Flexible Income Fund

(As of 12/31/20) — Equity markets extended their rally in the 4th quarter, with the S&P 500 Index returning 12.15%. This capped the end to a historic year in which the S&P advanced 18.40% despite the world suffering through a global pandemic. The biggest news in the quarter was the U.S. Food and Drug Administration’s (FDA) approval of two separate vaccines, following very encouraging clinical results. This helped investors look beyond worsening COVID-19 trends and provided hope that an end to the pandemic could be in sight.

The Russell 3000 Index increased 14.68% in the quarter. Value stocks led the advance, as the Russell 3000 Value Index advanced 17.21% compared to the Russell 3000 Growth Index return of 12.41% during the period. Relative performance was inversely correlated by market cap in the quarter (i.e., small caps outperformed big caps). The Russell 1000 Index delivered a return of 13.69% compared to the Russell Mid Cap Index return of 19.91%. Smaller market cap indexes surged even more as the Russell 2000 Index returned 31.37% and the Russell Micro Cap Index returned 31.39%. Cyclically-sensitive sectors such as Energy, Financials, Industrials, and Materials performed best in the quarter. The more defensive areas like Telecom Services, Consumer Staples, Utilities, and Healthcare lagged. All sectors produced positive absolute results.

(As of 12/31/20) — The Buffalo Flexible Income Fund (BUFBX) posted a return of 10.23% in the quarter, but underperformed the Morningstar Moderately Aggressive Target Risk Index return of 13.41% and the S&P 500 Index return of 12.15%.

The top contributors for the Fund during the quarter were Nuance 1.5% convertible bonds, Qualcomm, and Truist. Nuance benefited from positive earnings and guidance, as it showed continued momentum with its cloud transition, positive signs on the adoption of another one its software platforms, Dragon Ambient Experience (DAX), and the divestiture of some slower growth businesses. Qualcomm increased during the quarter due to improved clarity around its legal settlement, positive earnings and guidance as well its role in the upcoming transition to 5G. Truist’s positive return reflects good earnings and investor expectations that a steeper yield curve will result in better future earnings.

The top detractors from the Fund during the quarter were Kimberly Clark, Digital Realty, and Intel. Kimberly Clark provided weak earnings, and there are concerns around rising input costs (pulp), competition, and tougher 2021 earnings comparisons, though some of its business lines benefited in 2020 due to COVID. Digital Realty reported good earnings in the quarter, but the stock reflected a lot of good news and the outlook was not as glowing as some investors had expected. Intel was negatively-impacted by weak earnings and an announcement by Apple that it would begin using some of its own chips in certain products.

(As of 12/31/20) — The stock market ended the quarter at a record high on the expectations that the economy can recover from the COVID-19 pandemic. The double-digit stock market gain came despite rising cases and deaths due to COVID-19. The market favorably reacted to continued central banks’ accommodative policies, the conclusion of the U.S. presidential election, approval of COVID-19 vaccines, passage of another fiscal stimulus package, and an agreement on Great Britain’s exit from the European Union. As the new year begins the market will be focused on the change in the administration, potential for additional fiscal stimulus, vaccine rollouts, lockdowns to bend the COVID-19 curve, and how long monetary policy will remain accommodative.

Despite the uncertainty created by the pandemic, we remain focused on large capitalization, dividend-paying companies trading at reasonable valuations, in our view.