Emerging Opportunities Fund

Quick Facts

(As of 3/31/17)

Ticker
  BUFOX

Inception Date
  May 21st, 2004

Total Fund Assets
  $85.4 M

Expense Ratio
  1.48%

Benchmark Index
  Russell 2000 Growth

MORNINGSTAR RATING

Overall Morningstar™ rating out of 599 Small Growth funds as of 3-31-2017 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure, if applicable).

INVESTMENT STYLE

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

LOW HIGH

Overview

Investment Strategy

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.

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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

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Performance

(As of 3/31/17)3 MOYTD1 YR3 YR5 YR10 YRSince Inception
(5/21/04)
Buffalo Emerging Opportunities Fund7.137.1322.991.0611.286.167.59
Russell 2000 Growth Index5.355.3523.036.7212.108.069.08
Lipper Small Cap Growth Fund Index6.516.5119.935.2810.526.78-
Lipper Micro Cap Funds Index1.411.4125.024.7111.376.197.81
Morningstar Small Growth5.565.5622.415.3410.737.31-
Each Morningstar category average represents a universe of funds with similar objectives.
(As of 3/31/17)3 MOYTD1 YR3 YR5 YR10 YRSince Inception
(5/21/04)
Buffalo Emerging Opportunities Fund7.137.1322.991.0611.286.167.59
Russell 2000 Growth Index5.355.3523.036.7212.108.069.08
Lipper Small Cap Growth Fund Index6.516.5119.935.2810.526.78-
Lipper Micro Cap Funds Index1.411.4125.024.7111.376.197.81
Morningstar Small Growth5.565.5622.415.3410.737.31-
Each Morningstar category average represents a universe of funds with similar objectives.
YearBuffalo Emerging OpportunitiesRussell 2000 Growth IndexMorningstar Small Growth Category
201611.0511.3211.20
2015-9.41-1.38-2.41
2014-7.385.602.44
201361.7043.3040.91
201224.3014.5913.15
20118.14-2.91-3.55
201026.8629.0926.98
200948.1634.4735.46
2008-48.30-38.54-41.55
2007-11.887.057.59
Each Morningstar category average represents a universe of funds with similar objectives.
(As of 3/31/17)
vs Russell 2000 Growth Index
Upside Capture92.71
Downside Capture112.99
Alpha-5.28
Beta1.05
Standard Deviation19.25
Sharpe Ratio0.05

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.

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.

Portfolio

(As of 3/31/17)
# of Holdings59
Median Market Cap$732.18 M
Weighted Average Market Cap$908.74 M
3-Yr Annualized Turnover Ratio57.09%
% of Holdings with Free Cash Flow61.02%
% of Holdings with No Net Debt49.15%
Active Share96.40%
HoldingTickerSector% of Portfolio
Motorcar Parts of America MPAAConsumer Discretionary3.20%
MGP Ingredients MGPIConsumer Staples3.10%
Cross Country Healthcare CCRNIndustrials2.54%
Installed Building Products IBPMaterials2.40%
Nautilus NLSConsumer Discretionary2.36%
US Concrete USCRMaterials2.21%
Exa EXATechnology2.16%
At Home Group HOMEConsumer Discretionary2.04%
CommerceHub CHUBKTechnology1.89%
Instructure INSTTechnology1.81%
TOP 10 HOLDINGS TOTAL23.71%
View Full Holdings

As of 12/31/16. 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 3/31/17. 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 3/31/17. Market Cap percentages may not equal 100% due to rounding.

Commentary

CAPITAL MARKET OVERVIEW

Capital markets got off to a volatile start in 2016 with the Russell 3000 Index dropping over 11% and West Texas Intermediate (WTI) Crude Oil down almost 30% by mid-February. Concerns about soft Chinese economic growth contributed to equity market weakness early in the year, and the energy complex was struggling to resolve its oversupplied condition. Meanwhile, perceived “safe-haven” assets performed strongly as U.S. 10-year Treasury notes advanced and gold appreciated over 15% during the same time frame. Economic concerns and a falling stock market led the Federal Reserve to adopt a less aggressive stance toward interest rate increases, and falling crude production eventually calmed fears of oversupply. These drivers led to a rebound in prices of both equities and crude oil and began a period of steadily rising prices and declining volatility that would continue from mid-February through the end of the year with only minor interruption. Interestingly, perceived ”safe-haven” assets continued to perform strongly as gold and U.S. Treasuries rallied alongside equities into the summer and largely held those gains into the fall. The fourth quarter of 2016 began with this uneasy disequilibrium still largely intact, but sentiment changed dramatically with Donald Trump’s surprise election victory on November 8th. The election outcome created expectations of pro-growth policies and deregulation that drove accelerating gains in stock prices, higher interest rates and associated declines in the prices of both Treasury bonds and gold, all of which generally persisted through the end of 2016.

The Russell 3000 Index returned 12.74% for the full year. The Russell 3000 Value Index outperformed the Russell 3000 Growth Index by 11.01% during the year, and smaller-capitalization indices such as the Russell Microcap Index, the Russell 2000 Index and the Russell Midcap Index outperformed the large-capitalization Russell 1000 Index by 8.31%, 9.25% and 1.74%, respectively. Much of the outperformance of value stocks can be attributed to the strong performance of the energy sector. Outperformance of small-capitalization stocks was reflective of investor aversion to greater international exposure of larger companies in the face of a rising dollar, as well as increasingly optimistic expectations for the domestic economy and for a lower U.S. corporate tax rate following the election. For the year, Energy and Materials were the best performing sectors in the Russell 3000 Index as expectations for infrastructure investment and increasing investor risk appetite following the election contributed to the reversal of prior-year underperformance that was already underway. Health Care was the worst performing sector for the year, as concerns about political backlash against rising drug prices contributed to declines in Pharmaceutical & Biotech stocks.

For the fourth quarter, the Russell 3000 Index returned 4.21%. The Russell 3000 Value Index outperformed the Russell 3000 Growth Index by 6.04% during the quarter while smaller-capitalization indices such as the Russell Microcap Index and the Russell 2000 Index outperformed the large-capitalization Russell 1000 Index by 6.22% and 5.00%, respectively. The Russell Midcap Index of mid-sized companies underperformed the Russell 1000 Index by 0.62% in the fourth quarter and was the lone exception to the trend of small outperforming large. Outperformance of more cyclically sensitive value stocks and small capitalization stocks reflected some of the same drivers that were in place earlier in the year, as well as increasingly optimistic expectations for economic growth, higher interest rates and expectations of a lower corporate tax rate in the U.S. following the election. Financial Services was the best performing sector in the fourth quarter, benefiting from higher interest rates and expectations for a less adversarial regulatory regime under the new Republican administration. The flip-side of greater risk appetite was less demand for stable, “bond-like” equities which was reflected in the lower-risk Consumer Staples sector performing poorly during the quarter. Political risk continued to put pressure on the Health Care sector, as uncertainty regarding potential for drug price regulation and repeal of the Affordable Care Act contributed to Health Care being the worst performing sector during the quarter.

PERFORMANCE COMMENTARY

The Buffalo Emerging Opportunities Fund posted a return of 1.06% in the fourth quarter, which trailed the Russell 2000 Growth Index return of 3.57% for the same period. The post-election bounce in the Index was led by gains in Financials, Materials, and Industrials on the above mentioned expectations of higher interest rates and the potential for increased infrastructure spending under the Trump administration. The Fund delivered outperformance versus the Index in these three sectors led by Financials where the Fund’s holdings delivered a 19.57% return compared to the Index return of 13.59%. Financial Engines, the leading provider of automated advice for 401(k) participants, was a top contributor in the quarter. Buoyed by market advances in the quarter that boosted assets under management and favorable early reads on the integration of the Mutual Fund Store acquisition led to strong performance to close out the year. Financial Engines, with the benefit of automatic investing of 401(k) plans, has not had a year of negative asset flows since inception and is looking to utilize the advisor base of the Mutual Fund Store to gain wallet share of its 401(k) participants other accounts including IRAs.

In Healthcare, the Fund performed in-line with the Index during the quarter. Our continued underweight of the Biotech industry contributed to our performance while our Healthcare Equipment (medical devices) holdings more than offset this benefit. One of the top contributors overall to the Fund in the quarter was Cross Country Healthcare. After meeting with the company in July 2016, we initiated a position given the direction and discipline of the relatively new management team in place to drive topline growth and margin expansion. The company specializes in providing temporary and travel nurses and has benefited from demographics with the aging of baby boomers as those over 65 years of age require three times as much nursing care than those younger than 65. This trend along with the aging of the nurse population and more nurses leaving the profession due to retirement and family formation than entering the profession also provides a potential tailwind for Cross Country going forward.

The largest deterrent to performance in the fourth quarter was the Consumer Discretionary sector. MDC Partners along with Nautilus were drags on performance results. MDC, a leading global advertising agency, continued to struggle with business execution with growth targets not hitting expectations. Nautilus, a leading contributor in the prior quarter, gave back those gains in the fourth quarter. The leading provider of fitness equipment suffered from effects of the election cycle. Advertising spend proved less effective in the months of September and October given a distracted and concerned consumer and led to lower than expected sales.

In last quarter’s commentary, we highlighted MGP Ingredients as a new addition to the Fund and our argument for its attractiveness as we look out over several years. During the fourth quarter, it was a top contributor to Fund performance. MGP is a leading spirits provider, distilling gin, vodka, and more recently whiskey. Their positioning in the premium whiskey category as a supplier to the hundreds of craft distillers than have come to market is driving growth. Increased disclosure and increased analyst coverage has driven more investor interest to the company. The company is in the early to middle stages of executing their strategy to continue to supply the industry with gin, vodka and whiskey distillate but also build aged whiskey inventory that can be sold at a premium over time and also deliver their own branded product in time. The Fund will look to continue to uncover emerging growth companies like this going forward. We remain focused on valuations and fundamentals which has caused us to be more active in trimming or selling positions that have appreciated closer to our fair value targets and replacing them with securities that we believe have a better risk/reward profile as we enter the eighth year of this bull market cycle. We ended the quarter with 66 holdings. 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.

OUTLOOK

While the election cycle has passed and the initial steps taken by the new Trump administration will create daily headlines, we look to build a portfolio of companies that could benefit from underlying secular growth trends and over the long term could have thriving business models regardless of the political landscape. The Buffalo Emerging Opportunities Fund is focused primarily on identifying innovation within U.S. companies with North American revenue bases. We believe the biggest uncertainty with the new administration surrounds foreign policy and relations. Our universe is much more U.S. centric than mid and large cap holdings, thus we like the Fund’s positioning given this backdrop. In addition, U.S. consumer confidence and small business confidence are near or at all-time highs which could bode well for our smaller, U.S. centric companies. Additionally, we continue to believe the landscape for potential acquisitions could benefit the Fund as larger companies continue to search out areas for growth. More favorable taxation of repatriated profits earned abroad could be a catalyst for acceleration on this front.

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.

Fundamental Approach

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.

Proprietary Philosophy

We construct our portfolios based on our own proprietary investment strategy.

Disciplined Investing

Sticking to our disciplined investment strategy ensures we maintain a consistent, balanced approach.

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FOR INDIVIDUAL INVESTORS

The Morningstar RatingTM 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 RatingTM 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 1 star among 599 for the three-year, 3 stars among 527 for the five-year, and 1 star among 386 Small Growth category funds for the ten-year period ended 3/31/17.

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