Emerging Opportunities Fund
Recent Media Coverage
MarketWatch – Feb. 7, 2019
Fund Objective & Investment Process
The investment objective of the Buffalo Emerging Opportunities Fund is long-term growth of capital. The Fund invests primarily in equity securities, consisting of a portfolio of between 50-70 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 $1.5 billion or less.
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 premier early-stage growth companies which generally demonstrate:
- Strong management teams
- Little or no debt
- Potential for increasing free cash flow
- Scalable business models with a competitive advantage
- Potential for increasing margins
- Attractive risk/reward given the market framework
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
Overall Morningstar Rating™ based on risk-adjusted returns among 576 Small Growth funds as of 5/31/19.
|As of 5/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO EMERGING OPPORTUNITIES FUND||-0.96||17.95||4.03||18.35||9.58||17.11||8.46||8.58|
|Morningstar U.S. Small Growth Index||-4.59||14.24||-1.51||13.25||9.30||14.55||8.77||9.09|
|Russell 2000 Growth Index||-5.89||11.76||-6.88||11.72||8.32||13.93||8.60||8.88|
|Morningstar Small Growth Category||-3.82||13.80||-2.34||13.46||8.92||13.99||8.70||8.25|
|As of 3/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||Since Inception|
|BUFFALO EMERGING OPPORTUNITIES FUND||16.88||16.88||9.39||17.91||6.59||19.73||8.62|
|Morningstar U.S. Small Growth Index||19.43||19.43||8.94||16.74||9.58||16.99||9.52|
|Russell 2000 Growth Index||17.14||17.14||3.85||14.87||8.41||16.52||9.33|
|Morningstar Small Growth Category||17.01||17.01||7.70||15.88||8.45||16.24||8.54|
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.
As of July 27, 2018 the Morningstar U.S. Small Growth Index has replaced the Russell 2000 Growth Index as the Fund’s primary benchmark. The Advisor believes that the new index is more appropriate given the Fund’s holdings.
3 Year Risk Metrics
|vs Morningstar U.S. Small Growth Index (As of 3/31/19)|
Hypothetical Growth of $10,000
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.
|(As of 3/31/19)|| |
|# of Holdings||67|
|Median Market Cap||$1.02 B|
|Weighted Average Market Cap||$1.40 B|
|3-Yr Annualized Turnover Ratio||61.23%|
|% of Holdings with Free Cash Flow||49.25%|
|% of Holdings with No Net Debt||46.27%|
Top 10 Holdings
|Holding||Ticker||Sector||% of Net|
|Community Healthcare Trust||CHCT||Real Estate||2.47%|
|Air Transport Services Group||ATSG||Industrials||2.23%|
|Playa Hotels & Resorts||PLYA||Consumer Discretionary||2.06%|
|TOP 10 HOLDINGS TOTAL||24.46%|
As of 3/31/19. 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 3/31/19. Market Cap percentages may not equal 100% due to rounding.
CAPITAL MARKET OVERVIEW
(As of 3/31/19) — Equity markets rebounded sharply to start 2019. The widely followed S&P 500 Index returned 13.65% in the 1st quarter, its best quarterly performance in 10 years. The market advance can be largely attributed to the Federal Reserve’s decision to put quarterly short term interest rate hikes on hold and end its balance sheet runoff. Additionally, prospects for a trade agreement between the U.S. and China appeared to improve, and the U.S. Government reopened after its longest shut down in history.
The Russell 3000 Index advanced 14.04% in the 1st quarter. Growth outperformed value, with the Russell 3000 Growth Index returning 16.18% compared to a return of 11.93% for the Russell 3000 Value. By size, midcaps led the way this quarter with the Russell Midcap Index returning 16.54%, followed by a return of 14.58% for the small cap Russell 2000 Index and 14.00% for the large cap Russell 1000 Index. Technology, Real Estate, and Industrials were the best performing sectors, while Health Care and Financials were relative underperformers.
(As of 3/31/19) — quarter. This compares to the Morningstar U.S. Small Growth Index’s gain of 19.43%, and the Fund’s previous benchmark, the Russell 2000 Growth Index, which returned 17.14% in the quarter.
The strong start to the calendar year has erased most of the damage from the sell-off seen in the calendar 4th quarter of 2018. At the time of this writing in mid-April, the Russell 2000 Growth Index was within 9% of the all-time high reached in August of 2018. Additionally, the Russell 2000 Growth Index has rebounded 28% from its low watermark in December of 2018.
Every sector of the Morningstar U.S. Small Growth Index produced double-digit returns during the quarter except Consumer Staples. The largest index sectors by weight, Healthcare and Information Technology, saw gains of 19.42% and 22.52%, respectively.
Within the Fund, two leading contributors to returns in the 1st quarter were CyberArk and Mimecast. Both companies are involved in the growing need for solutions to combat the continuing sophistication and growing financial pain caused by cyberattacks on corporate networks. CyberArk is the top supplier focused on privileged access management, which provides protection from malicious attacks from insiders within an organization. While much of security spending by corporations over the years was on developing perimeter security for their information technology systems, most don’t have a solution in place to prevent insiders from accessing files that should be limited to certain users. This creates an attractive opportunity for CyberArk and first mover advantage as they typically do not have to unseat an incumbent solution provider when signing up new clients.
Mimecast is a leading email security provider that continued to take share from legacy email security providers through innovation and its cloud based solution. The company continued to release new add-on products to address phishing and archiving which has driven incremental revenue growth. Additionally, Mimecast has had success in serving small- and medium-size clients but continued to have success moving up market and signing larger corporate customers.
(As of 3/31/19) — The headlines that have driven the strong market bounce back this year continue to provide a supportive overall market backdrop. Resolution of some of the trade disputes could enable better global growth, and the Federal Reserve’s accommodative positioning towards monetary policy has been a stock market catalyst for the past nearly 10 years. With that said, our focus remains on finding early stage growth companies with the potential to benefit from secular trends and sustain growth due to the innovation and disruption they are introducing to an industry, regardless of the market’s overall backdrop and headlines.
The Buffalo Emerging Opportunities Fund is focused on identifying innovation among U.S. companies with North American revenue bases. We operate at the small end of the small capitalization spectrum and can uncover opportunities where we believe valuation dislocation is out of line with the actual results and outlook potential. As always, we pay close attention to the valuations of our holdings and will utilize market volatility to trim or add to our holdings as risk/reward profiles improve or degrade, in our view. 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. With an active share of greater than 95%, the Fund will continue to offer a distinct offering from the index and peers.
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. 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.
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 4 stars among 576 for the three-year, 3 stars among 515 for the five-year, and 5 stars among 390 Small Growth funds for the ten-year period ending 5/31/19.
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. ©2018 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.