China Fund

Manager Commentary as of 12/31/10

The fourth quarter of 2010 saw China markets begin to cool from their more hectic pace as concerns about inflation commanded more attention and distracted investors. The Chinese government has stepped in to contain inflation with limited steps, such as raising the benchmark interest rate and increasing reserve requirements for banks. While a real estate "bubble" is still rumored to be eminent in China, we feel that it provides more fodder for economic doomsayers that real systemic risk.

During the fourth quarter, the Buffalo China Fund outperformed the benchmark MSCI CHINA FREE Net (USD) Index by returning 2.01% compared to 0.70% for the Index. For calendar year 2010, the Fund returned 11.07%, far outperforming the Index at 4.63%.

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.

China markets were weaker than many other world markets in the fourth quarter, as investors began to worry about inflationary cost pressures. Pro-cyclical industries as well as the industries that benefit from commodity price increases such as Materials and Energy were particularly strong in the quarter. The Fund's positioning in these sectors contributed to positive returns for the quarter. Utilities detracted from performance as inflationary pressures from raw material prices and wages bit into their cost structures with little ability to easily pass on rate increases to their customers.

Among the top contributors to the Fund for the quarter were CNOOC Ltd. in Energy, Asian Citrus Holdings, a Consumer Staples name, and Anhui Expressway in Industrials. Detractors for the quarter include Anta Sports Products in Consumer Discretionary, Huadian Power International and Huaneng Power International in Utilities.

The Chinese government's new five-year economic plan, beginning in 2011, places much more emphasis on internal consumer spending, increased wages, less on infrastructure. The Buffalo China Fund should be well-positioned to take advantage of continued growth as the Country shifts its emphasis toward internal rather than external growth. The Fund has been reducing weight in infrastructure and adding to Consumer and Health Care names in anticipation of this new plan.

There will be ebbs and flows in the tide of China's economic growth, but we believe the prospects of China continuing its emergence in the global marketplace have never been better.

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