Growth Fund

Manager Commentary as of 06/30/10

During the second quarter of 2010, equity markets were down. This ended the string of four consecutive quarters of positive performance since the market lows in early 2009. A little over one year into the recovery, the economy is having a difficult time weaning itself off of government stimulus and finding the momentum to transition to a more robust self-sustaining recovery. Unemployment remains high while outsized budget deficits and rising government debt levels in developed economies depress consumer and business confidence. The U.S. government's recent policy positions challenge job creation, and higher proposed tax rates threaten discretionary and investment spending by consumers and businesses. While the economy is still expected to grow, the reality is that it is weaker and more fragile than a typical recovery. Looking forward, we remain consistent in our belief that relative earnings growth in the midst of a tepid or extended macroeconomic recovery will increasingly separate the winners from the losers going forward and that our trend-based investment process is well suited to this environment.

The Buffalo Growth Fund outperformed in a down market during the second calendar quarter and YTD 2010. The fund was down 10.43% in the second quarter and down 4.06% YTD while the Russell 1000 Growth was down 11.75% in the second quarter and down 7.65% YTD. Our outperformance versus the benchmark was due mostly to stock selection within the Information Technology, Industrial and Healthcare sectors. For the quarter, positive stock selection within these sectors more than offset the modest detraction to performance from our stock selection in the Financial and Consumer Discretionary sectors. We had minimal sector allocation effects during the quarter. At quarter end, we held 54 securities, which is unchanged from the prior quarter. Our median market capitalization is 20.1 billion up from the prior quarter level of 17.2 billion.

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 let our bottom-up stock selection drive our portfolio construction and sector allocations. At quarter end, the Financial, Industrial, Consumer Discretionary and Energy Sectors were modestly overweighted relative to the Russell 1000 Growth benchmark while Consumer Staples and Information Technology were underweighted. During the quarter we reduced our weight in the Industrial and Information Technology sectors and increased our weight in the Energy, Financial and Healthcare sectors where we believe increasing government regulation has broadly depressed multiples and opened up opportunities for attractive investments. We have also taken profits in smaller capitalization holdings which we believed were pricing in their growth potential, in favor of larger capitalization growth stocks where we believe price to growth looks more attractive. We are actively adding to positions which we feel have good long-term growth prospects, sustainable franchises and where the recent market weakness has created attractive valuations.

Our top contributing stocks in the period were NetApp and Pharmaceutical Product Development, Inc. (PPDI).  NetApp appreciated after stronger-than-expected revenues in the first quarter of 2010 demonstrated that they were accelerating their share gains within the networked attached-storage marketplace. PPDI appreciated after optimistic management commentary around new business activity and large strategic partnerships signaled a potential trough in business levels. Our top detractors in the quarter were EBAY and Monsanto. EBAY fell in anticipation of a slowdown in their core marketplace segment due to weakening U.S. consumer spending. Monsanto fell as their glyphosate business experienced a faster-than-expected pricing decline due to Chinese competitors and near-term oversupply in the marketplace.
 
We expect relative earnings growth to be a key determinant of stock price performance going forward. Those companies that can demonstrate relatively good earnings growth will likely experience some of the best stock returns. Growth comparisons are beginning to get more challenging as we move beyond the comparison to last year's depressed levels and as current demand patterns reach a more normal level.  Going forward, secular growers should increasingly separate themselves from those benefitting from only a cyclical lift. The market's breadth should begin to narrow. We look forward to a stock-picker's market that rewards organic fundamental growth. Our trend-based investment approach is geared toward identifying sustainable growth trends such as U.S. companies with products and services that appeal to an emerging markets consumer or which offer new technologies that drive productivity and efficiency within a global marketplace. We seek well-managed and well-capitalized companies leveraged to these sustainable and common sense growth trends and, more importantly; growth opportunities that are independent of broad economic recovery.

The Buffalo Growth Fund is differentiated from other funds in that it invests in U.S.-based companies that are beneficiaries of long-term structural trends and who derive incremental growth or diversification benefits from their exposure to attractive global markets.  On a long-term basis, we believe that many foreign economies will increase their contribution to global GDP growth via industrialization and urbanization trends that are leading to job creation and rising income levels in 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.  The fund primarily invests in a diversified group of established growth companies within the market capitalization range of the Russell 1000 Growth Index.     

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"The Buffalo Growth Fund outperformed in a down market environment during the second calendar quarter and year to date 2010. We're actively adding to positions which we feel have good long term growth prospects, sustainable franchises and where the recent market weakness has created attractive valuations."