Buffalo Small Cap: Window of Opportunity

These days, it's tough to find a good small-company fund because so many have shut their doors to new investors. Some fund shops have limited the availability of their small-cap offerings by other means, as Kornitzer Capital Management did in August 2003, when it stopped offering its Buffalo Small Cap fund through advisers or brokerage-sponsored fund supermarkets (although Kornitzer continued to sell the fund directly to investors).

Now, you can buy the $2.2-billion fund through a brokerage or adviser until July 31, or until the fund takes in $250 million of new assets -- whichever comes first. Kornitzer, headquartered in Mission, Kan., is temporarily re-opening the fund (symbol BUFSX) through these channels because it recently relinquished its role as a subadviser to the $252-million AFBA Five Star Small Cap fund (AFCAX). Kent Gasaway, one of Buffalo Small Cap's three managers, says the firm wanted to give shareholders in the AFBA fund the opportunity to stay with a Kornitzer-managed small-company offering. "We're not increasing our capacity, so it's not an asset-grab in any way," says Gasaway, who is also president of Buffalo Funds. "We're opening up roughly the same capacity that we're giving up in the [AFBA] fund to accommodate those shareholders."

Like all funds in the Buffalo fund herd, Small Cap takes a thematic approach to stockpicking. "We look for long-term trends that are driving industries," says Gasaway. "But we don't buy companies that may be growing now, but will shrink if the economy contracts." Buffalo funds also avoid energy companies and materials producers because of their cyclical nature. Gasaway, along with co-managers Robert Male and Grant Sarris, derive their picks from several dozen themes, including the aging population, technological advancement, and corporate outsourcing. Beyond that, the team looks for growing companies that sell at reasonable prices.

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For example, they think businesses will continue to struggle with tight labor markets. "Barring a recession, we're going into an extended period of low unemployment," says Gasaway. "Companies are going to have to do anything they can to get more out of their existing work force." A company he favors in this category is Checkfree Corp. (CKFR), which sells electronic bill-payment systems to banks and retailers. "This helps reduce the need for people, both on the bank's side and on the corporation's side, and it's a huge timesaver for consumers," he says. The stock, which closed at $40.28 on July 13, is up 20% since early May.

Another investment theme is Internet commerce (nearly 20% of the fund's assets are invested in technology.) "Companies that sell their products or offer services online have highly profitable business models and aren't as people-intensive," Gasaway says. That also plays into the labor-market theme. Gasaway likes Monster Worldwide (MNST), which runs the online job-recruiting site Monster.com. The stock closed at $42.40 on July 13.

Buffalo Small Cap, which launched in April 1998, has a solid record. Over the past five years through July 13, the fund delivered an annualized 19%, placing it in the top 13% for funds that invest in small, fast-growing companies. Like other funds in the Buffalo family, Small Cap uses a buy-and-hold strategy. Turnover is just 15%, implying that the fund holds a stock for nearly seven years, on average. "We identify the trends, buy the companies, and then we put them away and let them do their thing," he says.

The fund, which requires a $2,500 minimum investment, charges a reasonable 1.01% in annual fees.