Flexible Income Fund

(As of 12/31/19) — The combination of a U.S. Federal Reserve (Fed) interest rate cut, an improving economic outlook, and easing trade tensions, sent equity markets sharply higher in the 4th quarter. The S&P 500 Index advanced 9.10% during the period, which brought the full-year (2019) gain to 31.49%. The Fed cut interest rates three times in 2019, erasing the brief yield curve inversion and assuaging fears of a recession. The economy continued to add new jobs at a strong pace and unemployment declined to 3.5%. Consumer spending remained healthy, and there is optimism for better business investment following the announced “phase one” trade deal with China.

Similar to the S&P 500 Index, the broad-based Russell 3000 Index returned 9.04% during the quarter. Growth outperformed value, as the Russell 3000 Growth Index returned 10.62% compared to a return of 7.41% for the Russell 3000 Value Index. Smaller companies outperformed larger companies, as one would expect in a “risk-on” period. The Russell Microcap Index surged 13.45% and the Russell 2000 Index advanced 9.94%. Large company benchmarks such as the Russell 1000 Index advanced 9.04% while the Russell Midcap Index produced a return of 7.06%. Technology and Health Care were the best performing sectors in the quarter, while more defensive areas of the market lagged such as Real Estate and Utilities. Higher long-term interest rates weighed on high-quality bond proxies – the safe haven 10-year U.S. Treasury Bond produced a return of -1.74% during the quarter.

(As of 12/31/19) — The Buffalo Flexible Income Fund produced a return of 4.64% for the quarter, underperforming the Morningstar Moderately Aggressive Target Risk Index return of 6.87%. The Fund’s peer group index, the Lipper Mixed-Asset Allocation Moderate Funds Index, produced a return of 4.69% for the quarter.

PORTFOLIO PERFORMANCE

The equity portion of the portfolio produced a return of 4.62%. The top three contributors to the Fund’s performance during the quarter were Home Depot, Schlumberger, and McDonald’s. Relative underperformance compared to the Morningstar U.S. Large Cap Index was primarily driven by stock selection in the Information Technology, Consumer Staples, and Industrial sectors. Underperformance within the Information Technology segment was driven by an underweight position to the sector and the fact that Fund did not own Apple, a large weight in the benchmark, which negatively-influenced relative performance. The underperformance within the Consumer Staples segment was driven by security selection and included General Mills, Clorox, and Kimberly Clark. Meanwhile, Boeing drove underperformance within the Industrial sector. The company has been negatively impacted by the grounding of the 737 MAX airplane and the uncertainty of when it will return to production, delivery, and service.

(As of 12/31/19) — The healthy gains in the stock market during the quarter were primarily driven by expansion in market valuation metrics, as corporate earnings have been relatively flat. Key drivers for further stock market advancement are likely to be driven by how Middle East conflicts play out, the upcoming domestic election cycle, and improved corporate earnings growth.

We continue to be diligent in our process of seeking wide moat, large capitalization, 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 find ourselves confronted with relatively low spread and yield levels. 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.