Flexible Income Fund

(As of 9/30/18) — U.S. economic strength and solid corporate earnings growth drove healthy equity returns in the 3rd quarter. The widely-followed S&P 500 Index had a total return of 7.71%, its best quarterly gain since 2013. In September, initial jobless claims fell to the lowest level since 1969, wages grew at the fastest rate since 2009, consumer confidence reached the highest level since 2000, and the National Federation of Independent Business (NFIB) survey of small business optimism was at an all-time high (the survey dates back to 1974). Against this strong economic backdrop, the Federal Reserve raised the targeted federal funds rate by another 25 basis points to a range of 2.00% to 2.25%. Slowly rising interest rates led to flat bond returns.

The divergence between domestic and international equity market performance continued during the quarter, with the MSCI EAFE Index advancing just 1.35%. The Russell 3000 Index gained 7.12% in the 3rd quarter. By style, growth continued to outperform value, with the Russell 3000 Growth Index increasing 8.88% compared to the Russell 3000 Value Index’s advance of 5.39%. Large caps did better than small caps as the Russell 1000 Index returned 7.42%, the Russell Midcap Index returned 5.00%, and the Russell 2000 Index returned 3.58% in the quarter. Every economic sector was positive this quarter, with Health Care and Industrials the top performers, while Materials and Energy lagged the indexes.

(As of 9/30/18) — The Buffalo Flexible Income Fund produced a return of 4.77% for the period and outperformed the Lipper Mixed-Asset Target Allocation Moderate Funds Index return of 2.73%, but underperformed the primary benchmark, a blended index comprised of 60% of the Morningstar U.S. Large Cap Index and 40% of the ICE BofAML U.S. High Yield Index, which produced a return of 5.92% for the period.

The equity portion of the portfolio returned 5.30% vs. the S&P 500 Index return of 7.71% during the quarter. The fixed income portion of the portfolio generated a return of 1.62% for the quarter, which underperformed the ICE BofAML U.S. High Yield Index return of 2.44%.

TOP CONTRIBUTORS
The Fund’s equity component is primarily focused on large cap dividend payers, with top contributors in the quarter being Microsoft, Boeing, and Johnson & Johnson. The top contributors to the Fund’s fixed income performance included Nuance Communications, Consolidated Communications, and Wildhorse Resource Corporation.

TOP DETRACTORS
The primary sectors that led to the relative underperformance were Energy, Industrials, and Consumer Discretionary. Within Energy, the underperformance was due to our sector allocation decision, specifically the significant overweight to energy-related companies, as that area was among the worst performing benchmark sectors for the period. Meanwhile the underperformance within the Industrials and Consumer Sectors
was primarily due to security selection.

Specific securities that detracted from performance within Industrials included General Electric and Pitney Bowes while the underperformance in the Consumer Discretionary sector included shares of Ford and Lions Gate Entertainment. Additionally, the Fund did not own Amazon, as it is a non-dividend payer, which was once again one of the top contributors for the benchmark.

(As of 9/30/18) — As we begin the 4th quarter, significant uncertainty about the direction of the stock market exists, driven by factors including:
• the upcoming midterm elections in November and possible Democratic gains in the Congress,
• the ultimate outcome of the trade dispute with China and the impact it will have on earnings of large U.S.-based companies,
• the potential for continued interest rate hikes, and
• the fact that many stocks are trading at elevated valuations after the multi-year bull market.

This uncertainty is offset, in part, by continued strength in the U.S. economy and job markets. Amidst this uncertainty, we continue to be diligent in our process of seeking income-producing securities trading at reasonable valuations by our analysis. Given that we believe the U.S. is in the later stages of the current economic cycle, we continue to find ourselves confronted with relatively low spread and yield levels with the non-investment grade fixed income asset class that we prefer over the long haul. This backdrop has resulted in a bond allocation that is close to the low end of our expected range in terms of the fund’s overall asset mix of stocks, bonds, and cash. Within the fixed income portion of the portfolio we continue to focus on high-quality, non-investment grade issuers with defensive business models and manageable credit metrics. As always, we appreciate your support and confidence in our investment process over the long term.