Emerging Opportunities Fund

Quick Facts

(As of 3/31/17)

Ticker
  BUFOX

Inception Date
  May 21, 2004

Total Fund Assets
  $85.4 M

Expense Ratio
  1.48%

Benchmark Index
  Russell 2000 Growth

MORNINGSTAR RATING

Overall Morningstar™ rating out of 603 Small Growth funds as of 5-31-17 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure).

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

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 603 funds in the Small Growth category, as of 5/31/17.

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 5/31/17)3 MOYTD1 YR3 YR5 YR10 YRSince Inception
(5/21/04)
Buffalo Emerging Opportunities Fund11.2213.0330.057.4213.966.377.93
Russell 2000 Growth Index2.116.3119.718.5914.367.399.03
Lipper Small Cap Growth Fund Index2.638.3417.617.7812.726.18-
Lipper Micro Cap Funds Index1.851.8922.366.6913.555.627.75
Morningstar Small Growth2.707.3319.897.7913.086.76-
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 Net Assets
Motorcar Parts of AmericaMPAAConsumer Discretionary3.01%
Kornit DigitalKRNTIndustrials2.98%
OmnicellOMCLHealth Care2.61%
LHC GroupLHCGHealth Care2.58%
MGP IngredientsMGPIConsumer Staples2.48%
NautilusNLSConsumer Discretionary2.41%
InstructureINSTTechnology2.41%
Liberty MediaBATRKConsumer Discretionary2.28%
Five9FIVNTechnology2.27%
Del Taco RestaurantsTACOConsumer Discretionary2.18%
TOP 10 HOLDINGS TOTAL25.22%
View Full Holdings

As of 3/31/17. 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 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.

CAPITAL MARKET OVERVIEW

Equity markets got off to a strong start in the first quarter of 2017, thanks to an improving economic outlook. In February, small business optimism, as measured by the National Federation of Independent Businesses, was at its highest level in 12 years. In addition, the University of Michigan’s March consumer confidence survey showed that consumers were more confident in the economy than they have been at any time since 2000. Against this backdrop, growth stocks outperformed value stocks, led by technology, health care, and consumer discretionary companies. The recent strength in infrastructure companies, banks, and high-tax-rate stocks stalled late in the quarter when, following Congress’s failure to agree on a health care reform bill, investors began to question the Trump administration’s ability to enact elements of its pro-growth agenda. Within commodities, the price of West Texas Intermediate (WTI) crude oil fell 6% during the quarter in response to better than expected U.S. oil inventories and production.

The Russell 3000 Index advanced 5.74% in the first quarter and larger cap stocks outperformed smaller cap stocks. The Russell 1000 Index returned 6.03%, followed by the Russell Mid Cap Index return of 5.15%, and the Russell 2000 Index result of 2.47%. The Russell Micro Cap Index advanced just 0.38% in the quarter. The Russell 3000 Growth Index outperformed the Russell 3000 Value Index by 5.64%. Technology was the best performing sector during the quarter while the energy sector was the worst performer, driven by the decline in crude oil.

PERFORMANCE COMMENTARY

The Buffalo Emerging Opportunities Fund posted a return of 7.13% in the quarter and outperformed the Russell 2000 Growth Index return of 5.35%. The index returns this quarter were led by strong gains in the Healthcare and Information Technology sectors of 13.63% and 6.33%, respectively. This was in stark contrast to the previous quarter after the presidential election where these two sectors were two of the worst performing sectors as investors favored Financials and Industrials given the expectations for pro-growth policies and the anticipated impact on inflation/interest rates and infrastructure spending.

The fund’s outperformance during the period was led by the Industrials sector where the Fund’s holdings delivered an average of 10.37% return compared to the index return of 1.42%. Leading the way for the fund in Industrials were Kornit Digital and Installed Building Products. Kornit is the leading provider of digital direct to garment and roll-to-roll printing, allowing for high throughput of custom apparel and other use cases based on demand. With Kornit hardware and proprietary ink, online apparel designers can produce short runs of custom pieces based solely on demand. Kornit has been a prime beneficiary in the shift in consumer’s increasing desire to purchase apparel online and a desire to have more unique pieces of clothing. In January, Ama-zon selected Kornit to deliver a large number of its Avalanche 1000 printers in support of Amazon’s growing Merch program. In conjunction with this agreement, Kornit granted Amazon warrants that do not vest until Amazon purchases significant amounts of equipment and supplies from Kornit. Installed Building Products (IBP) posted strong returns in the quarter as the housing market continues to perform well in an era of solid job market, historically low interest rates, and a demographic boost from millennials entering the housing market. IBP is the second largest new residential insulation installer in the U.S. with over 100 locations. IBP has benefited from the scale of their operation, which provides them purchasing power with vendors and labor capacity to meet demand. We believe that demographics will continue to push new single family housing starts closer to historical levels as household formation trends could potentially benefit from millennials entering prime home buying ages.

The fund’s Technology sector holdings also contributed to the outperformance in the quarter, returning 11.63% on average compared to the Index’s return of 6.33% for the sector. Instructure was one of many contributors to the outperformance in the sector. The fund has owned Instructure, a provider of learning management systems for education institutions globally (online lessons, syllabi, grades, projects, etc.), since its initial public offering (IPO) in November 2015. The company has been a disruptor in the industry, delivering a cloud-based solution with an enhanced user interface, improved mobile usability, and less downtime and upkeep for its schools and universities compared to legacy providers such as BlackBoard and Moodle. The fund looks for disruptors of industries that can execute on their strategy and Instructure has fit the bill by continuing to take market share from the legacy providers, putting up revenue growth above 20%, and gross margins above 70% that point to the potential for an attractive bottom line margin profile as the company matures.

The Healthcare sector represented a modest drag to benchmark-relative performance results given our underweight in a quarter in which the sector was the strongest performer, delivering a 13.63% return for the index. Regarding stock selection in the sector, the fund’s return of 16.03% bested the index return and was led by Omnicell. Omnicell is a leading provider of medication dispensing cabinets and management systems for acute care hospitals and has been a multi-year holding in the fund. Their solutions provide hospitals with more effective control of medications from the time they hit the loading dock until they are given at the patient’s bedside. Much like Instructure in the previous paragraph, Omnicell has been a disruptor, taking share in a ratio of 50:1 in terms of win:loss ratio versus the legacy player and market leader that is now a subsidiary of Becton Dickinson. Omnicell is in the middle of a new medical cabinet hardware release in which the upgrade cycle should last five to seven years and could provide them with a revenue opportunity of $1.8 billion. While hospital spending could be a concern given the changing healthcare reimbursement landscape, we believe Omnicell’s multi-year technology lead over their peer and the up-grade cycle has the Fund positioned in the best disruptor in the industry.

We remain focused on valuations and fundamentals and continue to monitor the risk/reward profile of our holdings. We will make changes based on market moves intra quarter that could provide either an opportunity to trim or add to a position based on potential inefficiencies in the smaller end of the market cap spectrum. We ended the quarter with 59 holdings and continue to look for prudent ways to deploy cash as we remain long-term focused, aiming to be shrewd when the market environment presents opportunity.

OUTLOOK

As the daily political headlines pass, geopolitical tensions heat up, and the realization that getting legislation passed in Washing-ton is never easy, we aim to stay consistent to our strategy of building a portfolio of securities that should benefit from underlying secular growth trends that could have thriving business models over the long term regardless of the political climate. The Buffalo Emerging Opportunities Fund is focused primarily on identifying innovation within U.S. companies with North American revenue bases. Therefore the universe of companies we review for inclusion in the fund is typically much more U.S.-centric than most mid and large cap companies. We like this positioning given the dollar appreciation and foreign policy uncertainty. In addition, U.S. consumer and small business confidence are near or at all-time highs which should also 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 as we enter year nine of the current bull market.

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 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 603 for the three-year, 3 stars among 533 for the five-year, and 2 stars among 396 Small Growth category funds for the ten-year period ended 5/31/17.

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.

©2017 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.