Dividend Focus Fund
|Total Net Assets:||$79.76 Million (9/30/20)|
|Category:||Large Cap Blend|
|Benchmark:||Morningstar U.S. Large-Mid Cap|
Fund Fact Sheet Q3 2020
PM Commentary Q3 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 1,237 Large Blend funds as of 10/31/20.
|As of 10/31/20||3 MO||YTD||1 YR||3 YR||5 YR||Since Inception|
|BUFFALO DIVIDEND FOCUS FUND - Investor||0.27||-0.08||6.35||8.10||9.57||11.73|
|BUFFALO DIVIDEND FOCUS FUND - Institutional||0.31||0.04||6.47||8.26||9.73||11.89|
|Morningstar U.S. Large-Mid Cap Index||0.76||4.29||11.34||10.92||11.86||13.65|
|S&P 500 Index||0.37||2.77||9.71||10.42||11.71||13.52|
|Morningstar Large Blend Category||0.51||0.05||6.30||8.01||9.64||11.17|
|As of 9/30/20||3 MO||YTD||1 YR||3 YR||5 YR||Since Inception|
|BUFFALO DIVIDEND FOCUS FUND - Investor||6.54||1.77||9.80||9.51||11.63||12.12|
|BUFFALO DIVIDEND FOCUS FUND - Institutional||6.58||1.89||9.91||9.68||11.79||12.29|
|Morningstar U.S. Large-Mid Cap Index||9.57||7.06||16.71||12.75||14.21||14.19|
|S&P 500 Index||8.93||5.57||15.15||12.28||14.15||14.07|
|Morningstar Large Blend Category||8.06||2.30||10.70||9.55||11.77||11.61|
* 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 9/30/20)|| |
|# of Holdings||87|
|Median Market Cap||$61.02 B|
|Weighted Average Market Cap||$394.93 B|
|3-Yr Annualized Turnover Ratio||21.49%|
|% of Holdings with Free Cash Flow||68.92%|
|30-day SEC Yield||0.94%|
Top 10 Holdings
|Holding||Ticker / Maturity||Sector||% of Net|
|S&P Global||SPGI||Financial Services||2.24%|
|UnitedHealth Group||UNH||Health Care||2.18%|
|Horizon Pharma||2.500%, 3/15/22||Health Care||1.92%|
|American Electric Power||AEP||Utilities||1.65%|
|TOP 10 HOLDINGS TOTAL||27.45%|
CAPITAL MARKET OVERVIEW
(As of 9/30/20) — Equity markets sustained their momentum in the 3rd quarter, with the S&P 500 Index returning 8.93%. Macro data continued to improve, and companies broadly reported earnings that proved to be more resilient than expectations. While the U.S. experienced another spike in COVID-19 cases during the quarter and tragically surpassed 200,000 deaths, positive news on vaccines and therapy fronts continued to provide hope for investors.
The Russell 3000 Index increased 9.21% in the quarter. Growth continued to outperform value, as the Russell 3000 Growth Index advanced 12.86%, compared to the Russell 3000 Value Index return of 5.41%. Relative performance was correlated with market cap size in the quarter, with the large cap Russell 1000 Index delivering a return of 9.47%, compared to the Russell Mid Cap Index return of 7.46%, the smaller cap Russell 2000 Index return of 4.93%, and the Russell Micro Cap Index return of 3.69%. More cyclically-exposed Consumer Discretionary, Materials, and Industrial sectors performed best in the quarter. Energy was the sole declining sector, hurt by lingering weakness in oil demand.
(As of 9/30/20) — The Buffalo Dividend Focus Fund (BUFDX) posted a return of 6.54%, underperforming the Morningstar U.S. Large-Mid Cap Index return of 9.56% and the S&P 500 Index return of 8.93%. With the exception of our Energy and Utilities holdings, all sectors in the Fund and benchmark posted positive returns. The Fund’s sectors with the highest weightings had mixed performance relative to the benchmark index. Health Care and Financials posted favorable relative performance compared to the benchmark’s sectors performance, while Information Technology experienced lagging relative returns. Our holdings in the Energy, Real Estate, and Telecommunication Service sectors delivered constructive performance relative to the benchmark. Sectors including Consumer Discretionary, Consumer Staples, Industrials, Materials, and Utilities detracted from the Fund’s performance.
Specific securities that contributed most positively to performance include Apple (AAPL), Horizon Therapeutics (HZNP), and Nuance Communications (NUAN). Apple advanced on solid quarterly results, anticipated growth from 5G iPhone sales, and announcement of a stock split. 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). Nuance Communications (speech recognition software and artificial intelligence) climbed on healthy quarterly results and favorable traction in new healthcare products.
Viper Energy Partners (VNOM), BioMarin Pharmaceutical (BMRN), and Intel (INTC) diminished the Fund’s performance. Viper Energy, which holds mineral interests in the Permian Basin, declined on weak earnings due to falling energy prices and reduction in its dividend distribution. BioMarin Pharmaceutical fell after the U.S. Food & Drug Administration (FDA) failed to approve its hemophilia therapy. The regulator recommends two years of data from final-stage study. Intel, which develops and manufactures microprocessors and chipsets, dropped as the company issued a weak earnings outlook and delayed its next generation of computer chips.
(As of 9/30/20) — The stock market reached a record high during the quarter on the expectations that the economy can recover from the COVID-19 pandemic. The market fell from the peak as investors became concerned regarding a second wave of COVID-19 cases, the prospects for passage of a fiscal stimulus was bogged down by partisan politics, anxiety around the presidential election, lack of an agreement on Brexit, and rhetoric around new anti-trust regulation regarding the large technology companies. As the current quarter unfolds, the market will likely be impacted as some of these issues play out. Studies on vaccines and drug therapies to treat COVID-19 are likely to be released. In addition, the election will occur; nevertheless, the results may be delayed and contested. Additionally, Brexit deadlines will force decisions on an agreement or further delays. Resolution of these issues will likely influence the prospects, timing, and size of additional fiscal stimulus measures needed to support the economy over the intermediate term and sustainable growth over the longer term. Monetary policy continues to remain accommodative, as Central Banks reiterate their policies of not raising interest rates, continue debt-buying programs, and expand inflation tolerance levels.
Despite the uncertainty created by the pandemic, we remain focused on wide moat, large capitalization companies trading at reasonable valuations, in our view. As always, the Fund will continue to emphasize 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.