Emerging Opportunities Fund
Recent Media Coverage
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
Craig Richard, Portfolio Manager
Overall Morningstar Rating™ of BUFOX based on risk-adjusted returns among 568 Small Growth funds as of 1/31/20.
|As of 1/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO EMERGING OPPORTUNITIES FUND - Investor||9.29||0.36||22.53||17.74||11.79||15.76||9.02||9.11|
|BUFFALO EMERGING OPPORTUNITIES FUND - Institutional||9.28||0.42||22.74||17.92||11.97||15.94||9.18||9.27|
|Morningstar U.S. Small Growth Index||6.43||-0.14||13.06||13.11||10.60||13.95||9.33||9.44|
|Morningstar Small Growth Category||7.08||-0.25||14.48||12.83||10.55||13.20||9.07||8.66|
|As of 12/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO EMERGING OPPORTUNITIES FUND - Investor||12.61||34.03||34.03||17.86||10.49||15.45||8.71||9.14|
|BUFFALO EMERGING OPPORTUNITIES FUND - Institutional||12.59||34.20||34.20||18.03||10.65||15.62||8.87||9.30|
|Morningstar U.S. Small Growth Index||9.11||27.60||27.60||14.21||10.26||13.42||8.99||9.51|
|Morningstar Small Growth Category||9.41||27.66||27.66||13.49||9.61||12.21||7.94||8.73|
3 Year Risk Metrics
|BUFOX vs Morningstar U.S. Small Growth Index (As of 12/31/19)|
Hypothetical Growth of $10,000
|(As of 12/31/19)|| |
|# of Holdings||66|
|Median Market Cap||$1.06 B|
|Weighted Average Market Cap||$1.58 B|
|3-Yr Annualized Turnover Ratio||60.34%|
|% of Holdings with Free Cash Flow||51.52%|
|% of Holdings with No Net Debt||46.97%|
Top 10 Holdings
|Holding||Ticker||Sector||% of Net|
|Kinsale Capital Group||KNSL||Financial Services||3.19%|
|Community Healthcare Trust||CHCT||Real Estate||3.16%|
|Playa Hotels & Resorts||PLYA||Consumer Discretionary||2.18%|
|Air Transport Services Group||ATSG||Industrials||2.09%|
|TOP 10 HOLDINGS TOTAL||26.78%|
CAPITAL MARKET OVERVIEW
(As of 12/31/19) — The combination of a U.S. Federal Reserve (Fed) interest rate cut, an improving economic outlook, and easing trade tensions, sent equity markets sharply higher in the 4th quarter. The S&P 500 Index advanced 9.10% during the period, which brought the full-year (2019) gain to 31.49%. The Fed cut interest rates three times in 2019, erasing the brief yield curve inversion and assuaging fears of a recession. The economy continued to add new jobs at a strong pace and unemployment declined to 3.5%. Consumer spending remained healthy, and there is optimism for better business investment following the announced “phase one” trade deal with China.
Similar to the S&P 500 Index, the broad-based Russell 3000 Index returned 9.04% during the quarter. Growth outperformed value, as the Russell 3000 Growth Index returned 10.62% compared to a return of 7.41% for the Russell 3000 Value Index. Smaller companies outperformed larger companies, as one would expect in a “risk-on” period. The Russell Microcap Index surged 13.45% and the Russell 2000 Index advanced 9.94%. Large company benchmarks such as the Russell 1000 Index advanced 9.04% while the Russell Midcap Index produced a return of 7.06%. Technology and Health Care were the best performing sectors in the quarter, while more defensive areas of the market lagged such as Real Estate and Utilities. Higher long-term interest rates weighed on high-quality bond proxies – the safe haven 10-year U.S. Treasury Bond produced a return of -1.74% during the quarter.
(As of 12/31/19) — The Buffalo Emerging Opportunities Fund posted a return of 12.61% for the quarter ending December 31, 2019. This compares favorably to the Morningstar U.S. Small Growth Index’s return of 9.11%. The strong quarter capped off a solid 2019 as the Fund posted a gain of 34.03% versus the Index’s return of 27.60%.
Smaller companies (as measured by market capitalization) within the small cap universe outperformed larger market cap companies in the 4th quarter. This was a reversal from the past several quarters and served as a tailwind for the Fund’s performance. However, the major driver of outperformance was due to portfolio results in the Technology sector, which produced a return of 27.04% in the quarter compared to the Index’s return of 7.76% for the sector. The Fund remains overweight Technology and Industrials and underweight Health Care due to a continued underweighting of the biotechnology industry.
A leading contributor during the period was a newer Technology holding, Cerence, Inc. Cerence was a recent spin-off from parent company Nuance Communications. As a stand-alone company, Cerence can focus its resources on its attractive positioning in the artificial intelligence market for automobiles globally. Serving over 60 auto manufacturers, Cerence provides software for vehicle intelligence systems along with a cloud offering for virtual assistance (news, weather, directions, etc.). With a commanding market share at the early stages of technology penetration in the automobile, Cerence has a nice secular tailwind behind them. Additionally, Cerence generates very healthy profit and cash flow margins. Growing investor awareness of the company following the spin-off helped drive healthy returns in the quarter.
(As of 12/31/19) — Overall, 2019 produced one of the strongest equity market returns in recent memory. Domestic growth indices across the board posted 20%+ returns and recovered from the pullback experienced in late 2018. Improved investor sentiment in 2019 likely contributed as optimism regarding the potential for a U.S./China trade deal combined with accommodating central bank monetary policy to prop up financial markets. As we have mentioned before, small cap companies generally have less exposure to international markets than their larger company peers, and we believe this will continue to be relatively positive for small caps given the current stability seen in the U.S. economy. The Buffalo Emerging Opportunities Fund is focused primarily on identifying innovation within U.S. companies with primarily North American revenue bases. The U.S. presidential election provides a potential wild card given the range of political, regulatory, and economic positions held by various democratic candidates.
We believe less investor interest in the smaller market cap segment of the investment landscape creates opportunities for us to uncover value. The Fund typically invests at the smaller end of the small cap growth spectrum, and Fund management continues to seek companies with sustainable growth due to secular trends or innovative and disruptive products. As always, we will pay close attention to the valuations of our holdings and will utilize market volatility to trim or add to holdings as risk/reward profiles improve or degrade. The Fund ended the quarter with 66 holdings, down slightly from 67 as of the previous update.
We will continue to look for prudent ways to deploy cash and will remain focused on the long-term, 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% at the end of the period, the Fund continued to be a distinct offering compared to the Index and category peers.
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.