avoid doing that anytime soon.

But there are many, many other habits that people have created for themselves. And we have an investment in the grocery space that's been doing extremely well, largely because people are eating at home more often and they're starting to do more things there. They're baking more. They're finding things that they may have not done in a long time. And they're going back to that. So the habits that have been created here in the last six months are going to take some time to break. And I think consumers generally, particularly those who have either been furloughed or whose work situation is more tenuous, are going to be much more cautious about how they're spending their money. They're going to spend their money on needs, not wants. They're spending it around their house, but they're certainly not going to be spending it as frivolously.

And there just isn't as much discretionary income out there to go around. Moves to the suburbs and out of the cities that I talked to, that seems to be something that could continue for a few years and that'll be good for home builders and industries like that, but it's going to be bad for real estate in cities. So how that plays out and what kind of impact that has as we start to see retail vacancies in places like New York or fine dining establishments going out of business, that sort of creates the negative side of the equation.

From the business standpoint, the CFOs have historically taken their capital budgeting cues from the capital market. So seeing what's going on and the ease with which they're able to raise debt and the strong performance in the equity markets, that usually will give CFOs a very strong sense of comfort and would sort of lead them to put aggressive budgets in place. However, given everything else that's going on around us, I'm just not sure that any CFO feels particularly bullish right now to the extent that they're going to make some significant capital expenses and really aggressive budgets. So I do think that psychology here is on both the corporate and the consumer side, is really the biggest thing that is presenting a barrier right now to a full economic recovery. And I think that will improve over time.

Shawn Eubanks: Thank you. Brad, many investors are focused on the upcoming election. Do you think the outcome of the election will have a material impact on the economy going forward?

Bradley Kane: Markets have a poor uncertainty. And if this election season is anything, it has been completely uncertain. While the outcome of the election is anyone's guess, I would say that we'll have resolution in a few weeks. What we know is that the U.S. economy and financial markets have experienced growth under presidencies of both political parties. So it doesn't matter over time, if it's a Democratic administration or Republican administration. There are industries that will be impacted more than others by different administration's policies, but I think over time, company managements adapt their business models and the markets will discount the impacts that these administrations will have over time.

So, we do believe that there will be an impact to the economy, but it will be more based on reopening of the economy. And as companies bring customers back, bring employees back, I think that'll have a bigger impact over time rather than the election. I think there's a lot of pent-up demand in some savings and delayed spending by consumers and then in companies, and once we have some clarity on the next president and some of their policies, I think you begin to see those spendings released and they'll impact the economy more.

Shawn Eubanks: Great. Craig, how important do you think an additional stimulus package is to the overall economy?

Craig Manchuck: Well, I think it's certainly, as I just talked about, I think it's psychologically important because I think people will want to know and understand really where the Fed and the government stands in terms of how much support they're willing to continue to provide. So in the short run, I do think it's psychologically a positive, but I think long run, it's a negative in the fact that people will continue to talk about, how much do we really need? How long is this going to go on? When are we going to get back to normal? We believe that, I think the sooner we can get back to normal and if that we can be weaned off of the Fed support, the better. But for certain industries, I think it's critically important because there are certain industries that if they do not receive the necessary support, will end up shutting down and then will take not months but years to get restarted, like the airline industry. We can't just shut the airline industry down and then snap your fingers and turn it around.

So I think supporting the airline industry, given how many jobs they're responsible for out there, is critically important. I'd like to see if they could come up with a way to do it for parts of the restaurant industry, but it's just small parts because we do have fast food and the quick service restaurants that are actually doing quite well. So, it is important but I do think what's more important is being able to sort of see forward to the timetable when we can actually reduce the reliance on stimulus and have the economy actually running back on its own and not continuing to be reliant on the government to keep bailing us out.

Shawn Eubanks: Great. And Brad, one other question for you, where do you see inflation heading and what would be the implications if we do see a surge in inflation going forward?

Bradley Kane: That's a good question. The Federal Reserve has been trying to stoke growth and ultimately inflation for quite a while now. And unfortunately all that liquidity hasn't been spent the way the Fed thought it would. I think buying financial assets doesn't really stimulate the economy and considering demographic changes that the workforce has been facing, it's not a surprise the Fed's having a tough go. I think one thing that people seem to sometimes forget is that, there's also a problem with how inflation is measured. Historically, inflation has been measured by price changes in the stable basket of goods. And this basket's updated every few years by the Bureau of Labor Statistics actually. But with a multi-year time lag and I think they adjust out food and energy costs, which are volatile. And so you get sort of a muted measure of inflation that's it's historically looking, but if you could actually change the basket to more current markets, I think you would see inflation already.

For example, since March, if you've been out trying to buy toilet paper or other household cleaning products, you probably have to go to multiple stores, multiple times, which cost money to travel. It cost money, there's sometimes markup on products and or they're shrinking the size of the products you're allowed to buy. If you're buying a pack of 24, you're buying a pack of one toilet paper. That is inflationary and people don't think about it as inflation but it has been. And as people have been home more, buying as Craig said, you're buying, you're doing more renovation projects to decorate your house. You're buying more outdoor furniture. You're seeing prices of these products and demand for these products going up. And I think, when people don't realize that what they used to buy, now because of the demand, the prices are up, again, inflation. I think another example is people who've... Technology spending. Our technology spending since Covid has gone up dramatically as more and more people are having to buy and furnish for working from home.

Some families have had to, or tried to find tutors to help their children going to school at home. These are all costs that have going up that are not included in the [CPI] calculation. So I think you are seeing inflation. It has not been overly dramatic unless you're at the super high end of the wealth spectrum, where you still see the big houses and the art going, but we are seeing inflation. And I think over time, people will learn to adapt to it. As Craig mentioned about people moving out of cities or renting in the suburbs, you're seeing home prices going up significantly in urban areas or in suburban areas. And I think that is also another sign of inflation that people are learning how to live with. So I think the real thing is that inflation is happening. We're seeing it right now on an individual basis in different items, but we're not seeing a general rise across the entire economy.

And I think that is something that will happen over time, but again, given the demographic changes and given the Fed's investments that are really buying financial assets, you're not seeing that impact. I think over time, you will. We do think that the Fed balance sheet's something you always have to keep an eye on, but at this point in the near future, I think the inflation seems to be manageable. And we don't really see it getting out of hand and any other demographic changes, I think that happened with the millennial generation, which as large a cohort as the baby boomer generation. I think that's, again, it's going to be a multi-year process and it's going to take some time to flow through.

Shawn Eubanks: Thank you, Brad. So I have one more question for Carl, and then we're going to begin our Q&A. Carl given the Fed's explicit commitment to keeping short-term rates near zero through 2023, is it time for investors to start thinking about the new normal as a permanent situation and how should they think about their risk exposures in this market?

Carl Kaufman: Well, that's also a good question. Obviously, we've been dealing with a new normal now for about 10 years. But that said, the new new normal, one has to ask themselves the question, "Should we ignore the news and continue taking unbridled risk?" Essentially, pulling out the driver, like Bryson, and trying to knock the ball over the trees onto the green, not worrying about the hazards that lie ahead. We think that worked well when the markets were in disarray. And when we were buying, when others are fearful and valuations were under pressure. Today, we have much higher security prices. The Fed's support is very important, but it has been curtailed a little bit, they've been buying fewer bonds. We already have record low Treasury yields and continued uncertainty around renewed Covid upsurge and a tense presidential election. So, the very least these could cause a headwind going forward.

We think that looking forward is probably best to take a slightly more defensive posture at this point going forward. We've been scaling back our exposure to equity sensitive convertibles that have run quite a bit with the equity market and also in bonds where we see, where the prices have run up. And we see either fundamental weakness in their business continuing, or leverage has increased and is starting to erode what we consider appropriate measures of safety. So we do like cash, short duration, bonds of better quality companies, even though they may not be investment grade, they're still good quality companies. We still like convertible bonds, but some of the ones that we bought very cheaply, we've had them taking profits in. And I think it's best, changing analogies a bit... It's best to hit a lot of singles right now and be patient while we wait for more fat pitches. So, that's how we're viewing the world right now. Now a big correction could change all that and we can be back in buying with both hands, but we'll have to see what the market brings.

Shawn Eubanks: Thank you, Carl. We'll now begin our Q&A. So, I have a question here. Can you discuss more specifically kind of the changes in the portfolio over the last quarter and what you anticipate going forward?

Carl Kaufman: Sure. Well, as I said in my last answer, we'd had been selling off, taking profits in the equity sensitive convertibles. We have reverted back to buying shorter intermediate term bonds, as opposed to buying the longest bonds we could find in the selloff and locking up those yields for longer. It's been mostly trimming at the edges rather than wholesale changes, which is more our style. And that's pretty much it. It's been not taking some profits here and there and things they've run too far and buying shorter term paper to try to wait for a better buying opportunity.

Shawn Eubanks: Okay. I have another question here. Has the Fed distorted the corporate bond market as much as you originally thought back in early April and regarding the high yield markets, or the high yield sector mostly?

Carl Kaufman: The Fed has not really distorted directly the high yield market. They did buy a position in one of the high yield ETFs, but in terms of distorting the bond market, yes, they've been medicating the bond market for 10 years now. I think they really stepped up their efforts. The latest buying by the Fed equals all the previous programs combined. So, it was a big push into buying bonds and sort of when you have a price-insensitive buyer that has a blank checkbook, you are going to see distortions. Now how those distortions correct themselves is the 64 trillion-dollar question. Does the Fed gradually pull back and do rates normalize as the economy strengthens slowly? Or do they just keep up the stimulus and wait for the economy to catch up to the market? We just don't know the answer right now. I'd rather err on the side of caution right now.

Shawn Eubanks: Okay. We do have another question here, and this may be one for Brad. What are your thoughts on the loan market, bank loans and CLOs specifically?

Bradley Kane: I would say that our views on the loan market and bank loan specifically hasn't changed, which we've been talking about for a number of years. There's been a significant amount of capital raising in CLOs. And usually when there's a significant amount of capital raised, there's a significant amount of loans created to fill those CLOs. And what we're finding is, you're finding a lot more leveraged buyouts from private equity sponsors in those CLOs. You're seeing them at high leverage, so a lot higher than we're comfortable lending in both the bond market or the loan market.

And lately what you've been finding is the covenants, which had always been something that you held your hat on as a lender and a senior lender, and those have been declining over the last few years. What we're finding now is... And there was just a story today about a legal battle. And one of them you're finding the world within the loan market is becoming more cutthroat with each other, that when companies have a problem, they're finding ways to really squeeze lenders by bringing new capital in above them and taking away their assets.

And so, that's a space that we have always felt you weren't getting paid enough for moving up in the seniority and it turns out that seniority really isn't there. What I would say for us is a lot of the bonds and a lot of the companies that we're looking at don't have a lot of leveraged loan or don't have any leveraged loan. So we're not in the same risk boat as the CLOs are, with what they're lending to and that is partially, that is because the underwriters have raised capital in the loan market only and for the CLOs to have assets to buy and not really gone to the bond market with those companies. So, there may be some overlap with the bond market, but again, it's going to be in the LBO companies that we've been avoiding. And I think that, there's going to be a pretty ugly shake out in the loan market at some point. You're already starting to see it, it's more in the courts than it is in the market itself.

Shawn Eubanks: Thank you. So I have a question here, has the portfolio had any significant bad debts and how do you mark those to market if the credits are deteriorating in any way?

Carl Kaufman: No, we have not had significant bad debts over the course of the 18 years that we've been running it, I think we've had a handful of bankruptcies and a number of them were on purpose where we currently own the equities. Of two of them and one of them has been our best performing position for the last 12 months. And we mark positions daily. So for credits deteriorating, we do that daily. We don't wait until we wake up some morning and mark it down a lot. So, that's always been the case with our fund. So.

Shawn Eubanks: Okay.

Carl Kaufman: No things are pretty good in the portfolio. I'm feeling very comfortable about our positions in the portfolio at this point.

Shawn Eubanks: Okay. Can you talk about liquidity in the markets, are there any pockets of illiquidity that you're seeing?

Carl Kaufman: Markets have been no more liquid or illiquid than normal. The new issue market has been extremely robust. So there's a lot of liquidity there. We would like to see more sellers so we can do some buying at bargain prices, but doesn't seem to be happening. So, I suppose the illiquidity is on the offer side right now. We're hearing repeatedly that, they come to us looking for us to sell their buyers' bonds because they can't find any bonds to buy. So, that may change someday, but right now the markets are very well bid.

Shawn Eubanks: Great. Can you talk a little bit about the current duration profile and kind of where you are now relative to historically, and what would convince you to move one way or another?

Carl Kaufman: Well, keep in mind that it takes a lot of effort to move duration for a portfolio, but we're at about a little below 1.8, at quarter end, I think like 1.77, which is, on the low side. It's not as low as we've ever been because we tried to add duration. I would say that if the markets continue rising, that duration should come down as we get more conservative, as we tend to do in rising markets. If the market were to experience a major correction, I would hope that that duration would go up as we buy longer term paper at higher yields to lock in.

Shawn Eubanks: Okay. Where are you seeing the greatest risk in different bond sectors? Would you say it's high yield or Munies or somewhere else?

Carl Kaufman: Well, it depends how you define risk. If you were to own a long duration Muni fund and rates were to go up a 100 basis points, that would look like risk. Although the principal risk might not be great, the mark-to-market risk is very great in longer dated investment grade bonds. In high yield sectors, certainly traditional energy is probably at risk given that we think the fracking model is a faulty one, pardon the pun. But so we've been avoiding those types of sectors, heavily indebted companies. A lot of them are owned by private equity, as Craig mentioned. Brad mentioned in the loan space and the equity spaces and in high yield space, you're seeing a lot of sponsors that have deals common. They have a lot of leverage on them. So that's where I would tend to shy away from.

Shawn Eubanks: Great. Can you talk a little bit about your allocation to cash and cash alternatives at this point?

Carl Kaufman: Sure. Cash and cash alternatives have been sort of the hallmark of our strategy. We're not afraid to carry those. We currently have roughly about 4% in cash, cash. And we have bonds maturing under a year of about 15%. So about 25% and included in that, there's a lot of short-dated investment grade floaters. So, that's where we are. We got up to 35% coming into this. We got down as low as 15% in the heat of it, but now the bonds are rolling over and companies are calling their bonds. And some of them aren't replacing them with new bonds. They're just using the cash on hand to take the bonds out, that cash has started to move up again. And that's okay because so is the market.

Shawn Eubanks: Okay. And it looks like we have one last question. in general, are there areas, biggest contributors that you can think of in the portfolio or holdings or sectors that have performed particularly well?

Carl Kaufman: It's really been a mix., it's spread out over most of our portfolio. And what you'll find is that if you look at the attribution, the preponderance of positions do have positive performance. Of course there are some negative performers, but they tend to not be as severe when you look at the numbers then compare the ups to the downs. If that makes sense. So you look at our top three performers, the contribution to returns has been greater than the bottom five or the bottom 10 at most. So that's how we're kind of looking at it. So it's been a good ride, and we're going to try to tighten it up further.

Craig Manchuck: Yep. Hey Carl, can I just add one thing to that?

Carl Kaufman: Sure.

Craig Manchuck: We've had really great success with a number of different convertible positions and as Carl alluded to this earlier, and we've talked about it, as the convertible positions do well, they become more and more equity sensitive and we've just thought that it's been smart as that happens to continue to reduce the positions. So several of these positions, we just have been systematically selling on the way up to mitigate that, so that if the markets turn around and trade back down, we do not have the same kind of exposure to the downside that we've captured on the upside.

Shawn Eubanks: Okay. Well, that's the last of our questions for today. Carl, do you have any closing comments?

Carl Kaufman: I was just want to thank everybody for their participation today and their confidence in our ability to manage their fixed income assets. And we'll talk to you in a quarter after the election, should be fun.


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 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.

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

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.

Fed is short for Federal Reserve.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.

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

Duration measures the sensitivity of a bond’s price (or the aggregate market value of a portfolio of bonds) to changes in interest rates. Bonds with longer durations generally have more volatile prices than bonds of comparable quality with shorter durations. Effective Duration is a duration calculation for bonds with embedded options and takes into account that expected cash flows will fluctuate as interest rates change. Effective duration is calculated only on the Fund’s fixed income holdings and cash.

Cash flow measures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to pretax income.

An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies.

A collateralized loan obligation (CLO) is a single security backed by a pool of debt.

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition.

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-20201013-0027]