Q. We’re considering investing in Buffalo Small Cap Fund. I’m 60 years old and on a disability pension. My wife is 57. We’re seeking a safe fund. What’s your opinion?
O.W., via the Internet
A. It’s one of the best of its breed, but a small-cap growth fund may not suit your situation.
Although it’s less volatile than most of its peers, Buffalo Small Cap Fund (BUFSX) will be more volatile than more conservative funds. If you decide to invest, be sure it’s money you’re willing to hold more than three years to smooth out that volatility.
Stellar performance attracted many new investors in the past year, boosting its assets from $500 million to $1 billion.
Buffalo Small Cap rose 26 percent over the past 12 months and had a three-year annualized return of 35 percent. Both rank in the top 2 percent of small growth funds. Stocks from key industries are chosen by experienced portfolio managers Kent Gasaway, Tom Laming and Bob Male, on board since its inception four years ago.
“While it’s hard to find anything wrong with this fund, its growth to $1 billion in assets means you should keep a close eye to see whether the managers can manage so large a portfolio,” observed Brian Portnoy, analyst with Morningstar.
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The fund has less than 15 percent of portfolio in small-cap technology stocks. That reduces volatility, but it won’t perform as well as its peers if that group revives.
Nearly one-third of the portfolio of Buffalo Small Cap is in services, with technology, financials and health care significant concentrations. Largest holdings were recently Argosy Gaming, Elcor, Galen Holdings, ITT Educational Services, Ethan Allen Interiors, Performance Food Group, First Horizon Pharmaceutical, Medicis Pharmaceutical Class “A”, Zale and Education Management.
This “no-load” (no sales charge) fund requires a $2,500 minimum initial investment.
Q. My wife was laid off and must exercise her stock options by March 2003. Her option is at $25 a share. Should she hold these a while, or exercise them right away?
R.S., via the Internet
A. First, carefully read all stipulations for your options, which give you the right to buy a set amount of stock at a specified price.
Then determine whether the underlying stock has intrinsic value and potential for price appreciation. Ask yourself whether you have financial resources to exercise the stock, or need to make a “cashless” exercise in which a broker sells your shares, uses a portion of the profits to pay for the exercise, and gives you the remainder.
“If you do exercise the option, you must also decide whether to hold onto the stock or dispose of it,” said Anneliese D’Souza, a financial planner with Voso Financial Advisers, in Frederick, Md. “Normally, it’s a good idea to hold onto 10 percent of the underlying stock and sell the rest in order to diversify and limit your risk.”
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Andrew Leckey answers questions Sunday in Business and Tuesday in Your Money. Address inquiries to Andrew Leckey, P.M.B. 184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at [email protected].