Flexible Income Fund

(As of 9/30/19) — The U.S. stock market continued to advance in the 3rd quarter, as expectations for accommodative monetary policy appeared to outweigh concerns of slowing economic growth. The S&P 500 Index returned 1.70% in the period, bringing the year-to-date return to 20.55% through quarter-end. Weak economic data led the Federal Reserve to cut interest rates twice in the quarter, driving rates lower and bond prices higher. U.S. markets outperformed international markets on the strength of the U.S. dollar.

The Russell 3000 Index gained 1.16% in the quarter. Value narrowly outperformed growth, with the Russell 3000 Value Index up 1.23% and the Russell 3000 Growth Index advancing 1.10%. Large caps generally outperformed small caps in the quarter. The Russell 1000 Index returned 1.42%, the Russell Midcap Index returned 0.48%, and the Russell 2000 Index posted a loss of 2.40%. Defensive sectors led the way in the period, with Utilities up 9.34%, Real Estate up 7.69%, and Consumer Staples up 6.12%. Energy was the worst performing sector with a total return of -6.61%. Health Care was also weak, returning -2.25% on increasing political concerns.

(As of 9/30/19) — The Buffalo Flexible Income Fund produced a return of 1.11% for the quarter, which underperformed the Morningstar Moderately Aggressive Target Risk Index return of 6.05%. The Fund’s peer group index, the Lipper Mixed-Asset Allocation Moderate Funds Index, produced a return of 0.99% for the quarter.

EQUITIES PERFORMANCE

The equity portion of the portfolio returned 1.27%, which trailed the Morningstar Moderately Aggressive Target Risk Index. The relative underperformance was primarily driven by the Energy sector. The underperformance within Energy was primarily due to the sector allocation impact as the Fund was overweight the worst performing sector of the Index. Energy companies have underperformed the broader market due to several reasons including, secular growth fears around fossil fuels, market share losses to renewables, the ability of shale drillers to generate sufficient cash flow to service debt at current price levels, as well as investor acceptance of ESG (environmental, social and governance) standards, which typically avoid investment in fossil fuel securities.

Specific investments that negatively-impacted Fund performance included Pfizer, Schlumberger, and Lions Gate Entertainment. Pfizer shares declined due to the dilutive spin-off of its Upjohn unit (merging with Mylan) as investors re-rated Pfizer based on its new pro-forma margin structure, which will be lower going forward due to the spin off. Meanwhile Schlumberger has been negatively-impacted by the weak macro environment for exploration and production (E&P) which has resulted in declines in drilling activity and eroded fracking pricing. Finally, shares of Lions Gate Entertainment dropped when the company lowered its earnings growth rate from low-to-mid-teens to mid-to-high-single digits. The top three contributors to the Fund’s performance during the quarter were Proctor & Gamble, HollyFrontier, and AT&T.

FIXED INCOME PERFORMANCE

The fixed income portion of the portfolio represented roughly 5% of fund assets during the period. The best performers within the fixed income portion were the Medicines Corp 2.5% convertible bonds and the Everi Payments 7.5% senior notes. The Medicines converts benefited from positive clinical trial data for its cholesterol drug, inclisirin, while Everi Payments benefited from positive underlying fundamentals and news that the company was exploring strategic alternatives including a possible sale.

(As of 9/30/19) — Over the first three quarters of the year, the stock market has been primarily driven by expansion in market valuation metrics, as earnings have been relatively flat. Aiding the valuation expansion has been the Federal Reserve’s (the “Fed”) dovish pivot on monetary policy, indicating that future interest rate action will be down. The Fed has become concerned with inflation running below their targeted levels and slowing economic growth. Vagaries regarding trade policy (tariffs and trade agreements), evolving geopolitical risks, and the divided Congress further limit their forecasting abilities. A key driver for further stock market advancement is likely to be impacted by trade and tariff news and how aggressive the Fed cuts rates and how many cuts they ultimately decide to make. As always, we appreciate your confidence in our investment capabilities over the long term.