Dividend Focus Fund
|Total Net Assets:||$65.63 Million (3/31/20)|
|Category:||Large Cap Blend|
|Benchmark:||Morningstar U.S. Large-Mid Cap|
Fund Fact Sheet Q1 2020
PM Commentary Q1 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 1,232 Large Blend funds as of 5/31/20.
|As of 5/31/20||3 MO||YTD||1 YR||3 YR||5 YR||Since Inception|
|BUFFALO DIVIDEND FOCUS FUND - Investor||1.59||-6.06||9.65||7.64||7.33||11.50|
|BUFFALO DIVIDEND FOCUS FUND - Institutional||1.58||-6.01||9.81||7.80||7.49||11.66|
|Morningstar U.S. Large-Mid Cap Index||3.79||-4.44||13.13||10.39||9.68||13.14|
|S&P 500 Index||3.59||-4.97||12.84||10.23||9.86||13.14|
|Morningstar Large Blend Category||1.77||-7.11||8.70||7.80||7.58||10.77|
|As of 3/31/20||3 MO||YTD||1 YR||3 YR||5 YR||Since Inception|
|BUFFALO DIVIDEND FOCUS FUND - Investor||-20.35||-20.35||-8.32||2.26||4.64||9.29|
|BUFFALO DIVIDEND FOCUS FUND - Institutional||-20.31||-20.31||-8.17||2.41||4.79||9.45|
|Morningstar U.S. Large-Mid Cap Index||-19.75||-19.75||-7.35||4.98||6.35||10.78|
|S&P 500 Index||-19.60||-19.60||-6.98||5.10||6.73||10.90|
|Morningstar Large Blend Category||-20.92||-20.92||-9.97||2.80||4.46||8.64|
* Partial year. Inception to year-end.
3 Year Risk Metrics
|BUFDX vs Morningstar U.S. Large-Mid Cap Index (As of 3/31/20)|
Hypothetical Growth of $10,000
Record Date: September 17, 2020 | Payable Date: September 18, 2020
Record Date: December 17, 2020 | Payable Date: December 18, 2020
|(As of 3/31/20)|| |
|# of Holdings||77|
|Median Market Cap||$57.07 B|
|Weighted Average Market Cap||$254.60 B|
|3-Yr Annualized Turnover Ratio||24.31%|
|% of Holdings with Free Cash Flow||66.67%|
|30-day SEC Yield||1.55%|
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 3/31/20) — Global equity markets fell sharply in the 1st quarter of 2020 in reaction to the global spread of COVID-19. As the case count increased exponentially, the only effective response was for countries to go into lockdown. The economic impact of these actions became clear as the quarter progressed and virtually all asset classes suffered as a result. From February 19 through March 23, the U.S. stock market, as measured by the S&P 500 Index, declined around 34%, which was the fastest meltdown in history. Central banks and governments responded quickly to this event, with the U.S. Federal Reserve (the “Fed”) cutting interest rates twice in March and announcing unlimited quantitative easing. The U.S. Senate passed a $2 trillion stimulus package, providing assistance to individuals and businesses in distress. Optimism around these efforts helped the market rally into quarter end, leaving the S&P 500 Index down 19.60% from the start of the year.
The broad market Russell 3000 Index declined 20.90% in the 1st quarter. Growth outperformed value, with the Russell 3000 Growth Index declining 14.85% compared to the Russell 3000 Value Index decline of 27.32%. By capitalization size, large cap stocks held up best, with a -20.22% return in the quarter, represented by the Russell 1000 Index. The Russell Mid Cap Index fell -27.07%, followed by the smaller cap Russell 2000 Index which declined -30.61%. Best performing sectors were the Technology, Health Care, and Consumer Staples sectors. The Energy sector was hit hardest as falling demand and rising supply from Saudi Arabia caused oil prices to crater. The economically-sensitive Financial and Industrial sectors were also among the worst performing sectors in the quarter.
(As of 3/31/20) — The Buffalo Dividend Focus Fund (BUFDX) posted a return of -20.35%, slightly underperforming the Morningstar U.S. Large-Mid Cap Index return of -19.75% and the S&P 500 Index return of -19.60%. All sectors in the benchmark index posted double-digit
negative returns. The Fund’s sector performance experienced similar negative returns, with the exception of the Real Estate sector, which delivered a single-digit positive return. The Fund’s sectors with the highest weightings had mixed performance relative to the Index. Information Technology and Financials posted favorable relative performance compared to the benchmark, while Health Care experienced lagging relative returns. In addition to Real Estate, our Consumer Discretionary and Consumer Staples holdings also delivered constructive performance relative to the benchmark. Areas of the Fund that
detracted from performance included Utilities, Industrials, and Energy.
Specific securities that contributed most positively to performance included Community Healthcare Trust (CHCT), Amazon (AMZN), and Digital Realty Trust (DLR). Fund management initiated a new position in Community Healthcare Trust, a health care real estate company, in the quarter during the general market sell-off. Shares of Amazon advanced, as the company’s operations are expected to benefit from the trend in consumers increasingly shifting to on-line buying as they work from home due to shelter-in-place orders. Digital Realty Trust, a provider of data centers, is another recently-added position that contributed to Fund results through timely purchases of
shares during the volatile quarter.
Specific securities that detracted from performance included Energy Transfer, L.P. (ET), Viper Energy Partners L.P. (VNOM), and Truist Financial Corporation (TFC, formerly known as BB&T). Energy Transfer, an energy transportation services company, and Viper Energy Partners, a leased oil and gas properties company, dropped as energy prices plunged in response to the failure of an agreement between the Organization of the Petroleum Exporting Countries (OPEC) members on production cutbacks as well as the drop in demand caused by the Coronavirus pandemic. Meanwhile shares of Truist Financial Corporation fell on general economic decline and as a result of lower interest rates, as the Fed cut its benchmark lending rate to zero.
(As of 3/31/20) — The primary driver of the sharp decline in the stock market during the quarter was the Covid-19 pandemic and efforts to contain it, which has inflicted economic damage. Governments and healthcare experts have responded to the crisis by issuing stay at home orders to try to curtail the spread of the disease, new infections, and fatalities. The economic impact has resulted in a sharp decline in spending and an explosion in unemployment. To limit the economic damage, governments have passed and
are passing various financial aid programs in addition to health care measures to combat the pandemic. Central Banks have also cut benchmark lending rates and have expanded their balance sheets as they buy various assets of eligible securities. The fiscal and monetary response to the pandemic has been relatively swift and expansive, with indications that, if conditions do not improve, they will do “whatever it takes.”
Their efforts so far are encouraging and markets have begun to rebound. Over the intermediate term, the pandemic will need to be contained through a combination of better testing, improved therapies, vaccine development, and seasonal curtailment.
Hopefully, through these measures, the economy may begin to recover and generate sustainable growth.
Despite the uncertainty, we remain focused on wide moat, competitively-advantaged large capitalization companies trading at reasonable valuations, in our view. As stock market volatility spikes, we will look for opportunities to buy shares of 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.