Dividend Focus Fund
|Total Net Assets:||$75.78 Million (6/30/20)|
|Category:||Large Cap Blend|
|Benchmark:||Morningstar U.S. Large-Mid Cap|
Fund Fact Sheet Q2 2020
PM Commentary Q2 2020
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 1,223 Large Blend funds as of 8/31/20.
|As of 8/31/20||3 MO||YTD||1 YR||3 YR||5 YR||Since Inception|
|BUFFALO DIVIDEND FOCUS FUND - Investor||12.26||5.46||15.39||11.36||11.62||12.78|
|BUFFALO DIVIDEND FOCUS FUND - Institutional||12.35||5.60||15.56||11.54||11.80||12.95|
|Morningstar U.S. Large-Mid Cap Index||16.36||11.20||23.31||14.97||14.46||14.91|
|S&P 500 Index||15.48||9.74||21.94||14.52||14.46||14.80|
|Morningstar Large Blend Category||13.52||5.76||16.50||11.58||11.83||12.20|
|As of 6/30/20||3 MO||YTD||1 YR||3 YR||5 YR||Since Inception|
|BUFFALO DIVIDEND FOCUS FUND - Investor||19.93||-4.47||5.67||8.17||8.26||11.61|
|BUFFALO DIVIDEND FOCUS FUND - Institutional||19.97||-4.40||5.84||8.33||8.42||11.78|
|Morningstar U.S. Large-Mid Cap Index||21.76||-2.29||8.13||10.96||10.59||13.32|
|S&P 500 Index||20.54||-3.08||7.51||10.73||10.73||13.28|
|Morningstar Large Blend Category||19.61||-5.48||3.74||8.15||8.35||10.88|
* Partial year. Inception to year-end.
3 Year Risk Metrics
|BUFDX vs Morningstar U.S. Large-Mid Cap Index (As of 6/30/20)|
Hypothetical Growth of $10,000
Record Date: December 17, 2020 | Payable Date: December 18, 2020
|(As of 6/30/20)|| |
|# of Holdings||91|
|Median Market Cap||$58.10 B|
|Weighted Average Market Cap||$345.44 B|
|3-Yr Annualized Turnover Ratio||22.45%|
|% of Holdings with Free Cash Flow||67.53%|
|30-day SEC Yield||1.27%|
Top 10 Holdings
|Holding||Ticker / Maturity||Sector||% of Net|
|UnitedHealth Group||UNH||Health Care||2.16%|
|S&P Global||SPGI||Financial Services||1.95%|
|American Electric Power||AEP||Utilities||1.94%|
|Johnson & Johnson||JNJ||Health Care||1.67%|
|Lumentum Holdings||(12/15/2026, 0.500%)||Technology||1.58%|
|TOP 10 HOLDINGS TOTAL||25.51%|
CAPITAL MARKET OVERVIEW
(As of 6/30/20) — Equity markets rebounded sharply in the 2nd quarter following steep losses in the previous period. The S&P 500 Index produced a return of 20.54%, marking the best quarterly performance results in 20 years. Stimulus efforts by the Federal Reserve (the “Fed”) and the U.S. Treasury Department to limit COVID-related economic damage helped equity markets find a floor in late March. Declining COVID-19 case counts, optimism about treatment and potential vaccines, along with better-than-expected economic data also contributed to improved investor sentiment during the period. Although confirmed virus cases began spiking again in the final days of June, it was not enough to undo the best quarterly market results since the dot-com boom.
The broad market Russell 3000 Index advanced 22.03% in the quarter, and Growth outperformed Value as the Russell 3000 Growth Index moved up 27.99% during the period, compared to the Russell 3000 Value Index’s advance of 14.55%. Relative performance was inversely-correlated by market cap as the Russell Micro Cap Index advanced 30.54%, well above the large cap Russell 1000 Index’s return of 21.82%. Meanwhile the small cap Russell 2000 Index and the Russell Mid Cap Index were up 25.42% and 24.61%, respectively. The best performing sectors were Technology, Consumer Discretionary, and Energy while the less cyclically exposed, more defensive areas like Utilities, Telecommunication, and Consumer Staples lagged in the quarter.
(As of 6/30/20) — The Buffalo Dividend Focus Fund (BUFDX) posted a return of 19.93% during the period, a result that slightly trailed the Morningstar U.S. Large-Mid Cap Index return of 21.76% and the S&P 500 Index return of 20.54%. All sectors in the Fund and benchmark Index posted positive returns. The Fund’s sectors with the highest weightings had mixed performance relative to the Index. Health Care and Financials posted favorable relative performance compared to the benchmark’s sectors, while Information Technology experienced lagging relative returns. Smaller-weighted sectors like Industrials, Energy, and Utilities also delivered constructive performance relative to the benchmark, while Consumer Discretionary, Consumer Staples, Materials, and Telecommunications Services experienced weaker stock selection.
Specific securities that contributed most positively to performance include Apple Inc. (AAPL), Microsoft Corporation (MSFT), and Horizon Therapeutics Investments Ltd. (HZNP). Apple advanced on solid quarterly results, guidance on iPhone sales, strength in services, and the expected rebound in COVID-19 disruptions. Microsoft improved on growing momentum from cloud services and enterprise products, which boosted quarterly results above analyst’s estimates and drove expansion in the company’s valuation metrics. Meanwhile, shares of the biopharmaceuticals company Horizon Therapeutics rose on strong quarterly results, driven by the launch of Tepezza for thyroid eye disease and favorable study data on Krystexxa in combination with immunomodulation (methotrexate).
Conversely, Delta Airlines Inc. (DAL), Elanco Animal Health, Inc. (ELAN), and Otis Worldwide Corp. (OTIS) were the largest detractors from the Fund’s performance. Delta declined on reduced demand for airline travel due to COVID-19. Elanco Animal Health fell on poor quarterly results due to distributor inventory destocking. While OTIS, the elevator and escalator manufacturing and installation company, dropped as the investor base digested the shares from the spin out from United Technologies (now Raytheon Technologies). All three positions were liquidated during the quarter in favor of more attractive risk-reward opportunities.
(As of 6/30/20) — The primary driver of the sharp rise in the stock market during the quarter was the expectations that the economy can recover from the COVID-19 pandemic. Central Banks have cut benchmark lending rates and expanded their balance sheets as they buy various assets of eligible securities. Investors have reacted by accumulating more risk assets as they have been driven by the need to boost returns as well as the perception that Central Banks stand ready as a backstop to bail them out. The fiscal stimulus and financial aid programs passed by governments have begun to work their way into the economy. If the economy does not recover, politicians appear to be reluctantly willing to pass additional stimulus as needed. In addition, during the quarter, COVID-19 cases started to decline from peak levels, allowing domestic and international regions to reduce shelter in place orders and slowly get back to work. Nevertheless, as the restrictions are relaxed, the COVID-19 case count has begun to accelerate from trough levels. However, policy makers appear reluctant to re-impose shelter in place orders. Several promising therapies appear to lessen the death rate of the virus, but, over the intermediate term, for the economy to recover and generate sustainable growth, the pandemic will need to be contained through vaccine development, which still appears several quarters out.
Despite the uncertainty, we remain focused on wide-moat, large-capitalization companies trading at reasonable valuations, in our view. As always, the Fund will continue to place an emphasis on competitively-advantaged companies that can be purchased at a fair value, in our opinion. As 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.