Flexible Income Fund

(As of 3/31/19) — Equity markets rebounded sharply to start 2019. The widely followed S&P 500 Index returned 13.65% in the 1st quarter, its best quarterly performance in 10 years. The market advance can be largely attributed to the Federal Reserve’s decision to put quarterly short term interest rate hikes on hold and end its balance sheet runoff. Additionally, prospects for a trade agreement between the U.S. and China appeared to improve, and the U.S. Government reopened after its longest shut down in history.

The Russell 3000 Index advanced 14.04% in the 1st quarter. Growth outperformed value, with the Russell 3000 Growth Index returning 16.18% compared to a return of 11.93% for the Russell 3000 Value. By size, midcaps led the way this quarter with the Russell Midcap Index returning 16.54%, followed by a return of 14.58% for the small cap Russell 2000 Index and 14.00% for the large cap Russell 1000 Index. Technology, Real Estate, and Industrials were the best performing sectors, while Health Care and Financials were relative underperformers.

(As of 3/31/19) — The Buffalo Flexible Income Fund returned 11.84% for the quarter compared to the Fund’s primary benchmark (60% Morningstar U.S. Large Cap Index / 40% ICE BofAML U.S. High Yield Index) which produced a return of 10.85% during the period. For additional reference, the S&P 500 Index returned 13.65% for the period and the ICE BofAML U.S. High Yield Index returned 7.40%.

EQUITIES PERFORMANCE
For the quarter, the equity portion of the portfolio returned 12.96% vs. 13.65% for the S&P 500 Index. The Fund’s equity allocation is primarily focused on large cap, dividend-paying companies which we believe possess significant competitive advantages.

The primary sectors that led to slight relative underperformance during the period were Information Technology, Consumer Staples, and Consumer Discretionary. Technology was the best performing sector for period, and the Fund was underweight Technology when compared to the S&P 500 Index during the quarter. Security selection within Technology contributed to underperformance as the Fund was underweight Apple and Facebook – both stocks advanced over 20% during the quarter.

Meanwhile the underperformance in Consumer Staples was mostly due to security selection. Specific securities that detracted from performance included Coca-Cola and Clorox. Coca-Cola lowered earnings guidance for 2019 due to sluggish top line growth and higher costs. Clorox advanced during the period but not as much as the sector or the market overall, which negatively impacted relative performance.

The underperformance in the Consumer Discretionary sector was mostly due to security selection. Securities that negatively impacted performance with the sector were Lions Gate Entertainment, Amazon, and Netflix. Lions Gate’s stock price was essentially flat over the period, which negatively impacted relative performance when compared to the sector and broader market. Company management indicated the slate of films to be released in 2019 would be down, but that new releases should accelerate in 2020. In a bright note for the company, Starz continued to exceed expectations.
Overall the top contributors to the equity portfolio’s performance were Boeing, Microsoft, and Exxon Mobil while the top detractors were B&G Foods, Pfizer, and Lions Gate.

FIXED INCOME PERFORMANCE
The fixed income portion of the Buffalo Flexible Income Fund generated a return of 1.18% for the 1st quarter and underperformed the ICE BofAML U.S. High Yield Index return of 7.40%. The underperformance was primarily due to stock selection in the Energy sector. Approach Resources’ bonds declined significantly during the quarter as the company is faced with tight liquidity and potential fears over tripping a debt covenant due to weak underlying financial results.

The top contributors to the Fund’s fixed income portfolio included Nuance Communications 1.5% convertible bonds, Medicines Company, and Everi Payments, while the top detractors were Approach Resources, UTi Worldwide, and Nuance Communications 5.375% senior notes.

(As of 3/31/19) — 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 remains close to the low end of our 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 higher-quality, non-investment grade issuers with defensive business models and manageable credit metrics.