Growth Fund

Manager Commentary as of 12/31/10

The fourth quarter of 2010 saw full fruition of the issues which began or threatened during the third quarter. As expected, the Fed enacted further quantitative easing (QE2) in an effort to again stimulate a still-sluggish economy. Mid-term elections ushered in a more business-friendly group of lawmakers, and President Obama appeared ready to move to a more centrist position in order to work with the new Congress. Markets reacted favorably to both developments, viewing them as stabilizing forces in a heretofore rocky and unpredictable business climate.
 
Globally, inflation is becoming a concern in developing countries as the U.S. and Europe take measures to stimulate their respective economies, putting additional pressure on healthy economies in China, Brazil, and the like. In response, these countries have taken some steps to curb inflation, raising interest rates and reserve ratios. Despite monetary tinkering, we believe developing markets should continue to outpace developed markets in economic growth through 2011. The Fund will continue to look for premier U.S.-based companies with opportunities for growth through global penetration and expansion.

The Buffalo Growth Fund invests in stocks of U.S.-based companies that are leaders in their industries and that derive incremental growth or diversification benefits through a global growth strategy. The dichotomy between scarce growth and supportive valuation in domestic large capitalization companies and that of more speculative growth and rising valuations in developing countries like China highlights why we think our fund's emphasis on premier U.S. based growth companies with large or growing exposure to foreign markets is particularly attractive. We feel our position in this market gives us the benefits of incremental global growth with very reasonable valuations.

The Buffalo Growth Fund outperformed the Russell 1000 Growth Index both in the fourth quarter and year to date. In the fourth quarter the Fund returned 13.98%, compared to 11.83% for the Russell 1000 Growth Index. Year to date the Fund is up 23.28%, while the benchmark is up 16.71%.

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.

Our outperformance in the quarter is due largely to stock selection, particularly in pro-cyclical sectors (Consumer Discretionary, IT, Energy and Industrials). These sectors enjoyed a bounce during the fourth quarter as more cyclical stocks responded to encouraging economic and political news. Our slight overweight and stock selection in Health Care held performance down as these names generally have shown lackluster growth in 2010.
 
Top performing stocks in the Fund for the quarter were Chart Industries in the Industrial sector, Baker Hughes and Schlumberger in Energy, and MKS Instruments in Information Technology. Detractors included Cicso Systems, Inc. in Information Technology, Abbott Laboratories in Health Care, and Visa, Inc. in Financials. The Fund was underweight versus the benchmark in Consumer Staples and Energy, and overweight in Health Care and Financials. We had good flows in to the Fund which we have been putting to work, ending the quarter with 7.04% cash. Throughout the quarter we began moving into larger-cap stocks where we believe price to growth is more favorable.
 
On a long-term basis, we believe that many foreign economies will likely increase their contribution to global GDP growth via industrialization and urbanization trends that are leading to job creation and rising income levels in regions with very large populations. Our dual focus on U.S. companies benefitting from structural long-term trends and large or growing global exposure is intended to narrow our universe into an attractive growth universe. Thereafter, our fundamental analysis emphasizes large market opportunities, sustainable competitive advantage, scalable business models and profitable growth, while our disciplined valuation process helps us avoid overpaying for growth.

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