Q:  What is the history of the Buffalo Mid Cap Fund? A : Kornitzer Capital Management Inc. was founded in 1989 by John C. Kornitzer, as a full service investment management firm and is located in Shawnee Mission, Kansas. The company manages separate accounts for high net worth individuals, corporations, pensions, colleges and foundations, trust commingled and common funds, and ten Buffalo Funds. The Buffalo Mid Cap Fund was launched in 2001 and total asset under management including all the funds and private clients is $5.5 billion. Buffalo Mid cap Fund has over $400 million of assets. Q:  What core beliefs guide your investment philosophy? A : We seek to invest in companies that are trading at a reasonable price and have a long term growth profile. We believe in owning industry leaders across an economic cycle because of their financial characteristics which are going to take market share and become more profitable over time. But if a company that we believe in is having a difficult year for legitimate reasons, we will look beyond that and own it for the long-term as long as we think this is still a long-term growth story. Our belief is that periods of great pessimism often generate the best investment opportunities. Q:  How does your investment philosophy translate into the investment strategy? A : The fund normally invests at least 80% of net assets in domestic common stocks, preferred stocks, convertible preferred stocks, warrants and rights of mid-cap companies that have a market capitalization between $1.5 billion and $10 billion. The fund’s growth strategy combines the recognition of long-term trends and rigorous fundamental research and analysis into a process for identifying "buy and hold" companies. The first step of the strategy involves the identification of positive, fundamental trends such as demographic, technological and industrial trends that we believe will play out over a three-to-five- year period. These trends must be well defined and measurable. The goal of this strategy is to focus only on industries that will grow faster than the overall economy over the long-term. The second step consists of identifying the companies that can potentially benefit from the continuation of these trends. A valuation and business model analysis of each company is performed. This includes rigorous fundamental analysis which focuses on firms that have understandable business models we believe can either sustain or grow their profit margins, have solid management teams, and have the financial strength to weather difficult economic environments. Our analysis includes visiting our companies and creating detailed written reports on each of our holdings. We look for companies with little or no debt that can sustain and grow their market share and profit margins while possessing the ability to generate free cash flow even in tougher economic environments. Finally, a proprietary and disciplined valuation methodology is performed to determine the level and timing of purchases and sales. Q:  Can you illustrate some of the trends with a few examples? A : The trends are broad and they go across industries. One of the trends on the technology side is the expansion of media distribution channels and content. We are able to get content over a number of different ways these days as opposed to just traditional television. We try to find companies that benefit from that content because that content can be consumed in multiple ways. For instance, a company that we’ve owned in the mid-cap fund that’s a beneficiary of that would be Dolby Laboratories, Inc. It is a British-founded USA-based company specializing in audio noise reduction and audio encoding/compression. They are also starting to provide video technology. Traditionally their market was DVD players and Audio Video receivers and now their market has expanded into personal computers and all the other different devices that we can consume content on. It is a company that generates very high margins because they have their own technology that’s protected. They do not really produce anything. They just license their technology to be put on devices like the PC or television and so they have a royalty business that’s not capital intensive. They generate high margins and cash flow and have a strong balance sheet. We look for companies that have high gross margins because the higher the gross margins the better the competitive advantage that the company might have. We also look for companies that have scalable business models.. Dolby fits all those characteristics and it’s a company we have held for quite a long time. Globalization is another one of our trends. The volume of global trade is growing at double the growth rate of the US economy. We feel it is prudent to invest in U.S. based companies that appear poised to benefit from global growth trends. We seek well positioned and well managed U.S. growth companies that stand to benefit from international expansion and growth in emerging markets. And, on a long term basis, we believe that the emerging markets are going to be a significant driver of the growth in global gross domestic product. This should enable select US companies to benefit from global infrastructure growth and the emerging middle classes in foreign markets. Q:  How do you go about searching for opportunities within global trade? A : We look for companies that have a lot of exposure to the international markets, that it will be meaningful to them, but then we don't necessarily want a company that’s got 80% of their exposure in international markets because then they have already penetrated the international markets. So it's nice to have a material amount of exposure, but also a rising amount of exposure. We are looking for companies that have a material amount of maybe 20% plus sales from the international markets. Especially where the international business is growing at a significantly faster rate than the domestic business. Our perception is these companies can grow significantly faster than the overall U.S. economy. We then layer on our valuation research and pay a reasonable multiple for that stock. For example, Abercrombie & Fitch is an upscale American fashion retailer. Currently their exposure to the international markets is about 12% of revenue. Going forward and looking at the growth and the number of stores they are opening internationally, and potentially closing domestic stores, we expect that 12% to increase to 25% or higher by the end of this year. Additionally the profitability of their international stores is higher than the domestic stores. As they open more stores internationally, even if the domestic store growth is flattish, the company will experience an improvement in revenue growth and profitability. Q:  What are the analytical steps in your research process? A : Our research is comprehensive and 100% internally generated. This process involves a disciplined practice of discovery, investigation, and implementation. This proprietary analysis has been the key driver of our solid long-term results - not market timing or interest rate forecasting. We use a variety of fundamental evaluation methods while dissecting vast amounts of data, visiting companies as well as their competitors and suppliers, and writing formal research reports. Lastly, we build proprietary financial models and use multiple valuation methodologies to derive a security’s intrinsic value. After the completion of extensive analysis the recommendation is evaluated in both informal and formal investment meetings. The security is subject to intense group scrutiny. Once all discussion is complete then the group takes action. Q:  How do you do your portfolio construction in terms of diversification? A : We run a concentrated portfolio with somewhere between 50 and 70 names. Currently in the mid-cap fund there are 46 names. The turnover in the fund is about 25% which indicates that our holding period is three to five years. We don't pay a lot of attention to benchmarks. We are trying to discover long-term secular growth stocks. We typically avoid commodity or deep cyclical industries. We won’t own a stock position of above 5% of the portfolio. Most of our positions tend to be in the 1.5% to 2.5% range, occasionally a large position will be 3% or 4%.. The largest position in the fund is currently about 4%. We are going to be overweight in certain sectors, but, typically, the largest industry weighting would be around 10% in any particular industry. Q:  What risks do you perceive and how do you manage them? A : We manage risk in a number of ways. First, we use valuation as a guide to buy and sell stocks. Second, we like to buy companies that have no debt and have net cash on the balance sheet and free cash flow. Our belief is that high-quality companies tend to hold up in the downturn. Third, we have a concentrated portfolio where we don’t let an individual name get to be too big of a percentage of the portfolio. That’s also our risk governor. Q:  What is your sell discipline? A : We sell stocks for various reasons. If a particular stock gets expensive based on our valuation work, we will begin to trim the name or sell it outright. Or, if a company makes an acquisition, which changes the business model, we will sell the stock. We will also sell if a management team demonstrates that it is unable to execute on its business strategy. Q:  How has the recent financial crisis impacted your investment process? A : We really haven’t changed the process in terms of investment philosophy and strategy. In fact, we did outperform on the downside. We are going to stick to our process of owning high-quality companies for the long-term that we think will generate wealth for investors.