Flexible Income Fund
August 12, 1994
Total Fund Assets
$750.67 Million (9/30/17)
BofA ML Combined Index
Overall Morningstar™ rating out of 317 Allocation–70% to 85% Equity funds as of 11/30/17 (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 317 funds in the Allocation–-70% to 85% Equity category, as of 11/30/17.
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 11/30/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo Flexible Income Fund||6.69||9.96||13.77||5.35||7.53||6.14||8.22||7.33|
| BofA ML Combined Index|
S&P 500 Index (60%)
BofA ML HY Master II Index (40%)
|Lipper Mixed-Asset Target Allocation Moderate Funds Index||3.65||12.43||13.64||5.67||7.95||5.00||6.61||7.08|
|Morningstar Allocation--70% to 85% Equity||5.00||14.60||16.20||5.87||9.54||5.23||7.47||7.26|
|As of 9/30/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception
|Buffalo Flexible Income Fund||5.57||7.31||11.96||4.55||6.92||5.69||9.07||7.27|
| BofA ML Combined Index|
S&P 500 Index (60%)
BofA ML HY Master II Index (40%)
|Lipper Mixed-Asset Target Allocation Moderate Funds Index||3.06||9.89||10.65||5.72||7.53||4.71||6.95||7.02|
|Morningstar Allocation--70% to 85% Equity||3.63||11.23||12.84||6.01||8.87||4.69||7.81||7.17|
|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||55|
|# of Fixed Holdings||18|
|Median Market Cap||$61.93 B|
|Weighted Average Market Cap||$139.45 B|
|3-Yr Annualized Turnover Ratio||9.01%|
|Average Duration||1.98 years|
|Average Maturity||4.01 years|
|30-day SEC Yield||4.09%|
|Holding||Ticker||Sector||% of Portfolio|
|Lions Gate Entmt Cv (1.25% 4/15/2018)||-||-||4.17%|
|Procter & Gamble||PG||Consumer Staples||3.26%|
|Bankrate Inc Del 144A (6.125% 8/15/2018)||-||-||2.91%|
|GlaxoSmithKline PLC ADR||GSK||Health Care||2.72%|
|TOP 10 HOLDINGS TOTAL||29.51%|
As of 6/30/17. 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 winning streak in the 3rd quarter of 2017 with the S&P 500 Index posting its 8th consecutive quarterly gain. Investors have been encouraged by the synchronized upswing in global economic growth. For the first time since 2007, all 45 countries tracked by the Organization for Economic Cooperation and Development (OECD) are on pace to grow this year, with the growth rates expected to accelerate in 33 of those countries. This economic backdrop, in conjunction with strong corporate earnings and a renewed focus on tax reform, helped the reflation trade regain momentum in the quarter.
The reflation trade, also known as the “Trump trade” pushed shares of banks, industrials, and smaller companies higher, while expectations of another interest rate increase by the Federal Reserve drove relative weakness in Treasury bonds and their stock market proxies, such as utility companies. The U.S. dollar also strengthened during the period against most major foreign currencies. Furthermore, strong demand and slowing production of oil in the U.S. drove West Texas Intermediate crude prices up 12.2% in the period.
The Russell 3000 Index, a broad market performance benchmark, produced a total return of 4.57% during the quarter. Growth stocks outperformed value stocks, as the Russell 3000 Growth Index advanced 5.93% compared to a gain of 3.27% for the Russell 3000 Value Index. Shares of smaller-capitalized companies generally outperformed larger companies during the quarter. The Russell Microcap Index and the smaller-cap Russell 2000 Index climbed 6.65% and 5.67% respectively during the period, while the Russell Midcap Index advanced by 3.47%, and the larger-cap Russell 1000 Index increased by 4.48%. Technology and energy were the best performing sectors, while consumer staples and consumer discretionary sectors lagged.
The Buffalo Flexible Income Fund produced a return 5.57% for the quarter and outperformed the S&P 500 Index return of 4.48% and the Bank of America Merrill Lynch High Yield Master II Index return of 2.04%. The fund’s peer group index, the Lipper Mixed Asset Allocation Moderate Funds Index, produced a return of 3.06% for the quarter.
The equity portion of the portfolio outperformed the S&P 500 Index with a total return of 6.54% for the quarter. The relative outperformance was primarily driven by the energy and consumer discretionary sectors. The outperformance within energy was driven by sector allocation as the fund was significantly overweight a sector that outperformed the benchmark. Security selection was also constructive, and specific energy securities that provided positive relative performance included HollyFrontier, Royal Dutch Shell, and ConocoPhillips. Generally, all three companies benefited from a rebound in crude oil prices during the quarter, which rose into the $50 range at the end of the period from the low-mid $40 area at the beginning of the quarter. HollyFrontier also benefited from improved refining margins.
The relative outperformance within consumer discretionary was due to security selection. Lions Gate Entertainment advanced approximately 20% in the quarter on a positive earnings report. Other characteristics propelling the company’s shares included its discounted valuation, appealing free cash flow generation potential, and its position in the media value chain (content manufacturer).
The top three contributors to the fund’s performance during the quarter were Boeing, HollyFrontier, and Lions Gate Entertainment while the top three detractors were General Electric, GlaxoSmithKline, and Pitney Bowes.
The fixed income portion of the fund generated a return of 2.84% and outperformed the Bank of America Merrill Lynch High Yield Master II Index return of 2.04%. Relative outperformance was led by the consumer discretionary and health care sectors. Within the consumer discretionary sector the primary driver of outperformance was the portfolio’s Lions Gate Entertainment convertible bond investment which advanced on positive news from the company as discussed above. The health care segment outperformance was driven by both sector allocation and security selection. Valeant Pharmaceuticals, which refinanced some of their capital structure during the quarter and consequently some of the unsecured notes, rallied in price.
The top individual contributors to the fund’s fixed income performance included Lions Gate Entertainment 1.25% convertible notes, Valeant 6.375% senior notes, and BankRate’s 6.125% senior notes. The largest relative detractors to the fixed income return were Nuance Communications 1.5% convertible bonds, Consolidated Communications 6.5% senior notes, and Medicines Company 2.50% convertible notes.
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 are 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 317 for the three-year, 2 star among 277 for the five-year, and 5 stars among 199 Allocation--70% to 85% Equity funds for the ten-year period ending 11/30/17.
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.