Large Cap Fund

Manager Commentary as of 06/30/10

The equity markets declined in the second quarter of 2010 with the Russell 1000 Growth Index down 11.75% while the Buffalo Large Cap Fund fell 14.46% in the same period. Calendar year to date the Russell 1000 Growth Index fell 7.65% while the Buffalo Large Cap Fund declined 9.29%.

Data represented reflects past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original value. Current performance may be lower or higher than the performance quoted. Performance current to the most recent quarter end may be obtained by clicking here. Performance current to the most recent month end may be obtained by clicking here.

The headlines were riddled with negative news including European sovereign debt issues, the viability of the euro, the Gulf of Mexico oil spill, unimpressive U.S. job growth, financial regulatory reform and the tapering off of housing stimulus (tax credit) as well as unemployment benefits. Collectively these concerns weighed on growth expectations. We continue to expect modest growth in the second half of 2010 and 2011. The Buffalo Large Cap Fund holds secular growth companies that should thrive in that environment.

Our underperformance versus the Russell 1000 Growth Index in the quarter was primarily due to stock selection. This negative selection effect was concentrated in the consumer discretionary, industrial and material sectors, offset by solid stock selection in the information technology sector. As an investment firm that prides itself on superior stock selection, we are not satisfied with our performance in the quarter. Nevertheless, we strive for low turnover and long-term appreciation, sometimes at the expense of short-term performance. This strategy impacted our quarterly returns. Yet, we remain confident that over the intermediate to long term, our discipline should deliver outperformance.

Our top contributing stocks in the period were NetApp, Whole Foods, and General Mills. NetApp's storage solutions, which are accessed remotely and stored centrally, are gaining traction with customers because they are more efficient storage solutions. Whole Foods, appreciated on the news of improving and positive same store sales growth. General Mills' stock benefitted from solid volume growth and pricing in the U.S., as its products took share from other brands, as well as private label. As the more economically sensitive names pulled back in the quarter, we exited Whole Foods and significantly trimmed the position in General Mills.

Our top detractors in the quarter were eBay and Monsanto. eBay, a consumer discretionary name, has exposure to the euro; as the euro depreciated relative to the U.S. dollar, the stock underperformed. Over the past six months, we built a position in Monsanto, a component of the material sector. Monsanto is the technology leader in seed breeding and biotechnology. While we may have been early in initiating the position, the company's superior technology should translate into solid top- and bottom-line growth beyond 2010.

In addition to Whole Foods, we also exited Microsoft in the quarter. Microsoft's business is primarily based on distributed software while the market is increasingly moving toward networked applications. This migration could create significant headwinds for Microsoft over the next decade.

The fund exited the quarter with 35 holdings down from 37 at the end of the first quarter of calendar year 2010. We took the market's pull-back as an opportunity to concentrate the fund based on valuation and long term growth prospects. The fund focuses on companies with strong balance sheets that will generate free cash flow, even in a sluggish economic environment. We continue to invest in industries that we expect to grow faster than Gross Domestic Product over the long term and are consistent with the long-term trends we have identified. We believe that the valuations of the companies in our portfolio are attractive relative to their historical valuation ranges as evidenced by free cash flow yields that are higher than U.S. government bond yields.

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"We continue to expect modest growth in the second half of 2010 and 2011. The Buffalo Large Cap Fund holds secular growth companies that should thrive in that environment."