In The Growth & Income section of the February 2010 issue, Benjamin Shepherd profiled Buffalo Balanced (BUFBX) as a fund that would allow investors to enjoy the upside of stocks while maintaining current income though exposure to bonds and dividend-paying equities.

The fund’s strategy has proved sound. Buffalo Balanced generated a total return of 11.7 percent in 2010 and maintained an average yield of around 3 percent.

However, the fund’s equity component underperformed the S&P 500 last year. This caused Buffalo Balanced to fall in the rankings from near the top of the moderate allocation category to the middle of the pack.

Portfolio manager John Kornitzer adopts a more conservative stance than many of his peers, and the fund remained underweight financials and overweight consumer staples. This positioning meant the fund sat out the rally in banking stocks.

The fund’s bond allocation, however, helped make up the lost ground. The bond portfolio–made up entirely of high-yield bonds for most of the year–enjoyed a strong rally in the back half of 2010, as investors reached for yield in a low interest rate environment.

Since Shepherd profiled the fund, Kornitzer has made few adjustments to the fund’s portfolio allocations. He trimmed exposure to stocks and bonds by about 2 percent in favor of cash holdings, which now account for almost 20 percent of the fund’s investable assets.

In his latest quarterly commentary, Kornitzer told investors that the lion’s share of that cash was intended to finance future bond purchases; he expects interest rates to rise this year.