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Mutual Funds

Big Ideas Produce Big Winners

By focusing on trends, Buffalo Small Cap has clobbered most of its rivals.

Trying to guess where the market's headed is a loser's game, says Bob Male, of Buffalo Small Cap (symbol BUFSX). So he and co-managers Kent Gasaway and Grant Sarris stay fully invested throughout bull and bear markets and continue to follow a big-picture strategy they've honed for more than a decade.

The trio draw on long-term economic and social trends -- such as the aging of baby-boomers -- to uncover stocks worth owning for the next three to five years. In early 2008, they invested in for-profit education companies Corinthian Colleges and ITT Educational Services. Their original reasoning: As the U.S. economy grows increasingly service-based, manufacturing workers will need to be retrained.

But as the recession gathered steam, the picks proved to be beneficiaries of another trend: Hard times often drive people back to school. Those two top holdings returned 90% and 75%, respectively, over the past year through April 9. "The stars aligned for those companies," Gasaway says. Luck alone doesn't explain the fund's fine record. The managers avoid economically sensitive, cyclical industries, such as agriculture and energy, and gravitate to cash-rich companies, which performed comparatively well over the past year. At last report, "89% of the fund was invested in companies generating free cash flow, and 75% of the holdings had no debt," says Gasaway. The $1.3-billion fund reopened to new investors in November, but it might not stay open for long.