Published on October 17, 2022

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


Shawn Eubanks: Good morning, everyone. My name is Shawn Eubanks. I'm the Director of Business Development at Osterweis Capital Management. We'd like to welcome you all to our third quarter update for the Osterweis Strategic Income Fund, and at this point, all of our participants are in listen only mode. Later, we'll conduct a Q&A session and you can participate live via 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 or enter your question into the Q&A.

Please note that this webinar is being recorded. I'll be moderating a discussion with portfolio managers Carl Kaufman, Craig Manchuck, and Bradley Kane. After our discussion, we'll open it up for your questions. So let's begin. Carl, the third quarter was yet another really tough stretch in the markets with pretty much every major stock and bond index delivering negative returns. Would you provide a little perspective for us before we start?

Carl Kaufman: Thank you, Shawn. Clearly it wasn't fun for anybody. 2022, we are in unprecedented territory. We've taken a one two punch this year, both stocks and bonds, both down double digits. It's been about 14 years since the S&P 500 has lost this much, back in 2008. Ten-year Treasuries haven't lost more than 10% since 1988, and Treasuries as an asset class have not lost more than 5% since 1978, which is as far as we have accurate data. Investors are understandably getting impatient, but we may have a bit more volatility to come with the next hike and the midterm elections, and the good news is we are starting to get some really good valuations and seeing some very attractive bargains starting to creep into the market. So stay tuned.

Shawn Eubanks: Thanks, Carl. Can you talk a little bit about some of the drivers that are creating the market headwinds currently?

Carl Kaufman: Sure. Key among them in the U.S. and most of the world is inflation, remains people's top concern. The Fed keeps tightening. They keep on telling people they're going to tighten. Global central banks are also tightening, with the exception of Japan. There's no serious talk of a Fed pivot yet, but the yield curve remains inverted. England saw a little bit of a pivot due to stresses in their pension system having to do with leverage, which typically is the culprit in most of these type of downfalls in the markets. But I think the markets may have at least one more convulsion to go before stabilizing.

Shawn Eubanks: Okay, thanks, Carl. Craig, can you explain why inflation has been so persistent? Initially, the Fed said it would be transitory. Obviously that hasn't been the case.

Craig Manchuck: Good morning, Shawn. There are lots of different things that we could point to and everyone has their own opinion on why we're having these inflationary problems, but one of our research providers, Jim Bianco from Bianco Research, had a really interesting piece a few weeks ago and he said what we've had over the last several decades, we've had four things that have really helped to keep inflation down, and that's cheap energy, cheap labor, cheap goods, and technology. Today, three of those things have been kind of whittled away. Cheap energy is no longer available. We've got significant headwinds for fossil fuels here in the states, also in Europe.

Now we see when we have a problem in Russia, Europe is all of a sudden in an energy shortage. So energy has become dear. Labor, particularly skilled labor, was widely available and that is becoming more scarce and cost of labor's going up, wages are going up, that becomes a bit of a problem. Cheap goods, we had China producing just gobs of cheap materials, raw materials, and finished goods for a long time. That's no longer there, supply chains being what they are and China having their own Covid problems. The only thing we have left really is technology, and it's like a one armed bandit. It can no longer kind of tether inflation down to these lower levels, so it's one of the reasons why I think we're seeing a much more difficult problem facing the Fed right now and then trying to battle this inflation.

Shawn Eubanks: Thanks, Craig. Brad, we've all been hearing about problems in the UK bond market and the trouble started shortly after the new prime minister took over. Can you talk about what's been going on there and help us understand why it matters?

Bradley Kane: Sure. So first of all, the new PM took over just a little over a month ago and in that time we've seen some significant turmoil. I'll remind everybody that in the UK, unlike the U.S., the UK and Europe, they're going from negative rates on their government bonds to gilts in the UK to positive rates where we've never been negative. But either way, when you see rising rates, you see a huge move in price, especially with long UK Treasuries or UK Gilts, which are typically 40, 50 years versus our 30 years. So you see big increases, you've seen that move. Prices have actually declined over 35 to 40 points in principal, not even ... So you've lost almost half your principal in the last 18 months. But what's happened in the last 30 days is we've seen energy, all the headlines about high energy prices in Europe and Europe running out of potentially energy in the winter.

In the UK, what the government has done is they tried to put a cap on the total price that people would be billed in any one month for energy. The problem is when you do that, you've got to fund it somehow. The government, at the same time they're dealing with inflation, now all of a sudden they have to start funding these unfunded mandates of energy prices and at the same time, they also announced they were going to cut the top tax income rate. So now you have government needing to borrow even more at the same time that they're trying to raise rates. So prices are dropping, the government's trying to borrow more, and that's put a little bit more turmoil into the government trading in Europe.

In addition, and what we've really seen, when you mentioned the pension system before, Carl mentioned it, the pension managers in the UK have been trying to fund long-dated liabilities by buying their government Treasuries, or gilts, when both rates were negative and even now as the positive. So what they did is when rates were negative, they started using a lot of swaps to kind of lever up the portfolios in order to generate income for the pension liabilities. Well, what's happened is in the last month with this huge run we've seen in interest rates, you've seen the gilts drop dramatically in price, especially since they're so long in maturity, their durations are very long. So what's happened is pension managers are starting to get margin calls on all their swaps and having to unwind trades all at the same time that the government's trying to raise rates.

So you've seen weakness in the gilt market be kind of added to by pension managers even needing to sell more and more. So the Bank of England stepped in, they've been buying up paper. In fact, the last two days they've been buying up the inflation-adjusted gilts, which are called linkers, and so they've really been the buyer of last resort in the UK. I would say this isn't really a contagion issue globally. This is more a short term liquidity crisis in the UK. We don't think it's going to translate into pushing pressure on anywhere else. We don't use swaps the same way they do in the UK in the U.S. So I think it's a little bit not a tempest in a teapot, but I would say we're keeping an eye on it just to see what the outcome is.

It's possible that pension managers have to sell other securities if they have them, and could that put pressure on other prices? But the reality is what we see in the U.S. is different. But I would say that this is just a sign of when you get things that have gone ... as we've talked about, when rates are too low for too long or there's too much leverage in the system, you're going to see some unintended consequences and that's what we worry about in the U.S. and that's why we keep an eye on this.

Shawn Eubanks: Thanks, Brad. We've seen a really sharp rise in mortgage rates year-to-date. Can you talk a little bit about how you think they may be impacting the economy generally here in the U.S.?

Bradley Kane: Sure, yeah, it's no surprise with rates rising that you've seen mortgage rates go up. We've seen a move from on the average 30 year in the twos to now 7% or around 7%. So this definitely has slowed down home purchases right now as buyers are still trying to adjust themselves to, "Can we afford these new payments?" Or, "Do we want to afford these new payments?" So you've seen that slowing. At the same time, sellers have decided if they're not getting the price, they haven't adjusted price dramatically yet. I think that's usually the corollary to a rise in rates is you'll start to see prices come down. At this point, because of the demand for rental properties, a lot of homeowners have said, "You know what? Instead of selling, I'll just rent my property out at these current market levels."

So I think that's had some impact on transactions, but the real thing is what we see is the other things ... buying a house, it's got multiple arms that feed out into the economy. You buy a new house, then you're going to start furnishing it and you're going to upgrade things. So I think that's where you'll start to see slowdowns in durable good purchases, appliances, other things that people buy for houses. That will help slow some of the demand in the economy, some of the inflationary pressure by people not having to do that. At some point I think sellers will begin to adjust price down. At the same time, home buyers will begin to look and at say, "Okay, well these rates aren't changing, they're not coming back down. Maybe we can change what we can afford or pick a different monthly price." But I think in the meantime, it's a natural vent for getting some of the inflationary pressure out of the economy.

Shawn Eubanks: Thanks, Brad. On a related topic, Carl, it seems to be on everyone's mind about the likelihood of a recession. Curious if you think that's immanent or do you think a soft landing is possible given that's what the Fed is trying to engineer?

Carl Kaufman: It's almost 100% certain that we will get a recession at some point. We just don't know when and how deep. Clearly, Brad mentioned housing. One of the things we look at is buyers are pretty creative. I mean, seven one arms are becoming ... or interest-only mortgages are becoming more popular now, so people will find ways to afford housing and new home builders are buying down points, so I don't view that like 2008 where housing was drastically over-invested and over-levered in the system and caused that banking kerfuffle. I don't see that happening again. Labor markets clearly are tight, although they are loosening a little bit. As long as labor remains tight and people are comfortable with their jobs, they will probably continue to spend, which will avoid going into a deep recession.

Deep recessions are typically accompanied with very high unemployment rates and right now, even though the latest JOLTS number was better than expected, I mean worse than expected, depending on your vantage point, labor is still very tight. So as long as unemployment doesn't get out of hand, the economy should be able to adjust to higher rates. Onshoring green energy investment should also keep labor markets strong. We have passed the latest bill, which has funding for that, so right now we're not seeing many signs of distress in our market. Clearly over-leveraged companies could and probably will get into trouble, but they should not be a contagion for the rest of the market, that were pretty savvy and refinanced at low coupons and longer maturities when the going was good. As most of you know, we look at the part of the market maturing in three years and is in a very low point. It's about 18% of the market right now. So that will not be a trigger for a big default cycle.

Shawn Eubanks: Thanks, Carl. That's a great segue way into my next question. Craig, can you talk about what's been happening in the private equity markets? I know sponsor backed deals or well known for being highly levered.

Craig Manchuck: Yeah, as you can imagine, the word leverage keeps coming up over and over and over again in our conversations here and from many different angles. When rates rise as rapidly as they have, any leverage strategy is really in the crosshairs. Whether it's convertible arbitrage where they use leverage to boost their returns or private equity where they rely on leverage and the leverage provided to them by the high yield and leverage loan markets, they've had a 15, 20-year tailwind and have provided really strong returns for people over that period of time where the high yield and leverage loan markets developed, interest rates have come down, the cost of the leverage that they've been putting on their companies has gotten cheaper and cheaper. The structures that they've been offering bond holders have gotten weaker and weaker and so the pendulum has swung in favor of them for a long, long time.

But we feel pretty strongly and have for a long time that lending to those companies is not a good idea for us because the incentives are misaligned with what it is that we want. I think where we are right now, it's a pretty perilous time for the returns in private equity. As we're going to start to see, they're either going to mark their books down, they're going to have to own some of these companies for longer periods of time. The ease of exiting is going to become much more difficult. They're not going to be able to get companies out very quickly and at high valuations into the public markets. They're not going to be able to rip dividends out particularly easily. So there are a lot of things getting in the way of private equity returns going forward. Our market right now is starting to really push back on the debt of some of these companies as they're coming out.

We saw a very large leverage buyout for Citrix Systems, one of the biggest that came to market two or three weeks ago. That deal, about $9 billion in debt, I think it was, ended up costing the investment banks somewhere in the area of $600 to $700 million. That's the losses that they took because they had to write that debt down, the loans down about nine points and the bonds down 17 points in order to get them sold out into the market. The investors are demanding much higher yields right now on private equity transactions because they're highly levered and they use questionable EBITDA adjustments often. That's part of the reason why we've just avoided them now. People eventually will catch on to the fact, and I think those companies are at greater risk than the average in our market to run into trouble and perhaps be forced to file bankruptcy a year or two down the road.

Shawn Eubanks: Thanks, Craig, I'd like to stick with you for the next question. How have all these economic headwinds impacted the new issue market for high yield and what are the team's expectations for the remainder of this year?

Craig Manchuck: Well, new issue volume's down tremendously year-to-date. Just a couple data points. As of September 30th ... Sorry. No, this is as of just yesterday, there's been $98 billion of new issue in high yield. For 2021, the full year was $516 billion. In 2020 was $441 billion. Again, of course most of that was in the last seven months. So you think about an 18 month or a 19 month period where there was about a trillion dollars of high yield debt issued between the end of '20 and all of '21, and here we are now at less than a 10th of that. So things have really slowed down. Most of what's coming, as I mentioned the Citrix deal, but we have a company called Bright Speed that Apollo tried to bring to market. They were purchasing assets from Lumen. That deal failed. There's a Tenneco bridge that's five and a half billion dollars that's funded by the banks out there that's going to have to come to market. Nielsen as well.

So most of what we're going to see, not all, but most are going to be LBO transactions because many of the companies in the market were able to finance themselves quite attractively over the last year and a half. What that also does is it sets the general health of the market up, I think, to be in a better spot than we've had in quite a while. Maturities are longer, coupons are relatively low, and it does create an opportunity for some of these companies to be able to come back in and hopefully, at our behest, buy back some of their debt at significant discounts to where they issued. So should they run into problems, I think that option will be available to them. I think that's about it.

Shawn Eubanks: Okay, thank you, Craig. Let's focus in on the fund now, if you don't mind, and we'll quickly show some performance, which has been good on a relative basis. As we move through that slide, Brad, can you talk a little bit about how the fund is positioned right now? Earlier Carl mentioned that you're starting to see some good bargains and how's that affecting your approach going forward into year end?

Bradley Kane: Yeah, thanks. You can see here, I mean this is current stats as of September 30th. I would say we've been selectively adding as we're starting to finally see levels get to yields that make some really nice returns for the next few years. But overall, it's still a relatively defensive posture. I mean, we still have a fair amount of dry powder in cash and short one-month commercial paper. We are not jumping in with both feet at the moment. I think we're still waiting. The Fed still has probably one or two more raises this year and need to change, I guess, their comments about outlook. But the rate increases so far and the kind of volatility in the market thanks to things like the UK, that has definitely caused some prices to move.

Where we see very attractive yields on names we really like or names that we own and we can buy even cheaper, we are selectively adding, but we're not getting aggressive. I do think we will at some point get that very exciting market, as Carl mentioned, where we can jump in with both feet. Right now, I would also mention that the portfolio average price is in the mid-80s, so that gives us ... it has that shorter duration names from the mid-80s pull back to par by maturity. We should see along with the income, some nice total return gains over the next few years. As we see more of that, we're going to keep adding it, but at the moment, I still want to leave a little more dry powder out there.

Shawn Eubanks: Thanks, Brad. That's really interesting. Appreciate it. Craig, one thing we haven't discussed yet is impact of spreads versus interest rates on the portfolio and the high yield market in general. Have the losses in the market been more based on higher rates or have they been more based on spreads widening in the high yield market? Can you comment on where spreads are now and we'll display some portfolio statistics for everyone as we go through this.

Craig Manchuck: Yeah, we've had a combination of spread widening and rate moves to push everything wider from here, but while we certainly watch spreads and pay attention to them, we like to look at absolute returns and absolute yield levels to find attractive entry points. If you think about where we are today, and I think the high yield index right now is yielding about nine and a quarter percent, double Bs are about seven and a half, single Bs, call it high nines. If you compare that to historical returns of the S&P, as of 9/30, the 15-year S&P return is 8% annualized, the 20-year's at 9.84. So the high yield market compares, I think, very favorably right now and certainly on a risk adjusted basis to where long term S&P type returns are. We find that we're getting very, very close, if not really in the midst of what is a very historically attractive time to enter the markets.

Now, having said that, we are very cognizant of and wary of a potential recession, which may cause the return profile to be pushed out in times, maybe a slightly little longer than normal. But given the absolute level of rates that we're moving towards, we've been kicking around the concept and the idea of when we ought to be looking at stepping in and buying Treasuries again or buying IG. So we continue to be focused on upgrading the portfolio, trying to immunize ourselves from the names that will be most impacted by a recession, because even if we don't get all the way in, there's certainly going to be some slowdown that we're going to be faced with and that result may end up being us buying Treasuries for the first time in a dozen years or so. So stay tuned.

Shawn Eubanks: Thanks Craig. Carl, before we open up the floor to the Q&A, do you have anything you'd like to add?

Carl Kaufman: Sure. For those of you who have known us for many years, we know we try to keep things simple and rely on, I guess, a more appropriately called "uncommon sense." Right now, it's a tough market. The best strategy is to invest in companies that we know well and are profitable and are responsible stewards of capital. In times like these, it's particularly important that our incentives are aligned with that of our borrowers, as Craig touched upon, why we really shy away from private equity type deals, along with being defensive until we get a clearer picture of where the economy and various crosscurrents are taking us before we get aggressive. We're happy to stick with a very solid portfolio with enough liquidity to add to things when they ... I think we like to say when you're getting that feeling in your stomach like you're not going to be well, that's generally the time to buy and we're starting to get that feeling. So stay tuned as Craig says.

Shawn Eubanks: Okay. Well, we'll now begin the Q&A Our first audience question was sent in before today's call. The Ukraine continues to drag on and Putin has been doing more nuclear saber-rattling recently. How do you see this impacting the markets, Carl?

Carl Kaufman: Well, so far I think the markets, like they have in the past with North Korea, although this is a superpower, have kind of taken it in stride because there's not much we can do about it until something happens, until something changes. It's clearly a worry, but it's hard to discount that worry at this point. I mean, he's talking about limited nuclear weapons, which would certainly wreak havoc in the area, but also the winds tend to blow west to east so that radioactive plume would basically blow over Russia. I'm not saying it'd be a rational move because he has certainly proven himself to be a bit irrational, but it's a worry, but it's not front and center at this point and we just hope that saner minds prevail.

Shawn Eubanks: Thanks, Carl. Have a question here. Carl, could you take a minute and describe how high you see spreads heading over the next 12 to 18 months?

Carl Kaufman: Sure. As Craig mentioned, we try not to get hung up on spread so much is absolute yields. They're the bond equivalent of P/Es. As you know, focusing on a single factor can be suboptimal. Example is buying a cyclical at low P/Es is a guaranteed money loser because you're buying them at the top of the cycle. We think yields are getting into buy territory as they get near double digits, but still feel there may be more market convulsions following the next hike in the midterms going into yearend. In terms of how high they can go, I mean, they're about 500, give or take a little bit now, which is a little bit below the long-term average and it's widened a little bit from where it was at the sort of trough in spreads, which was 300.

Do they get to a thousand? Do they get the 700? Do they get there by Treasuries rallying? Do they get there by yields rising on high yield? We don't know. It really depends on how that transpires. If it turns out that we're not going into a deep recession and Treasuries rally, spreads will widen, but yields could also fall in that process just as they have ... not really blown out, but yields have risen because the underlying benchmark, i.e., Treasuries that spreads are measured against, the yields have risen there. So that's why we've had weakness that has been partly interest rate related and partly spread related. We'll just have to wait and see. But as I say, we just don't know, but I will buy based on absolute returns and yields rather than just spreads, if that makes sense.

Shawn Eubanks: Okay, thank you, Carl.

As a non-benchmark driven fund, I would say one of the key benefits has been the ability to take advantage of maybe bonds that are too small to be in the benchmark, to be in the ETFs, and in some cases those smaller issues can dislocate relative to other market holdings. Do you have any thoughts on whether that's happened this year or how you see that evolving over time?

Carl Kaufman: It's a good question. Certainly there are a number of non-benchmark issues that have dislocated. You don't need a lot of sellers to really bring the price down. But there have also been a lot of benchmark issues where people rush to raise money and get liquidity that have gotten absolutely ... not decimated, but certainly hurt badly because being benchmark issues, they came with much lower coupons because people have to buy them. So yeah, we are seeing most of the opportunities now are in the ... less slightly smaller issue sizes, but in good companies that are responsible about issuing debt and have not taken the past ... some companies will issue more debt than they need at the advice of their bankers because it would then get them into the benchmark category, which all the index guys need to buy. Makes the banker's job a lot easier in selling the deal. But some say, "No, I don't care. I only need this much debt." We tend to focus on those.

Shawn Eubanks: I guess this question is about defaults. Have there been any defaults in the fund year-to-date, and what's your outlook for defaults in general?

Carl Kaufman: There have been no defaults in the fund year-to-date. Our view on defaults is that it will probably remain fairly low. As I mentioned, there are very few bonds maturing, so there's fewer triggers. The interest burdens on the issuers is a lot lower than it's been and business remains pretty solid for the most part. I mean, they're taking price increases, so their revenues have not taken a big hit. Their margins have been, for the most part, maintained. I don't know how much longer this lasts, but the lag between economic slowdown and the default is such that I just don't see a meaningful rise in defaults for the next year or two, with the exception of perhaps private equity sponsored, highly leveraged companies.

Craig Manchuck: That may be, but the one other thing too, something that we haven't seen in the private equity playbook that I think could come in here as well is if there is a company out there that is kind of stumbling along or having a problem, you could see some private equity guys come in and provide some equity support in certain situations where they can buy control of companies that way in order to escape a competitive market. So many of the private equity targets out there are well known targets, you've got dozens of guys competing for them and that's why I think prices end up getting pushed up and it becomes financing dependent. But in a situation where they can buy a company that's maybe having a little bit of trouble and cure the problem simply by putting in a check and reducing some of the pressure from it being over-levered, I think we could see a few of those things start to happen.

So the markets are different. Game's different, people are going to take different tactics and strategies that they're going to apply as to how they get their money invested. I think we'll start to see some of that, because there is a lot of cash out there, whether it's private credit or private debt, and they're looking for good companies. So if you find a good company with a bad balance sheet and you can fix it with a check and put yourself in a really nice position from an equity standpoint, I think we'll start to see some of those things happen.

Bradley Kane: I would just add two other quick things. One is I think Carl's right, in the high yield market, I think the interest rate increases you're not going to see as impactful because most of that debt is termed out. In the loan market, though, where there's a lot less overlap with the bond market than there used to be, they've been seeing interest rates increases really hurting the revolvers and the term loans because those are all floating rate securities. I think that's where you'll see the impact more than in the high yield market. The other thing, and we've talked about this in the past, the one thing to note though is when companies do default, their debt is typically already trading at those levels. You've already seen those pricing decreases.

It's not like they're going to go from par to 40 or 50 cents on the dollar overnight. A lot of those names, when they do get to default, they're already reflected in market. I think it'll have less of an impact on the default rate until you start to see a big increase in defaults if you did. That would be only, I think, after we see either rates continue to rise a lot further or we get into more of an economic recession. I think that's a little ways off.

Shawn Eubanks: Carl, a lot of our clients have typically used the Strategic Income Fund as a non-correlated kind of alpha oriented fund around maybe their core Agg exposure. Can you talk a little bit about Strategic Income's positioning and return outlook relative to say the BC Agg-oriented type investment?

Carl Kaufman: Sure. We clearly have less interest rate exposure. We have a much shorter duration than the Agg, which the duration on the Agg is about 6.2. Ours is about 2.9. In terms of years to maturity, ours is 3.7, theirs is, I think, 8.5. In terms of yield, their yield has risen to about four and three quarters. Ours is about 9.7 on the fixed income part, 8.7 on the total fund. That's yield to maturity. The average weighted prices are surprisingly about the same, mid 80s. So that's our profile versus the Agg. I think you're going to need a deep recession for the Treasury part of the Agg to recover. The corporate part of the Agg will see wider spread. Their spreads have remained fairly tight on the investment grade corporates and I think you need to see that widen first.

Ours already have a little bit and our yields are high enough to support that. I don't think corporates are at this point, so that's something to take into consideration. We're not at the point where we'd want to buy Treasuries yet. you want to buy those when rates have definitely peaked. Recession is very real and the Fed has started to cut. Before those happen, there's no reason to try to guess when to buy Treasuries.

Shawn Eubanks: Thank you, Carl. While we're at it, a number of other clients have used the fund as kind of a risk averse, high yield alternative with somewhat lower volatility, lower downside capture. Maybe you can just talk about the fund's positioning relative to more just the high yield market in general and we'll leave it with that.

Carl Kaufman: Sure. I mean, our positioning right now is, as you know, we've been buying commercial paper, which most high yield funds don't do. We also have a residual position in convertibles. We added one busted convertible recently. We're looking more there, generally shorter dated yields that are competitive to high yield on the short end. We're overweight slightly in single Bs, we're grossly underweight double Bs because of their interest rate sensitivity, and we are actually grossly underweight triple Cs, and what makes up for those two under weightings is the cash in short term paper.

So yeah, we don't look like your typical high yield fund and the way we manage risk is that we manage the duration of the fund. We have the flexibility to do that, whereas most credit funds sort of follow the bench.

Shawn Eubanks: Okay. Well thanks, everyone, for joining us today. Carl, do you have any kind of closing comments or anyone else from the team?

Carl Kaufman: I'd say get ready for the fat pitch. It's going to come at some point. I think it's sooner rather than later at this point. I think the next few years should be pretty good, as they usually are. Keep in mind, I don't know if it'll happen again this year, but in every year following a midterm election, 12 months out, the market is typically higher. This could be the one exception, but who knows? Just throwing it out there.

Shawn Eubanks: Thank you, everyone.

Bradley Kane: Thank you.

Carl Kaufman: Thank you.

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 (Agg) is an unmanaged index that 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.

Source for any Bloomberg index is Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg owns all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

The S&P 500 Index is an unmanaged index that is widely regarded as the standard for measuring large-cap U.S. stock market performance.

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.

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

A yield curve is a graph that plots bond yields vs. maturities, at a set point in time, assuming the bonds have equal credit quality. In the U.S., the yield curve generally refers to that of Treasuries.

Gilts are bonds that are issued by the British government and generally considered low-risk equivalent to U.S. Treasury securities.

The job openings and labor turnover survey (JOLTS) is a monthly report by the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor counting job vacancies and separations, including the number of workers voluntarily quitting employment.

A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as “blank check companies,” SPACs have been around for decades.

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization.

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

Investment grade (IG) bonds are those with high and medium credit quality as determined by ratings agencies.

Price-to-Earnings (P/E) Ratio is the ratio of a company’s stock price to its twelve months’ earnings per share.

Alpha is a measure of the difference between the portfolio’s actual return versus its expected performance, given its level of risk as measured by Beta. It is a measure of the historical movement of a portfolio’s performance not explained by movements of the market. It is also referred to as a portfolio’s non-systematic return.

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

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

Par is the face value, or value at which a bond will be redeemed at maturity.

Par weighted average price is computed by weighting the price of each bond by its relative position size (face value) in the portfolio.

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

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%.

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.

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-20221011-0629]