Science & Technology Fund

Manager Commentary as of 06/30/10

Buffalo Science and Technology Fund was down 10.10% in the second calendar quarter of 2010 and down 2.29% for the year to date.  The NYSE Arca Technology 100 outperformed the fund in the second quarter, by posting a loss of 8.40%, while the fund outperformed the index's year-to-date performance of -3.08%.

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.

Our underperformance versus the benchmark for the quarter was split between asset allocation and stock selection, outperforming the index in consumer discretionary, industrials, and telecommunication services, while underperforming in health care and information technology sectors.  Top contributors in the quarter were Akamai Technologies (AKAM), as strong demand for digital downloads during the quarter resulted in analysts revising their estimates upward, and Pharmaceutical Product Development Inc. (PPDI) reporting strong bookings to backlog during the first quarter.  Detractors during the quarter included Ebay (EBAY), reflecting currency headwinds and a slower than expected transition to the new pricing structure rolled out in early April in the US, and Align Technologies (ALGN), being negatively impacted by perceived competitive threat to their market-leading clear aligner technology during the quarter.  Year to date, energy technologies and telecommunication services significantly outperformed the index led by the performance of AKAM and Smith International (SII), which was acquired by Schlumberger Ltd (SLB).
 
During the quarter, the fund held 61 securities, which is unchanged from the prior quarter. Our bottom-up stock selection drives portfolio construction and sector allocations. The fund ended the quarter with 59 percent invested in information technology, 29 percent in health care, 10 percent in industrial technology, and two percent cash, essentially unchanged from the previous quarter.  During the quarter, we reallocated capital from the cyclical areas that have performed in line with expectations and transitioned the capital into areas that have lagged the market.
 
The market recovery that started last year in March reversed this April as concerns over the sustainability of worldwide economic recovery is questioned.  Europe, a geographic region most investors never anticipated providing a significant contribution to world GDP growth, began to deteriorate to a point that the viability of sovereign debt issues (Portugal, Italy, Ireland, Greece, and Spain) was a concern.  The continued weak employment numbers in the United States further suggested that the labor markets and economy recovery have decelerated.  Our concern has been that a strengthening global economic recovery depends on the transition to a self-sustaining economic expansion.  During the second half of 2010, growth comparisons will get more challenging as we move beyond the comparison to last year's depressed levels and as current demand patterns reach a more normal level.

We focus on investing in companies exhibiting secular growth regardless of economic conditions, and feel very comfortable with how the fund is positioned in companies that should demonstrate relatively good earnings growth.  In addition to focusing on secular growth companies, the fund's investments have strong balance sheets and operate in markets that have a high barrier of entry, thus making them attractive acquisition targets in what may be the beginning of a substantial rise in the merger and acquisition cycle.                                     

Our trend-based investment approach is geared toward identifying sustainable growth trends such as products and services leveraged to better and more cost-effective health outcomes or new technologies that drive productivity and efficiency. We seek well-managed and well-capitalized companies leveraged to these sustainable and common sense growth trends and, more importantly, growth opportunities that are independent of broad economic recovery. Our fundamental analysis emphasizes large market opportunities, sustainable competitive advantage and profitable growth. We believe our disciplined valuation process helps us avoid overpaying for growth.

We find it encouraging that market valuation levels are modest relative to history and that corporate earnings have improved. While challenges remain, namely sluggish employment, high government debt levels, and rising interest rates, well-managed companies that are exposed to secular growth trends are now poised to exhibit superior relative earnings growth with the resumption of more normal demand trends. Many of our holdings are also beneficiaries of improving global economies and an emerging middle class where low penetration rates leave ample headroom as discretionary incomes rise. In summary, we think there is still opportunity to discover profitable growth and invest in high-quality growth companies at good prices.

The Buffalo Science and Technology Fund applies a broad definition of technology when constructing our universe of available companies. We define technology as the application of knowledge to solve problems, increase productivity and improve the quality of life. Our emphasis on secular growth, good value and diversity across the innovation-based industries provides stability in uncertain economic periods and provides a universe of broad market opportunities that do not go away in a poor economy. Instead, the market opportunities are bounded only by the challenges and inefficiencies of today's world and the imagination and ingenuity of the world's innovators.

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"We find it encouraging that market valuation levels are modest relative to history and that corporate earnings have improved. While challenges remain, namely sluggish employment, high government debt levels, and rising interest rates, well-managed companies that are exposed to secular growth trends are now poised to exhibit superior relative earnings growth with the resumption of more normal demand trends."