Dividend Focus Fund
|Total Net Assets:||$79.82 Million (12/31/19)|
|Category:||Large Cap Blend|
|Benchmark:||Morningstar U.S. Large-Mid Cap|
Fund Fact Sheet Q4 2019
PM Commentary Q4 2019
FUND OBJECTIVE & INVESTMENT PROCESS
The investment objective of the Buffalo Dividend Focus Fund is primarily current income, with long-term growth of capital as a secondary objective.
To pursue its investment objective, the Fund invests in dividend-paying equity securities, consisting of domestic common stocks, preferred stocks, and convertible securities. During normal market conditions, at least 80% of the Fund’s assets will be invested in dividend-paying equity securities, companies that declare and pay cash dividends on at least an annual basis.
While the Fund may invest in securities of companies of any size, the Fund managers expect the majority of common stocks purchased will be of large-cap companies, those with market capitalizations in excess of $10 billion at the time of initial purchase. In addition to investments in domestic securities, the Fund may invest up to 20% of its net assets in sponsored or unsponsored ADRs and securities of foreign companies that are traded on U.S. stock exchanges.
We are focused on buying dividend-paying companies that can have sustainable competitive advantages, generate strong return on capital and free cash flow, have conservative balance sheets, and have great management teams.
We seek to buy these companies at reasonable valuations and believe that holding them for the long-term will generate favorable risk adjusted returns.
Paul Dlugosch, Portfolio Manager
Overall Morningstar Rating™ of BUFDX based on risk-adjusted returns among 1,208 Large Blend funds as of 1/31/20.
|As of 1/31/20||3 MO||YTD||1 YR||3 YR||5 YR||Since Inception|
|BUFFALO DIVIDEND FOCUS FUND - Investor||6.50||0.05||19.70||11.90||10.53||13.05|
|BUFFALO DIVIDEND FOCUS FUND - Institutional||6.48||0.05||19.86||12.06||10.69||13.21|
|Morningstar U.S. Large-Mid Cap Index||6.99||0.23||21.80||14.53||12.15||14.54|
|S&P 500 Index||6.72||-0.04||21.68||14.54||12.37||14.59|
|Morningstar Large Blend Category||5.61||-0.58||18.63||12.38||10.33||12.36|
|As of 12/31/19||3 MO||YTD||1 YR||3 YR||5 YR||Since Inception|
|BUFFALO DIVIDEND FOCUS FUND - Investor||7.89||27.66||27.66||12.68||9.93||13.21|
|BUFFALO DIVIDEND FOCUS FUND - Institutional||7.87||27.85||27.85||12.84||10.09||13.37|
|Morningstar U.S. Large-Mid Cap Index||9.01||31.61||31.61||15.21||11.49||14.69|
|S&P 500 Index||9.07||31.49||31.49||15.27||11.70||14.78|
|Morningstar Large Blend Category||8.13||28.62||28.62||13.25||9.52||12.62|
* Partial year. Inception to year-end.
3 Year Risk Metrics
|BUFDX vs Morningstar U.S. Large-Mid Cap Index (As of 12/31/19)|
Hypothetical Growth of $10,000
Record Date: March 17, 2020 | Payable Date: March 18, 2020
Record Date: June 17, 2020 | Payable Date: June 18, 2020
Record Date: September 17, 2020 | Payable Date: September 18, 2020
Record Date: December 17, 2020 | Payable Date: December 18, 2020
|(As of 12/31/19)|| |
|# of Holdings||78|
|Median Market Cap||$87.33 B|
|Weighted Average Market Cap||$264.92 B|
|3-Yr Annualized Turnover Ratio||28.07%|
|% of Holdings with Free Cash Flow||70.51%|
|30-day SEC Yield||1.14%|
Top 10 Holdings
|Holding||Ticker / Maturity||Sector||% of Net|
|American Electric Power||AEP||Utilities||2.43%|
|JPMorgan Chase||JPM||Financial Services||2.14%|
|S&P Global||SPGI||Financial Services||2.08%|
|Bank of America||BAC||Financial Services||1.93%|
|TOP 10 HOLDINGS TOTAL||27.16%|
CAPITAL MARKET OVERVIEW
(As of 12/31/19) — The combination of a U.S. Federal Reserve (Fed) interest rate cut, an improving economic outlook, and easing trade tensions, sent equity markets sharply higher in the 4th quarter. The S&P 500 Index advanced 9.10% during the period, which brought the full-year (2019) gain to 31.49%. The Fed cut interest rates three times in 2019, erasing the brief yield curve inversion and assuaging fears of a recession. The economy continued to add new jobs at a strong pace and unemployment declined to 3.5%. Consumer spending remained healthy, and there is optimism for better business investment following the announced “phase one” trade deal with China.
Similar to the S&P 500 Index, the broad-based Russell 3000 Index returned 9.04% during the quarter. Growth outperformed value, as the Russell 3000 Growth Index returned 10.62% compared to a return of 7.41% for the Russell 3000 Value Index. Smaller companies outperformed larger companies, as one would expect in a “risk-on” period. The Russell Microcap Index surged 13.45% and the Russell 2000 Index advanced 9.94%. Large company benchmarks such as the Russell 1000 Index advanced 9.04% while the Russell Midcap Index produced a return of 7.06%. Technology and Health Care were the best performing sectors in the quarter, while more defensive areas of the market lagged such as Real Estate and Utilities. Higher long-term interest rates weighed on high-quality bond proxies – the safe haven 10-year U.S. Treasury Bond produced a return of -1.74% during the quarter.
(As of 12/31/19) — The Buffalo Dividend Focus Fund posted a return of 7.89% for the quarter, underperforming the Morningstar U.S. Large-Mid Cap Index return of 9.01% and the S&P 500 Index return of 9.07%. Sector weightings and security selection curtailed the Fund’s performance relative to the benchmark. The Fund’s sectors with highest weightings – Information Technology, Health Care, and Financials – posted positive, low double-digit returns, and the latter two sectors had positive contribution to comparable index sectors due the Fund’s overweight position and investment performance. Information Technology, a strong performing benchmark sector for the quarter, detracted from relative performance due to a portfolio underweight within, along with weaker security selection for the Fund. Information Technology averaged a weighting of nearly 27% during the quarter compared to the Fund’s 23%. The Industrial sector also detracted from relative performance for the portfolio.
Specific securities that contributed most positively to performance included Apple Inc., Medicines Company, and Microsoft Corporation. Shares of Apple advanced on solid quarterly results, guidance on iPhone sales, strength in services and wearables, better trends in China, and reduced trade tensions. Microsoft improved on growing momentum from its cloud services and enterprise products which boosted quarterly results above analyst estimates. The company also won the Pentagon’s JEDI cloud contract, and shares experienced valuation multiple expansion on all the good news. Meanwhile, drug development company Medicines Co. jumped on favorable study results for Inclisiran (cholesterol therapy), which led to an acquisition agreement with Norvartis.
Specific securities that detracted from performance included Boeing Company, AMC Entertainment Holdings, and Vistra Energy. Shares of Boeing fell due to uncertainty regarding the delayed and growing costs related to the return to service of its grounded 737Max planes. The movie theater chain AMC Entertainment dropped on lagging box office results and concerns regarding its high debt leverage. Meanwhile, Vistra Energy, a retail and wholesale electricity production and distribution company, declined due to a large shareholder selling some of their position, as well as a negative Capacity, Demand and Reserves report by the Electric Reliability Council of Texas (ERCOT).
(As of 12/31/19) — The healthy gains in the stock market during the quarter were primarily driven by expansion in market valuation metrics, as corporate earnings have been relatively flat. Aiding the valuation expansion was the Fed, which cut short-term interest rates during the quarter and indicated a pause in further rate actions, possibly for an extended period. Trade tensions have also been reduced with agreements reached on the USMCA (United States, Mexico, and Canada) and the phase one pact with China. Key drivers for further stock market advancement are likely to be driven by how the Middle East conflicts play out, the upcoming domestic election cycle, and improved corporate earnings growth.
Despite the uncertainty primarily related to non-economic events, we remain focused on finding wide moat, large-capitalization companies trading at reasonable valuations, in our view. As always, the Fund will continue to emphasize competitively-advantaged companies that can be purchased at a fair price, by our analysis. If and when stock market volatility spikes, we will look for opportunities to find companies that fit our investment criteria, as we continue to follow our process of finding new investment ideas and to be ready when market declines provide better entry points.
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.
The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating™ for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating™ metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
In each Morningstar Category, the 10% of funds with the lowest measured risk are described as Low Risk, the next 22.5% Below Average, the middle 35% Average, the next 22.5% Above Average, and the top 10% High. Morningstar Risk is measured for up to three time periods (three, five, and 10 years). These separate measures are then weighted and averaged to produce an overall measure for the fund. Funds with less than three years of performance history are not rated. ©2020 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Style Box™ reveals a fund’s investment strategy by showing its investment style and market capitalization based on the fund’s portfolio holdings.