Flexible Income Fund
(As of 6/30/17)
August 12, 1994
Total Fund Assets
BofA ML Combined Index
Overall Morningstar™ rating out of 328 Allocation–70% to 85% Equity funds as of 8/31/17 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure).
The Morningstar Style Box™ reveals a fund’s investment strategy by showing its investment style and market capitalization based on the fund’s portfolio holdings.
RISK VS CATEGORY
The Morningstar™ Risk vs Category rating is an assessment of the variations in a fund’s monthly returns, with an emphasis on downside variations, in comparison to the 328 funds in the Allocation–-70% to 85% Equity category, as of 8/31/17.
The investment objective of the Buffalo Flexible Income Fund is primarily the generation of high current income and, as a secondary objective, the long-term growth of capital.
To pursue its investment objectives, the Flexible Income Fund invests in both debt and equity securities.
Our investment strategy seeks to generate yield for any investor needing monthly income with capital appreciation, and we use many methods to address potential downside risks.
~ John Kornitzer, Portfolio Manager
With respect to debt securities, the Fund managers perform extensive fundamental investment research to identify investment opportunities for the Flexible Income Fund. When evaluating investments and the credit quality of rated and unrated securities, the Fund managers look at a number of past, present and estimated future factors, including financial strength of the issuer, cash flow, management, borrowing requirements, sensitivity to changes in interest rates and business conditions, relative value. The Flexible Income Fund relies on the Fund manager to undertake a careful analysis to determine the creditworthiness of the issuers of rated debt (on debt ratings by Moody’s Investors Service, Inc., (“Moody’s) or S&P Global Ratings, (“S&P”)), as well as the issuers of debt not rated by Moody’s or S&P.
The Fund will not purchase a debt security that is rated less than Caa/CCC by Moody’s or S&P, respectively, and will only purchase an unrated debt security if the Fund managers believe that the security is of at least B quality, subject to a limitation that the Fund may not hold more than 20% of its net assets in debt securities that are rated less than B or that are unrated debt securities of similar quality, based on the Fund managers’ fundamental analysis of the issuer and of rated bonds issued by similar issuers. The Fund has no limitations on principal, interest or reset terms on debt securities held in the Fund.
With respect to equity securities, the Fund managers emphasize dividend-paying stocks that over time have exhibited consistent growth of dividends, but may sell investments to secure gains, limit losses or reinvest
in more promising investment opportunities.
|As of 8/31/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo Flexible Income Fund||1.58||3.06||7.14||2.50||6.38||5.64||8.35||7.11|
| BofA ML Combined Index|
S&P 500 Index (60%)
BofA ML HY Master II Index (40%)
|Lipper Mixed-Asset Target Allocation Moderate Funds Index||2.01||8.48||9.49||4.58||7.64||4.85||6.47||6.99|
|Morningstar Allocation--70% to 85% Equity||2.34||9.13||11.12||4.37||8.92||4.83||7.16||7.11|
|As of 6/30/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo Flexible Income Fund||0.05||1.65||7.07||2.50||6.63||5.44||7.64||7.10|
|S&P 500 Index||0.62||9.34||17.90||9.61||14.63||7.18||8.34||9.61|
|Lipper Mixed-Asset Target Allocation Moderate Funds Index||2.29||6.62||10.76||4.31||7.85||4.58||6.13||6.96|
|Morningstar Allocation--70% to 85% Equity||2.79||7.78||13.44||4.20||9.27||4.37||6.59||7.08|
|Year||Buffalo Flexible Income||S&P 500 Index||Morningstar Allocation-50% to 70% Equity|
Performance data quoted represents past performance; past performance does not guarantee 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 cost. Current performance of the fund may be lower of higher than the performance quoted and can be obtained here. Performance is annualized for periods greater than 1 year. Each Morningstar category average represents a universe of funds with similar objectives.
Growth of $10k
This chart illustrates the performance of a hypothetical $10,000 investment made in the Fund on the Inception Date. Assumes reinvestment of dividends and capital gains. This chart does not imply future performance.
|# of Equity Holdings||61|
|# of Fixed Holdings||22|
|Median Market Cap||$54.39 B|
|Weighted Average Market Cap||$132.02 B|
|3-Yr Annualized Turnover Ratio||16.41%|
|Average Duration||1.60 years|
|Average Maturity||4.23 years|
|30-day SEC Yield||1.38%|
|Holding||Ticker||Sector||% of Portfolio|
|Lions Gate Entmt Cv (1.25% 4/15/2018)||-||-||3.89%|
|Procter & Gamble||PG||Consumer Staples||3.21%|
|Bankrate Inc Del 144A (6.125% 8/15/2018)||-||-||2.78%|
|GlaxoSmithKline PLC ADR||GSK||Health Care||2.64%|
|TOP 10 HOLDINGS TOTAL||29.67%|
As of 3/31/17. Top 10 Holdings for the quarter are not disclosed until 60 days after quarter end. Those listed are for the previous quarter. Fund holdings are subject to change and are not recommendations to buy or sell any securities.
Buffalo publishes this listing of securities held as of the most recent calendar-quarter end, with a 30 or 60 day lag depending on the portfolio. Buffalo may exclude any portion of holdings from publication when deemed in the best interest of the portfolio.
The portfolio data and its presentation here may differ from the complete schedules of investments in regulatory filings due to differing accounting and reporting requirements.
As of 6/30/17. Security weightings are subject to change and are not recommendations to buy or sell any securities.
Sector Allocation may not equal 100% due to rounding.
As of 6/30/17. Allocation percentages may not equal 100% due to rounding.
CAPITAL MARKET OVERVIEW
Equity markets continued their strong start to the year during the second quarter, primarily driven by strong corporate earnings growth. The Russell 3000 Index advanced 3.02% in the second quarter. As reported during the June 30 period, earnings from SP 500 Index companies were up 14% year-over-year in the first quarter, the strongest growth reading since 2011.
Broadly speaking, growth stocks continued their outperformance relative to value stocks, while cyclical stocks that rallied to end 2016 underperformed as investors continue to discount the likelihood of government infrastructure spending and comprehensive tax reform.
The yield on the U.S. 10-year Treasury ended the June 30 period at 2.298%, a decline from its recent high of 2.609% in March due in large part to weaker inflation readings. In contrast, the outlook for growth and interest rate expectations improved in much of the rest of the world, which has driven the trade weighted U.S. dollar down 5.6% year to date. Oil entered bear market territory, with crude prices declining 9% during the quarter in response to stronger than expected inventory levels and rising U.S. production.
As mentioned above investors continued to favor growth over value, and the Russell 3000 Growth Index climbed 4.65% during the period compared to the more modest gain of 1.29% for the Russell 3000 Value Index. By size, microcaps were the best performers with the Russell Microcap Index gaining 3.83%. Meanwhile the large cap Russell 1000 Index gained 3.06%, followed by the Russell Midcap Index at 2.70% and the Russell 2000 Index finishing with a gain of 2.46% during the period.
In general health care was the best performing sector as the chances for legislation to repeal or reform the Affordable Care Act appeared to diminish, and investors reacted by bidding up health care stocks. The technology sector was also a strong performer as the market continued to reward the strong earnings growth produced in this area. Conversely, energy was the worst performing sector driven by the decline in oil prices mentioned above.
The Buffalo Flexible Income Fund produced a return of 0.05% during the period and underperformed the S&P 500 Index return of 3.09% and the Bank of America Merrill Lynch High Yield Master II Index return of 2.14%. The equity portion of the portfolio declined 0.35% during the quarter compared to a gain of 3.09% for the S&P 500 Index.
Areas of the portfolio that led to the underperformance were energy and information technology. The underperformance in energy was primarily driven by sector allocation as the fund was significantly overweight the worst performing sector in the S&P 500 Index during the period. The underperformance in information technology was due to a sector allocation effect and security selection. The technology sector generated substantial positive returns for the index during the quarter and the fund failed to fully participate due to a significant underweight In the area.
As it relates to security selection among tech companies that are in the portfolio, IBM, Cisco, and Intel negatively impacted performance. IBM was negatively impacted by weak first quarter earnings reported during the period which was driven by gross margin pressure, as well as the public disclosure that one of its largest shareholders, Berkshire Hathaway, had reduced its stake in the company by 30%. Cisco was negatively impacted by a disappointing outlook driven by persistent weakness in its service provider business, competitive pressures in emerging markets, and weakness in some of its legacy products. Intel declined due to a weak outlook for its next quarter and softness in some end markets such as federal spending and traditional networking products.
The top contributors to the fund in the quarter were Boeing, Pitney Bowes, and Microsoft, while the top detractors in the quarter were IBM, ConocoPhillips, and General Electric. The equity portion of the portfolio ending the period as just over 80% of total fund assets, near the higher end of the expected range for common stock exposure.
The fixed income portion of the Buffalo Flexible Income Fund generated a return of 1.95% for the quarter which slightly underperformed the Bank of America Merrill Lynch High Yield Master II Index return of 2.14%. The primary reason the fund failed to keep full pace with the index was due to our performance results within information technology. Our technology performance was held back by the convertible bond position in Cornerstone onDemand which declined during the quarter. The company continues to face challenges and reported weaker than expected billings in the first quarter. The top contributors to the fund’s fixed income performance included Valeant, Lions Gate Entertainment, and Bankrate while the three top detractors were Medicines Company, Cornerstone onDemand, and Wildhorse Resource Development.
We believe the market could experience more volatility in the coming quarters as the Federal Reserve continues with its desire to normalize interest rates along with a focus on the likelihood of the Trump administration to enact infrastructure spending, deregulation, and corporate tax reform. Prospective tailwinds for the economy include further job growth, wage increases, lower tax rates, and simply more optimism from both businesses and consumers; all of which could lead to higher Gross Domestic Product (GDP) growth.
On the other hand, possible headwinds include potential strengthening of the U.S. dollar, further increases in interest rates, and stock price valuation metrics that are above historical market averages leading us to believe that the stock market may have a hard time achieving further multiple expansion. Despite the expectation of more volatility, we continue to focus on wide moat, large capitalization companies that are trading at reasonable valuations, in our view.
As always, the fund will continue to focus on competitively advantaged companies that can be purchased at a fair price, in our opinion. As the stock market has continued to climb, it is getting harder to find companies that fit our investment criteria, but we continue follow our process of finding new investment ideas and to be ready when market declines provide better opportunities. Within the fixed income portion of the fund, we continue to focus on higher quality, below investment grade credit securities. With credit yield spreads at cycle lows in our opinion, we are being selective and disciplined with purchases as we do not anticipate much price appreciation within fixed income markets, in general.
The opinions expressed are those of the Portfolio Manager(s) and are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security. Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security. Earnings growth is not representative of the fund’s future performance.
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The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating™ for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating™ metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
The Buffalo Flexible Income Fund received 2 stars among 328 for the three-year, 1 star among 285 for the five-year, and 4 stars among 206 Allocation--70% to 85% Equity funds for the ten-year period ending 8/31/17.
In each Morningstar Category, the 10% of funds with the lowest measured risk are described as Low Risk, the next 22.5% Below Average, the middle 35% Average, the next 22.5% Above Average, and the top 10% High. Morningstar Risk is measured for up to three time periods (three, five, and 10 years). These separate measures are then weighted and averaged to produce an overall measure for the fund. Funds with less than three years of performance history are not rated.
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Bond ratings are grades given to bonds that indicates their credit quality as determined by a private independent rating service such as [Standard & Poor's or Moody’s, etc.]. The firm evaluates a bond issuer's financial strength, or its ability to pay a bond's principal and interest in a timely fashion. Ratings are expressed as letters ranging from 'AAA', which is the highest grade, to 'D', which is the lowest grade. Not Rated category includes holdings that are not rated by any rating agencies.