Emerging Opportunities Fund
May 21, 2004
Total Fund Assets
$90.58 Million (12/31/17)
Russell 2000 Growth
Overall Morningstar™ rating out of 607 Small Growth funds as of 1/31/18 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure).
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.
RISK VS CATEGORY
The Morningstar™ Risk vs Category rating is an assessment of the variations in a fund’s monthly returns, with an emphasis on downside variations, in comparison to the 607 funds in the Small Growth category, as of 1/31/18.
The investment objective of the Buffalo Emerging Opportunities Fund is long-term growth of capital. The Fund invests primarily in equity securities, consisting of domestic common stocks, preferred stocks, convertible securities, warrants and rights, of companies that, at the time of purchase by the Fund, have market capitalizations of $1 billion or less.
While the Fund’s investments in equity securities will consist primarily of domestic securities, the Fund may also invest up to 20% of its net assets in sponsored or unsponsored ADRs and equity securities of foreign companies that are traded on U.S. stock exchanges.
We believe investing in an actively-managed portfolio of premier, early-stage, growth companies could lead to growth of capital over time. We look for companies that could benefit from long-term industrial, technological, or general market trends, and are trading at what we view as attractive valuations.
~ Craig Richard, Portfolio Manager
The Fund managers seek to identify companies for the Fund’s portfolio that are expected to experience growth based on the identification of long-term, measurable secular trends, and which, as a result, 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 Fund managers believe have favorable attributes, including attractive valuation, strong management, conservative debt, free cash flow, scalable business models, and competitive advantages.
|As of 1/31/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||Since Inception|
|Buffalo Emerging Opportunities Fund||3.45||2.43||29.40||11.46||13.26||10.76||8.65|
|Russell 2000 Growth Index||7.00||3.90||24.90||12.56||14.62||10.67||9.99|
|Lipper Small Cap Growth Fund Index||8.63||4.73||27.02||12.85||13.60||9.47||9.06|
|Lipper Micro Cap Funds Index||2.89||1.66||17.19||11.70||12.90||8.97||8.43|
|Morningstar Small Growth||6.84||3.77||23.68||12.44||13.47||9.89||8.83|
|As of 12/31/17||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||Since Inception|
|Buffalo Emerging Opportunities Fund||1.32||27.18||27.18||8.56||13.89||9.61||8.51|
|Russell 2000 Growth Index||4.59||22.17||22.17||10.28||15.21||9.19||9.74|
|Lipper Small Cap Growth Fund Index||6.16||24.77||24.77||10.09||13.92||7.84||8.10|
|Lipper Micro Cap Funds Index||1.96||14.87||14.87||9.49||13.82||7.72||8.35|
|Morningstar Small Growth||4.70||21.50||21.50||9.97||13.96||8.42||8.60|
|Year||Buffalo Emerging Opportunities||Russell 2000 Growth Index||Morningstar Small Growth Category|
|vs Russell 2000 Growth Index|
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower of higher than the performance quoted and can be obtained here. Performance is annualized for periods greater than 1 year. Each Morningstar category average represents a universe of funds with similar objectives.
Growth of $10k
This chart illustrates the performance of a hypothetical $10,000 investment made in the Fund on the Inception Date. Assumes reinvestment of dividends and capital gains. This chart does not imply future performance.
|# of Holdings||60|
|Median Market Cap||$962.53 M|
|Weighted Average Market Cap||$1.19 B|
|3-Yr Annualized Turnover Ratio||67.50%|
|% of Holdings with Free Cash Flow||60.00%|
|% of Holdings with No Net Debt||40.00%|
|Holding||Ticker||Sector||% of Net Assets|
|Motorcar Parts of America||MPAA||Consumer Discretionary||3.02%|
|Community Healthcare Trust||CHCT||Real Estate||2.68%|
|Del Taco Restaurants||TACO||Consumer Discretionary||2.12%|
|TOP 10 HOLDINGS TOTAL||24.48%|
As of 9/30/17. Top 10 Holdings for the quarter are not disclosed until 60 days after quarter end. Those listed are for the previous quarter. Fund holdings are subject to change and are not recommendations to buy or sell any securities.
Buffalo publishes this listing of securities held as of the most recent calendar-quarter end, with a 30 or 60 day lag depending on the portfolio. Buffalo may exclude any portion of holdings from publication when deemed in the best interest of the portfolio.
The portfolio data and its presentation here may differ from the complete schedules of investments in regulatory filings due to differing accounting and reporting requirements.
As of 9/30/17. Security weightings are subject to change and are not recommendations to buy or sell any securities.
Sector Allocation may not equal 100% due to rounding.
As of 9/30/17. Market Cap percentages may not equal 100% due to rounding.
CAPITAL MARKET OVERVIEW
Equity markets ended 2017 on a strong note. The 4th quarter saw a continuation of trends that have influenced the market all year. Investor optimism about improving global economic growth and strong corporate earnings led to another quarter of higher stock prices and low volatility. Strong holiday sales and the passage of tax reform legislation also provided tailwinds to equity markets during the period. The Chicago Board of Options Exchange Volatility (CBOE) Index continued to hover near record lows, and, for the first time since 1958, the S&P 500 Index delivered positive returns in every single month of the year.
The Russell 3000 Index produced a total return of 6.34% in the 4th quarter. Growth continued to outperform value, as the Russell 3000 Growth Index advanced 7.61% and outperformed the Russell 3000 Value Index return of 5.08%. Large companies generally outperformed smaller companies during the quarter. The Russell 1000 Index returned 6.59%, the Russell Midcap Index returned 6.07%, the Russell 2000 Index returned 3.34%, and the Russell Microcap Index returned 1.80%. Consumer discretionary and technology were the best performing sectors while utilities, health care, and consumer staples underperformed in the quarter.
The Buffalo Emerging Opportunities Fund posted a return of 1.32% in the 4th quarter. This performance trailed the Russell 2000 Growth Index return of 4.59%. During the quarter, every sector of the Index posted positive returns as the markets finished 2017 on a strong note. For the calendar year, the Fund returned 27.18% compared to the Index return of 22.17%.
The Healthcare, Information Technology (IT) and Industrials sectors generated returns of 38.3%, 21.2% and 17.9%, respectively. These sectors represent the largest weightings in the Index.
Only the Energy sector (1% weighting) within the Index saw negative calendar year returns. The outperformance by the Fund in 2017 was due to stock-picking within the IT sector where the Fund generated an average return of 57.5% compared to the Index’s IT sector returns of 21.19%.
Since the market recovery began dating back to the beginning of 2009, the Index has returned 291.5%, with the IT sector leading the way with 446.9% in cumulative returns. The Fund has generated a 384.1% cumulative return over this same time period. The current market expansion the past nine years has been remarkable and is worth putting in writing both the Index and Fund’s returns over this time period to gain perspective.
Digging deeper into the most recent quarter, the Fund trailed mainly due to stock-picking within the Consumer Discretionary sector. Over capacity within the restaurant space, the Amazon-effect on retailers, and the fickle nature of consumers’ tastes has presented its problems in the Consumer area, where investor sentiment is quick to turn negative and valuation multiples can compress quickly.
One example from the quarter is Nautilus, a leading manufacturer of exercise equipment. Nautilus goes to market with their cardio and strength equipment both through the direct-to-consumer market (online store) and through retail partners (Amazon, Dick’s Sporting Goods). Nautilus has seen a sharper-than-expected decline in sales from an older product line, the Treadclimber, and newly introduced products have been slower to offset these declines. Longer term, we believe product innovation, Nautilus’ leadership position in the space, and a high quality management team will overcome some of these shorter term issues. In Consumer, we have lightened up on restaurants (only own one) and have moved towards experiences and items where Amazon cannot cause as much disruption.
During the quarter, one of the new holdings added to the Fund was Wildan Group. Wildan is an engineering and consulting firm focused on serving utilities and their customers (large companies, state/local government entities). The primary offering from Wildan is delivering energy efficiency programs. With renewable energy sources coming online and older sources of electricity going offline, utilities need plans to balance periods of strong demand and unstable power generation.
Wildan performs energy audits, designs programs, and implements equipment (lighting, windows, boilers, etc.) to deliver energy savings to allow for balancing the demand and supply in this evolving environment. The marquee customer example is Con Edison in Brooklyn that was evaluating spending $1-2 billion for new power generation capacity. Wildan worked with Con Edison to generate the electricity savings from energy efficiency programs with their largest clients to eliminate the need for this capital expenditure investment. With a clean balance sheet, a strong market demand outlook of greater than 10%, win rates of 80+% on projects they bid on, and an opportunity for outsized growth in the California market given current initiatives on the table, we began a position in Wildan. We like the risk/reward at these levels and believe this represents an example of a Fund holding that is under the radar.
2017 saw strong domestic returns across the board, with growth equity classes leading the way with returns above 20% in many cases. All the more impressive is that this comes in year 9 of the market expansion.
The incremental positive for our Fund in 2017 is the passage of the tax reform bill before year end. With larger companies forecasting lower tax rates, and, in some cases, an ability to bring back onshore some of their offshore earnings (repatriation), we expect merger and acquisition (M&A) activity to pick up in 2018. With a weighted average market capitalization for our holdings around $1.2 billion and a median revenue growth rate of 16%, we like the possibility of seeing increased M&A activity this year from the single take-out we saw in the Fund in 2017.
As noted above, the Fund is positioned at the smaller end of the Index with a weighted average market cap of $1.2 billion versus the Index at $2.6 billion. We would note that the Russell 2000 Growth has outperformed the Russell Microcap Growth for four consecutive years, and any trend reversal in this could provide a tailwind for the Fund given our positioning on the smaller end of the small cap growth spectrum.
Given where we stand in this market cycle, we remain focused on valuations and fundamentals and continue to monitor the risk/reward profile of our holdings. As a result, we often make changes based on market moves intra quarter that provide either an opportunity to trim or add to a position based on the inefficiencies that exist at the smaller end of the market cap spectrum.
The Buffalo Emerging Opportunities Fund is focused primarily on identifying innovation within U.S. companies with North American revenue bases. The U.S. consumer confidence and small business confidence remain near all-time highs which should bode well for our smaller, U.S. centric companies.
We ended the quarter with 60 holdings, adding 3 holdings while moving on from 3 others. We continue to look for prudent ways to deploy cash, and we remain long-term focused, aiming to be shrewd when the market environment presents opportunity and more cautious when it does not.
The opinions expressed are those of the Portfolio Manager(s) and are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security. Fund holdings and sector allocations are subject to change and are not recommendations to buy or sell any security. Earnings growth is not representative of the fund’s future performance.
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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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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.
The Buffalo Emerging Opportunities Fund received 2 stars among 607 for the three-year, 2 stars among 542 for the five-year, and 2 stars among 407 Small Growth funds for the ten-year period ending 1/31/18.
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.
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