Flexible Income Fund

(As of 3/31/21) — Equity markets continued to move higher in the 1st quarter of 2021, with the S&P 500 Index returning 6.17%. The period was marked by outperformance of value stocks as the market rotation that began in the last quarter of 2020 became even more pronounced. The vaccination rollout, combined with prospects for more fiscal stimulus, bolstered optimism towards companies that could benefit from the economy reopening. Additionally, an 80+ basis point move higher in the 10-Year U.S. Treasury yield during the quarter left sentiment towards growth stocks relatively more subdued.

The broad market Russell 3000 Index advanced 6.35% in the quarter. Value outperformed growth for the second straight quarter, with the Russell 3000 Value Index up 11.89% compared to the Russell 3000 Growth Index returning 1.19%. Relative performance was inversely-correlated with market cap size in the quarter, with the Russell Micro Cap Index up 23.89%, the small cap Russell 2000 Index up 12.70%, the Russell Midcap Index up 8.14%, and the large cap Russell 1000 Index returning 5.91%. The more cyclically-sensitive Energy, Financial, and Industrial sectors performed best in the quarter. Consumer Staples, Information Technology, and Utilities were the bottom three performing sectors. All sectors produced positive returns.

(As of 3/31/21) — The Buffalo Flexible Income Fund (BUFBX) produced a return of 9.11% in the quarter, outperforming the Morningstar Moderately Aggressive Target Risk Index return of 4.08%. The top three contributors to the Fund’s performance during the quarter were Hess, Chevron, and ConocoPhillips. All of these companies experienced significant price appreciation as oil prices increased due to the improved outlook for global travel and the corresponding potential for an increase in oil consumption. The top three detractors were Costco, Clorox, and Pepsi. Stocks most leveraged to rising interest rates, a steepening yield curve, and reopening did relatively better, while pricey, more crowded beneficiaries of COVID lockdowns experienced some investor rotation away.

(As of 3/31/21) — The S&P 500 Index achieved a record high during the period and ended just below the intra-quarter peak. The rise can be attributed to the expectation that the economy can recover from the COVID-19 pandemic. New COVID-19 infections, hospitalizations, and deaths have declined in the U.S. as vaccines have been approved and injected into arms. The market favorably reacted to the new administration, passage of additional fiscal stimulus, and the central banks’ continued accommodative policies. Although the Federal Reserve continues to indicate that interest rates increases are on hold for the near future, the longer end of the treasury market sold off on concerns that inflation will increase. The rise in bond yields resulted in some market rotation as investors shifted from growth to value sectors. As the year continues to unfold, investors will be focused on the administration’s recently announced infrastructure proposal, vaccine rollouts, COVID-19 related reopening, and the length of accommodative monetary policy.

Despite the uncertainty created by the pandemic, we remain focused on wide moat, large capitalization dividend paying companies trading at reasonable valuations, in our view. As stock market volatility spikes, we will look for opportunities to find companies that fit our investment criteria, as we continue to follow our process of finding new investment ideas and to be ready when market declines provide better entry points.