Balanced Fund

Manager Commentary as of 06/30/10

The Buffalo Balanced Fund declined 5.39 % in the quarter, outperforming its peers as tracked by the Lipper Balanced Fund Index which was down 6.26%. For the trailing twelve-month period ending June 30, 2010, the fund was up 15.58%, outperforming the index return of 13.33%. The fund also outperformed the index for the three-, five- and ten-year time periods.

Data represented reflects past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original value. Current performance may be lower or higher than the performance quoted. Performance current to the most recent quarter end may be obtained by clicking here. Performance current to the most recent month end may be obtained by clicking here.

We are positive on the outlook for the bonds currently in our portfolio, and believe that many of our convertibles have room for meaningful upside in coming months if the economic outlook continues to improve.  We continue to seek out opportunities in the high yield market that offer favorable risk/reward profiles.  We will look to add new names to our fund, and redeploy cash into the names that we believe have the best potential for outperformance. We remain primarily focused on identifying companies that have the following credit characteristics: leading market positions in growth industries; high barriers to entry; sustainable margin structures; manageable balance sheet leverage; adequate liquidity and generate free cash flow; improving credit metrics; and with business models that should be relatively stable regardless of the state of the external economic environment.

We find the return potential of the high yield fixed asset class favorable. We continue to focus on the higher-quality spectrum of the high yield market and look to benefit from our convertible bond exposure which could provide additional upside to the extent the equity markets continue to perform well.  To the extent the economy weakens in the second half of 2010, we feel good about the higher-quality nature of the portfolio.

The equity portion of the fund outperformed the general market (as represented by the S&P 500 Index) in the second quarter by 6.20%.  Outperformance was due primarily to our patience and conservatism as we maintained a large cash weighting in a down market which led to 2.30% of outperformance.  Additionally, we had good stock selection performance within the Consumer Discretionary and Healthcare sectors which contributed a combined 2.05% of outperformance.  We generated outperformance in seven of the ten sectors in the second quarter.
 
In addition to our overweight position in cash, the fund continues to be overweight the Energy sector and underweight in Financials and Information Technology.  This is driven by our long-term view that rising middle classes in emerging markets and stable demand in developed countries will continue to lead to increased demand for oil and natural gas.  Utilizing our in-house research library, we continue to monitor high-quality names as we look to invest our cash position.

We have constructed the portfolio with a long-term focus and do not significantly change our holdings from quarter to quarter.  We view market fluctuations as opportunities to add to existing positions at attractive prices or initiate new positions in high-quality companies we have researched.  We look to trim our exposure when a stock moves above our estimate of fair value.  This low-turnover approach provides stability throughout a cycle and also minimizes expenses for clients.

The fund's stocks are actively managed with the goal of providing consistent, increasing income plus capital appreciation, investing in a combination of stocks and bonds. The majority of equities chosen for this fund are income- and/or value-oriented. The fund looks for equities of companies that have increased their dividend at least every other year. We buy companies that have solid cash flows, good management teams, and high-quality balance sheets trading at reasonable valuations.

The fund remains well-positioned, having generated high current income in an environment when interest rates are quite low, which also helps to buffer price volatility somewhat. The fund's current allocation between stocks and bonds and within various sectors remains favorable, in our view, for weathering a tough market and uncertain economic outlook.

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"The equity portion of the fund outperformed the general market (as represented by the S&P 500 Index) in the second quarter by 6.20%. We generated outperformance in seven of the ten sectors in the second quarter."