China Fund

Manager Commentary as of 12/31/09

As markets around the world continued to recover during the fourth quarter of 2009, movements in the Chinese markets were among the strongest. Investor confidence in China's growth continued, centered on the expectation that the government would slowly temper the surge in bank loans without hindering steady economic growth. Domestic consumption is expected to continue to comprise a larger and larger portion of the economy going forward.

The Buffalo China Fund was up 9.96% in the quarter ending 12/31/2009, up 53.95% for the full year 2009. The MSCI CHINA FREE Net (USD) Index, was up 9.56% in the quarter, 62.29% for the full year 2009.

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.

The Buffalo China Fund outperformed its benchmark in the quarter. Some of stronger performing stocks in the quarter included Chongqing Changan Automobile Company, Chaoda Modern Agriculture, and Golden Meditech, a medical device company. The portfolio was most helped by continued strong exposure to energy and materials sectors. During the quarter, poorly performing stocks included Power companies Huadian and Datang, as well as Jolimark Holdings Ltd. For the full year, one of the reasons for the underperformance versus the benchmark was the fund's holding in Kwang Sung Electronics, as was mentioned in last quarter's commentary. Trading in Kwang Sung was halted for a time due to lack of liquidity. After the stock re-opened for trading there were some hedge funds that were forced to liquidate their positions.

In this macroeconomic environment, we believe that China will have attractive GDP growth in 2010. The fund has continued to reduce holdings in some of the smaller capitalization companies and is further concentrating in some of the larger companies that are generating significant cash, fit our growth trend strategy and are trading at what we feel are attractive valuations. We continued to take the opportunity in this past quarter to further diversify the portfolio into some of the sectors that should benefit from increasing domestic consumption, such as consumer stocks, financials and healthcare.

We believe China is a key place to find growth in 2010; forecasts for Chinese economic growth are in the range of 8.6-9.6%. We continue to believe that investment opportunities in China remain excellent, especially over the long term, as the economy shifts more and more from being an export-driven economy to one fueled by internal domestic demand. China remains a low-cost production center with a relatively flexible labor market. In addition, government debt-to-GDP is low compared to the developed world, which gives the government further leeway to provide fiscal stimulus when needed to the economy. Finally, the high savings rate coupled with very low debt among the population provides opportunity for stimulating domestic consumption.

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"We believe China is a key place to find growth in 2010; forecasts for Chinese economic growth are in the range of 8.6-9.6%. We continue to believe that investment opportunities in China remain excellent, especially over the long term, as the economy shifts more and more from being an export-driven economy to one fueled by internal domestic demand. "