Flexible Income Fund
|As of 2/7/2023|
|Total Net Assets:||$496.23 Million (12/31/22)|
|Morningstar Category:||Large Value|
|Benchmark Index:||Russell 3000|
Fund Fact Sheet Q4 2022
PM Commentary Q4 2022
Fund Objective & Investment Process
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.
The allocation of assets invested in each type of security is designed to balance income and long-term capital appreciation with reduced volatility of returns. The Flexible Income Fund expects to change its allocation mix over time based on the Fund managers’ view of economic conditions and underlying security values.
The Fund maintains a flexible investment policy which allows it to invest in debt securities with varying maturities. However, it is anticipated that the dollar-weighted average maturity of debt securities that the Fund purchases will not exceed 15 years.▼
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.
John Kornitzer, Portfolio Manager
Overall Morningstar Rating™ of BUFBX based on risk-adjusted returns among 1,155 Large Value funds as of 12/31/22.
|As of 1/31/23||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO FLEXIBLE INCOME FUND - Investor||3.76||2.26||5.89||11.16||7.67||7.80||7.36||8.84||7.57|
|BUFFALO FLEXIBLE INCOME FUND - Institutional||3.80||2.22||6.04||11.33||7.82||7.96||7.52||9.00||7.73|
|Russell 3000 Index||5.88||6.89||-8.24||9.51||9.12||12.28||9.60||10.39||9.98|
|Morningstar Moderately Aggressive Target Risk Index||11.14||6.40||-5.94||5.53||5.13||7.54||-||-||-|
|Lipper Mixed-Asset Target Allocation Moderate Funds Index||7.47||4.93||-6.33||4.64||4.56||6.18||5.36||6.43||6.71|
|Morningstar Large Value Category||6.98||5.06||0.27||9.74||7.19||10.14||7.79||8.90||-|
|As of 12/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO FLEXIBLE INCOME FUND - Investor||13.64||4.01||4.01||9.75||7.86||7.97||6.81||8.60||7.51|
|BUFFALO FLEXIBLE INCOME FUND - Institutional||13.75||4.22||4.22||9.93||8.02||8.13||6.97||8.76||7.67|
|Russell 3000 Index||7.18||-19.21||-19.21||7.07||8.79||12.13||8.66||9.88||9.75|
|Morningstar Moderately Aggressive Target Risk Index||9.51||-15.48||-15.48||3.04||4.64||7.30||-||-||-|
|Lipper Mixed-Asset Target Allocation Moderate Funds Index||6.48||-13.73||-13.73||2.94||4.09||5.97||4.81||6.12||6.55|
|Morningstar Large Value Category||12.77||-5.90||-5.90||6.96||7.03||10.23||7.10||8.48||-|
|BUFFALO FLEXIBLE INCOME FUND - Investor||16.68||3.59||-1.97||9.90||13.21||-7.00||18.76||-2.24||30.00||4.01|
|BUFFALO FLEXIBLE INCOME FUND - Institutional||16.85||3.75||-1.83||10.07||13.38||-6.86||18.87||-2.10||30.21||4.22|
|Russell 3000 Index||33.55||12.56||0.48||12.74||21.13||-5.24||31.02||20.89||25.66||-19.21|
|Morningstar Moderately Aggressive Target Risk Index||20.18||4.97||-2.40||10.21||18.89||-6.74||22.95||13.51||14.04||-15.48|
Hypothetical Growth of $10,000
Net Investment Income, if any – Record Date (2/17/23); Payment Date (2/21/23)
Net Investment Income, if any – Record Date (3/17/23); Payment Date (3/20/23)
Net Investment Income, if any – Record Date (4/17/23); Payment Date (4/18/23)
Net Investment Income, if any – Record Date (5/17/23); Payment Date (5/18/23)
Net Investment Income, if any – Record Date (6/20/23); Payment Date (6/21/23)
Net Investment Income, if any – Record Date (7/17/23); Payment Date (7/18/23)
Net Investment Income, if any – Record Date (8/17/23); Payment Date (8/18/23)
Net Investment Income, if any – Record Date (9/18/23); Payment Date (9/19/23)
Net Investment Income, if any – Record Date (10/17/23); Payment Date (10/18/23)
Net Investment Income, if any – Record Date (11/17/23); Payment Date (11/20/23)
Capital Gains, if any – Record Date (12/4/23); Payment Date (12/5/23)
Net Investment Income, if any – Record Date (12/18/23); Payment Date (12/19/23)
|(As of 12/31/22)||
|# of Holdings||56|
|Median Market Cap||$58.47 B|
|Weighted Average Market Cap||$264.09 B|
|3-Yr Annualized Turnover Ratio||2.49%|
|30-day SEC Yield||1.94%|
Top 10 Holdings
|Holding||Ticker / Maturity||Sector||% of Net
|Eli Lilly & Co||LLY||Health Care||3.40%|
|Costco Wholesale||COST||Consumer Staples||3.31%|
|Arthur J Gallagher & Co||AJG||Financial Services||3.00%|
|TOP 10 HOLDINGS TOTAL||39.02%|
CAPITAL MARKET OVERVIEW
(As of 12/31/22) — Capital markets rallied modestly in the 4th quarter as the S&P 500 Index gained 7.56%, the only positive quarter for 2022. Cooler inflation readings, resilient consumer spending, and better-than-expected corporate earnings buoyed markets during the first two months of the 4th quarter before pulling back in December. Much of the focus remains on the path of future interest rates, recession fears, and the economic and market impact those events may generate in 2023.
Despite the 4th quarter advance, the stock market recorded its worst calendar year since 2008, with a decline of -18.11% for the S&P 500 Index, and a loss of -32.54% for the growth-oriented and technology-heavy Nasdaq Composite Index. Large cap technology stocks and the more interest-rate sensitive assets suffered the most, while value stocks outperformed. In the end, nine of the S&P 500 Index’s 11 economic sectors declined. Energy stocks were the bright spot, recording a gain of 65.72% for the sector while Utilities eked out a gain of 1.57% in 2022.
The damage wasn’t isolated to the stock market as the investment-grade bond indices suffered double-digit losses for the year as well. In fact, a traditional balanced investment portfolio of 60% stocks and 40% bonds suffered the 4th worst drawdown in the past 100 years.
Recapping quarterly results, the broad-based Russell 3000 Index advanced 7.18% in the period. Value stocks significantly outperformed growth stocks to close out 2022, as the Russell 3000 Value Index returned 12.18% versus a return of just 2.31% for the Russell 3000 Growth Index. Relative performance was mixed going down in market cap size as small caps advanced less than large caps in the quarter, while mid cap stocks outperformed both large and small caps. Larger cap stocks returned 7.24%, as measured by the Russell 1000 Index, compared to the smaller cap Russell 2000 Index return of 6.23%, while the Russell Midcap Index produced a return of 9.18% in the quarter.
(As of 12/31/22) — The Buffalo Flexible Income Fund (BUFBX) returned 13.64% for the quarter compared to a return of 7.18% for the Russell 3000 Index.
The sectors primarily responsible for the Fund’s relative outperformance were Energy, Health Care, and Technology. Energy was the strongest contributor to Fund results during the period due to a significant portfolio overweight to the strongest performing sector of the market during the period. Hess, APA Corporation, Chevron, Exxon Mobil, ConocoPhillips, and Schlumberger were the strongest contributors to portfolio results. Energy companies continued to benefit from higher oil and gas prices relative to prior years.
Health Care was another area of strength for portfolio results due to stock selection and a slight overweight allocation relative to the benchmark. Gilead, Merck, Pfizer, and Eli Lilly were the strongest contributors to Fund results within Health Care. Gilead benefited from a positive earnings release and better than expected guidance due to strong performance across multiple products. Merck also reported good earnings during the quarter driven by its flagship drug Keytruda as well as Gardasil and its animal health segment.
(As of 12/31/22) — We believe a lot of bad news has been priced into market valuations, but volatility could remain elevated. The direction of the market will depend on inflation’s trajectory, the Federal Reserve’s actions to tame inflation, and the amount of economic damage caused by higher interest rates. We are seeing a decline in logistics costs, shipping rates, and most commodity prices, however component shortages/supply chain issues continue to persist. The Fed has increased interest rates by 425 basis points since the beginning of 2022, and market expectations forecast another 50 to 75 basis point increase in this tightening cycle. Meanwhile, global economies continue to slow, especially in Europe where energy prices remain high. While many companies have already lowered financial guidance for the year, we could be bracing for an earnings season where companies’ lower guidance for 2023.
Despite the uncertainty, we remain focused on wide moat, large capitalization dividend-paying companies trading at reasonable valuations, in our view. As always, the Fund will continue to emphasize competitively advantaged companies that can be purchased at a fair value. We will be ready to take advantage of opportunities created by stock market volatility using market declines as attractive entry points for long-term investors.
We get to know the companies we invest in and learn how they run their business.
Top-Down & Bottom-Up
We identify Top-Down broad, secular growth trends and search for companies from the Bottom-Up.
We construct our portfolios based on our own proprietary investment strategy.
Sticking to our disciplined investment strategy ensures we maintain a consistent, balanced approach.
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