Flexible Income Fund
|Total Net Assets:||$581.82 Million (9/30/19)|
|Category:||Large Cap Value|
|Benchmark:||Morningstar Moderately Aggressive Target Risk|
Fund Fact Sheet Q3 2019
PM Commentary Q3 2019
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 304 Allocation 70-85% Equity funds as of 11/30/19.
|As of 11/30/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO FLEXIBLE INCOME FUND - Investor||5.09||15.32||5.44||7.90||5.24||8.01||6.84||7.15|
|BUFFALO FLEXIBLE INCOME FUND - Institutional||5.20||15.48||5.59||8.06||5.40||8.18||7.00||7.31|
|Morningstar Moderately Aggressive Target Risk Index||6.05||19.65||13.21||10.51||7.13||8.99||7.37||-|
|Lipper Mixed-Asset Target Allocation Moderate Funds Index||3.66||16.05||11.05||8.04||5.55||7.38||5.76||6.94|
|Morningstar Allocation 70-85% Equity Category||5.25||18.51||10.74||8.85||5.82||8.45||6.33||7.08|
|As of 9/30/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO FLEXIBLE INCOME FUND - Investor||1.11||13.50||0.17||7.63||4.94||8.18||7.00||7.13|
|BUFFALO FLEXIBLE INCOME FUND - Institutional||1.14||13.62||0.31||7.79||5.10||8.34||7.16||7.29|
|Morningstar Moderately Aggressive Target Risk Index||0.59||15.04||3.91||8.95||6.79||8.80||7.53||-|
| Combined Index|
Morningstar U.S. Large Cap Index (60%)
ICE BofAML U.S. High Yield Index (40%)
|Lipper Mixed-Asset Target Allocation Moderate Funds Index||0.99||12.92||4.46||6.92||5.48||7.32||5.82||6.87|
|Morningstar Allocation 70-85% Equity Category||0.53||14.33||1.33||7.55||5.66||8.26||6.46||6.98|
* Morningstar U.S. Large Cap Index (60%) / ICE BofAML U.S. High Yield Index (40%)
** S&P 500 Index (60%) / ICE BofAML U.S. High Yield Index (40%)
Hypothetical Growth of $10,000
Record Date: December 17 | Payable Date: December 18
|(As of 9/30/19)|| |
|# of Equity Holdings||59|
|# of Fixed Holdings||7|
|Median Market Cap||$48.76 B|
|Weighted Average Market Cap||$169.35 B|
|3-Yr Annualized Turnover Ratio||3.81%|
|Average Duration||1.75 years|
|Average Maturity||4.96 years|
|30-day SEC Yield||2.42%|
Top 10 Holdings
|Holding||Ticker||Sector||% of Net|
|Johnson & Johnson||JNJ||Health Care||2.89%|
|Procter & Gamble||PG||Consumer Staples||2.78%|
|Coca Cola||KO||Consumer Staples||2.57%|
|TOP 10 HOLDINGS TOTAL||31.04%|
CAPITAL MARKET OVERVIEW
(As of 9/30/19) — The U.S. stock market continued to advance in the 3rd quarter, as expectations for accommodative monetary policy appeared to outweigh concerns of slowing economic growth. The S&P 500 Index returned 1.70% in the period, bringing the year-to-date return to 20.55% through quarter-end. Weak economic data led the Federal Reserve to cut interest rates twice in the quarter, driving rates lower and bond prices higher. U.S. markets outperformed international markets on the strength of the U.S. dollar.
The Russell 3000 Index gained 1.16% in the quarter. Value narrowly outperformed growth, with the Russell 3000 Value Index up 1.23% and the Russell 3000 Growth Index advancing 1.10%. Large caps generally outperformed small caps in the quarter. The Russell 1000 Index returned 1.42%, the Russell Midcap Index returned 0.48%, and the Russell 2000 Index posted a loss of 2.40%. Defensive sectors led the way in the period, with Utilities up 9.34%, Real Estate up 7.69%, and Consumer Staples up 6.12%. Energy was the worst performing sector with a total return of -6.61%. Health Care was also weak, returning -2.25% on increasing political concerns.
(As of 9/30/19) — The Buffalo Flexible Income Fund produced a return of 1.11% for the quarter, which underperformed the Morningstar Moderately Aggressive Target Risk Index return of 6.05%. The Fund’s peer group index, the Lipper Mixed-Asset Allocation Moderate Funds Index, produced a return of 0.99% for the quarter.
The equity portion of the portfolio returned 1.27%, which trailed the Morningstar Moderately Aggressive Target Risk Index. The relative underperformance was primarily driven by the Energy sector. The underperformance within Energy was primarily due to the sector allocation impact as the Fund was overweight the worst performing sector of the Index. Energy companies have underperformed the broader market due to several reasons including, secular growth fears around fossil fuels, market share losses to renewables, the ability of shale drillers to generate sufficient cash flow to service debt at current price levels, as well as investor acceptance of ESG (environmental, social and governance) standards, which typically avoid investment in fossil fuel securities.
Specific investments that negatively-impacted Fund performance included Pfizer, Schlumberger, and Lions Gate Entertainment. Pfizer shares declined due to the dilutive spin-off of its Upjohn unit (merging with Mylan) as investors re-rated Pfizer based on its new pro-forma margin structure, which will be lower going forward due to the spin off. Meanwhile Schlumberger has been negatively-impacted by the weak macro environment for exploration and production (E&P) which has resulted in declines in drilling activity and eroded fracking pricing. Finally, shares of Lions Gate Entertainment dropped when the company lowered its earnings growth rate from low-to-mid-teens to mid-to-high-single digits. The top three contributors to the Fund’s performance during the quarter were Proctor & Gamble, HollyFrontier, and AT&T.
FIXED INCOME PERFORMANCE
The fixed income portion of the portfolio represented roughly 5% of fund assets during the period. The best performers within the fixed income portion were the Medicines Corp 2.5% convertible bonds and the Everi Payments 7.5% senior notes. The Medicines converts benefited from positive clinical trial data for its cholesterol drug, inclisirin, while Everi Payments benefited from positive underlying fundamentals and news that the company was exploring strategic alternatives including a possible sale.
(As of 9/30/19) — Over the first three quarters of the year, the stock market has been primarily driven by expansion in market valuation metrics, as earnings have been relatively flat. Aiding the valuation expansion has been the Federal Reserve’s (the “Fed”) dovish pivot on monetary policy, indicating that future interest rate action will be down. The Fed has become concerned with inflation running below their targeted levels and slowing economic growth. Vagaries regarding trade policy (tariffs and trade agreements), evolving geopolitical risks, and the divided Congress further limit their forecasting abilities. A key driver for further stock market advancement is likely to be impacted by trade and tariff news and how aggressive the Fed cuts rates and how many cuts they ultimately decide to make. As always, we appreciate your confidence in our investment capabilities over the long term.
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