FundAlarm Annex - Fund Report

[Back to Annex Home]

Fund name: Buffalo Balanced (BUFBX)

Objective: The fund is actively managed with the goal of providing consistent increasing income plus capital appreciation. The fund invests in a combination of domestic common stocks, preferred stocks, convertible debt and equity securities, and corporate debt securities, including some high-yield issues. The fund has about 65% of its portfolio in stocks, though the prospectus allows that number to go as low as 25%. Its yield is about 2.9%.

Adviser: Kornitzer Capital Management (KCM) of Kansas City. Kornitzer was founded in 1989. It serves as investment manager to the eight Buffalo funds (about $3 billion in assets), as well as to a variety of “individual, corporate, and other institutional clients.” They’re about to add a sub-advised China fund to the mix.

Manager: John Kornitzer is the president and chief investment officer of KCM, and has over 36 years of investment experience. He served as investment manager at several Fortune 500 companies prior to founding KCM. Mr. Kornitzer received his degree in Business Administration from St. Francis College in Pennsylvania (this represents cheerleading on my part on behalf of small liberal arts colleges). Mr. Kornitzer has over $1,000,000 invested in this fund.

Inception: August 12, 1994.

Minimum investment: $2,500 for regular accounts, $250 for IRAs and $100 with an automatic investment plan.

Expense ratio: 1.02% on an asset base of about $150 million.

Comments: John Kornitzer, KCM’s founder, became the manager for Buffalo Balanced almost four years ago. Since that time, a formerly tepid performer has been consistently first-rate. It has a five-star rating from Morningstar for the past three years, four stars over the past five years, and it's on this month's FundAlarm Honor Roll. It has been above average every year since Mr. Kornitzer took over and its trailing one-, three- and five-year records are in or around its peer group’s top decile.

According to the manager, “The fund looks for equities that increase their dividend at least every other year. We buy companies that have good cash flows, stock repurchases and rising earnings. We look for shareholder friendliness, and integrity of management.” That has led to an unusually high weighting in energy stocks (almost 25%), which contributed to really bad short term performance as the energy markets corrected. In the longer term, a focus on rising dividends and rising cash flow should allow the fund to maintain a stout yield which should partially buffer the short-term volatility that comes with strong sector bets.

Two factors stand out here. First is the issue of M-squared. Most folks think they understand “alpha” as a measure of return and “beta” as a measure of risk. What they fail to understand is that alpha and beta are a function of a fund’s correlation to its index; that is, its r-squared. The lower a fund’s r-squared, the less reliable the alpha and beta values become. (Be brave, the boring part is almost over.) As a result, two balanced funds might both have betas of 79 but might have dramatically different risk characteristics if they have dramatically different r-squared values. The M-squared, propounded by Leah Modigliani and her grandfather (a Nobel Laureate in economics) adjusts to control for the r-squared differences. In theory, the higher a fund’s M-squared, the better its risk-adjusted returns actually are.

And Buffalo Balanced has a three-year M-squared that’s about as high as you can get: 17.6. Its nearest competitors (Dodge & Cox Balanced, Vanguard Wellington) are awfully good funds but are still two points behind Buffalo.

Second is the respect that this management group seems to have earned from peers and commentators. A surprising number of folks have gone out of their way to speak well of Buffalo’s corporate standards. Morningstar gives it a generally strong stewardship report: excellent board, excellent on regulatory policy, good corporate culture, good manager incentives, pretty good on fees. Buffalo supports the NAIA’s “Champions of Character” initiative to teach “respect, integrity, responsibility, leadership and sportsmanship.” Kornitzer declared, “We want to be part of a solution that stems the tide of eroding character” and has had its own executives complete the program. Steven Goldberg of Kiplinger’s selected twelve mutual fund families which represent “brands you can trust.” He described the dauntless dozen this way:

"You could also describe these families as most trusted. They treat you as partners as well as clients. Their costs are reasonable. Their long-term results are above average. They're willing to close funds to new investors lest they grow too big." (“Brands You Can Trust,” Kiplinger's Personal Finance, September 2006)

He describes Buffalo as the least-known of a group that includes Artisan, Bridgeway, Dodge & Cox and a variety of fund families that really have earned a lot of respect.

Bottom line: This is clearly not a mild-mannered fund in the mold of Mairs & Power or Bridgeway. It takes more risks but is managed by an immensely experienced professional who has a pretty clearly-defined discipline. That has paid off, and likely will continue to pay off.

Company link: Buffalo Balanced

November 1, 2006

Update (posted August 1, 2008):

Assets: $181 million	Expenses: 1.03%
YTD return: (6.6%)(as of 7/24/08)
Buffalo’s managers made a fairly bold and fairly profitable sector bet which helps buoy results. They placed half of the fund’s stock portfolio into just two sectors – energy and industrial materials – which was a really good move for the first six months of the year and a really painful one during the seventh month. BUFBX’s 6.6% loss places it in the top 12% of its Morningstar "moderate allocation" peer group, which follows a top 13% finish in 2007 and top 4% the year before. BUFBX remains one of the few funds to earn the "Lipper Leader" designation for highest returns over all of the trailing periods (3-, 5- and 10-year, and since inception). That said, the fund’s sector biases drove it to be bottom of the stack during July when energy and commodity prices dropped sharply. Given the fund’s long-term record, such short-term reverses don’t seem terribly threatening.