Large Cap Fund
Fund Objective & Investment Process
The investment objective of the Buffalo Large Cap Fund is long-term growth of capital. The Large Cap Fund invests primarily in equity securities, consisting of domestic common and preferred stocks of large capitalization (“large-cap”) companies, that, at time of purchase by the Fund, have a market capitalization greater than $30 billion.
The Fund managers seek to identify companies for the Large Cap Fund’s portfolio that are expected to experience growth based on the identification of long-term, measurable secular trends, and which, as a result, the managers believe may have potential revenue growth in excess of the gross domestic product growth rate.
Companies are screened using in-depth, in-house research to identify those which the managers believe have favorable attributes, including attractive valuation, strong management, conservative debt, free cash flow, scalable business models, and competitive advantages.
Management of the Buffalo Large Cap Fund integrates ESG (Environmental, Social, and Governance) related factors into the investment decision making process. ESG-related factors material to the risk and return of investments are explicitly considered, alongside traditional financial factors, when making investment decisions.
We don’t manage to our benchmark so we don’t have too much concentration in any one single trend. We also manage based on valuation, trimming positions when they approach their potential upside and adding to them as they get closer to the potential downside.
Ken Laudan, Portfolio Manager
Overall Morningstar Rating™ of BUFEX based on risk-adjusted returns among 1,141 Large Growth funds as of 5/31/21.
|As of 5/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||8.76||9.49||37.99||20.17||19.28||14.75||11.63||8.43||10.85|
|BUFFALO LARGE CAP FUND - Institutional||8.79||9.54||38.20||20.35||19.46||14.92||11.80||8.59||11.01|
|Morningstar U.S. Large Growth Index||5.85||5.39||34.04||22.18||21.92||17.43||12.82||7.89||-|
|Lipper Large Cap Growth Fund Index||6.68||7.51||39.69||22.44||21.79||15.90||11.88||8.29||9.85|
|Morningstar Large Growth Category||5.70||7.06||40.25||20.90||20.41||15.23||11.73||8.82||9.83|
|As of 3/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||3.22||3.22||56.78||19.60||18.56||14.50||11.00||8.69||10.67|
|BUFFALO LARGE CAP FUND - Institutional||3.23||3.23||57.02||19.77||18.74||14.67||11.17||8.85||10.83|
|Morningstar U.S. Large Growth Index||-0.73||-0.73||55.78||21.84||20.77||16.89||12.03||8.19||-|
|Lipper Large Cap Growth Fund Index||1.57||1.57||62.69||22.03||20.97||15.44||11.09||8.50||9.68|
|Morningstar Large Growth Category||2.23||2.23||63.57||20.44||19.42||14.73||10.96||9.07||9.69|
3 Year Risk Metrics
|BUFEX vs Morningstar U.S. Large Growth Index (As of 3/31/21)|
Hypothetical Growth of $10,000
|(As of 3/31/21)|| |
|# of Holdings||50|
|Median Market Cap||$82.37 B|
|Weighted Average Market Cap||$599.41 B|
|3-Yr Annualized Turnover Ratio||18.57%|
|% of Holdings with Free Cash Flow||80.00%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|S&P Global||SPGI||Financial Services||1.98%|
|TOP 10 HOLDINGS TOTAL||41.85%|
CAPITAL MARKET OVERVIEW
(As of 3/31/21) — Equity markets continued to move higher in the 1st quarter of 2021, with the S&P 500 Index returning 6.17%. The period was marked by outperformance of value stocks as the market rotation that began in the last quarter of 2020 became even more pronounced. The vaccination rollout, combined with prospects for more fiscal stimulus, bolstered optimism towards companies that could benefit from the economy reopening. Additionally, an 80+ basis point move higher in the 10-Year U.S. Treasury yield during the quarter left sentiment towards growth stocks relatively more subdued.
The broad market Russell 3000 Index advanced 6.35% in the quarter. Value outperformed growth for the second straight quarter, with the Russell 3000 Value Index up 11.89% compared to the Russell 3000 Growth Index returning 1.19%. Relative performance was inversely-correlated with market cap size in the quarter, with the Russell Micro Cap Index up 23.89%, the small cap Russell 2000 Index up 12.70%, the Russell Midcap Index up 8.14%, and the large cap Russell 1000 Index returning 5.91%. The more cyclically-sensitive Energy, Financial, and Industrial sectors performed best in the quarter. Consumer Staples, Information Technology, and Utilities were the bottom three performing sectors. All sectors produced positive returns.
(As of 3/31/21) — The Buffalo Large Cap Fund (BUFEX) gained 3.22% during the 1st quarter, outperforming the Morningstar U.S. Large Growth Index return of -0.73%. Strong stock selection in the Industrials, Health Care, Consumer Discretionary, and Financials sectors were the biggest contributors to outperformance relative to the Index. With the exception of the slight drag on relative results from Telecommunications and Real Estate, all remaining sectors contributed to the outperformance, compared to the Index, but to a lesser degree. Cash averaged just over 3% of Fund assets in the quarter, in-line with our normal cash range. Stocks most leveraged to rising interest rates, a steepening yield curve, and reopening did relatively better while pricey, more crowded beneficiaries of COVID lockdowns and digital transformation experienced some investor rotation away.
Alphabet, Inc. was the top contributor to portfolio results in the quarter. The company experienced improving growth in its leading digital advertising businesses following a relatively cautious ad budget environment through most of last year. Alphabet is poised to benefit in 2021 as digital advertising budgets expand alongside improving economic conditions.
Microsoft Corporation was also a top contributor to the Fund during the quarter, as it continued its streak of beating and raising expectations for revenue and earnings per share (EPS). The company is a prime beneficiary of workplace digital transformation and the move from on-premise IT infrastructure to the cloud. As the economy emerges from the pandemic, Microsoft is well positioned to gain share of rising IT budgets.
Apple Inc. shares declined modestly in the quarter, after more than doubling in the last nine months of 2020, as news of downwardly revised iPhone build expectations emerged intra-quarter. Weaker consumer demand in China and supply chain component shortages are thought to have led to the lower build expectations. The company remains well positioned to benefit from the 5G handset product cycle and a favorable mix shift to high margin digital services.
Amazon.com, Inc. shares were relatively weak, despite strong results and upward earnings revisions, as investors rotated toward more cyclical reopening beneficiaries. In the near term, some investors worry the pandemic has pulled forward ecommerce adoption contributing to above trend growth rates in 2020 that may moderate going forward. Over the long run, Amazon should continue to disrupt markets and sustain an attractive growth rate as its Amazon Web Services and leadership position in ecommerce capture additional share gains from on-premise computing and off-line commerce.
(As of 3/31/21) — The market environment remains constructive for active growth stock investing, in our view. Interest rates and inflation remain relatively low by historical standards, providing a healthy backdrop for corporate earnings growth and investors’ allocation to equities. Meanwhile, global central bankers have pledged to sustain aggressive monetary and fiscal stimulus measures to ward off deflation and spur along continued economic recovery. Recent improvement in vaccine availability has accelerated shots-in-arms and is a much-needed spark that should help ignite economic recovery and a return to normalcy. We are seeing mobility and economic activity levels begin to rebound across many countries and sectors. Consumer and business confidence is rising too as the world has found innovative ways to adapt, progress, and grow despite the one-hundred-year pandemic still in our midst.
We are constructive about continued recovery and believe a rising and strengthening economic tide is likely to materialize in 2021 producing above average gross domestic product (GDP) growth. The market should continue to broaden out as more sectors of the economy recover and as under-appreciated growth and/or operating leverage materialize. Under-appreciated is key. Compared to history, valuations are higher than normal in the early stages of this economic recovery due to the faith placed in the ability of unprecedented fiscal and monetary stimulus to ignite and sustain earnings recovery. Interest rates are lower too in support of higher valuations, and we are likely to embark on a period of rising revenue and earnings expectations on relatively easy growth comparisons, which is fuel for optimism and sustained multiples.
For 2021, we believe there’s ample room for earnings upside in our investable universe and are constructive on the prospects for the portfolio. On a broader level, earnings growth expectations for 2021 S&P 500 Index earnings are reasonable at about $175 per share, 26% higher than 2020’s COVID-impacted earnings but only about 9% higher than pre-pandemic earnings in 2019, implying about 4.5% cumulative annualized growth over the two-year period. 2022 S&P 500 Index earnings expectations at about $201 per share again imply a reasonable 7.8% cumulative annualized growth rate expected over the 2019 to 2022 period.
As we get deeper into recovery and positive estimate revisions slow, the interplay between interest rates and stock market multiples will likely wax more prominently, while concerns about high debt levels and rising tax rates could also begin to affect broader valuation levels. That said, we think under-appreciated growth and operating leverage will be ample and rewarded throughout 2021.
Economic conditions may ebb and flow, but our focus remains constant; we invest in attractively-priced, financially-strong, well-managed companies benefiting from secular growth opportunities, in our opinion. Thank you for your support.
We get to know the companies we invest in and learn how they run their business.
Top-Down & Bottom-Up
We identify Top-Down broad, secular growth trends and search for companies from the Bottom-Up.
We construct our portfolios based on our own proprietary investment strategy.
Sticking to our disciplined investment strategy ensures we maintain a consistent, balanced approach.
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