Emerging Opportunities Fund

Quick Facts

(As of 6/30/17)

Ticker
  BUFOX

Inception Date
  May 21, 2004

Total Fund Assets
  $91.0 Million

Expense Ratio
  1.49%

Benchmark Index
  Russell 2000 Growth

MORNINGSTAR RATING

Overall Morningstar™ rating out of 603 Small Growth funds as of 7/31/17 (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 599 funds in the Small Growth category, as of 6/30/17.

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 7/31/17)3 MOYTD1 YR3 YR5 YR10 YRSince Inception
(5/21/04)
Buffalo Emerging Opportunities Fund7.6218.8727.918.6414.137.498.24
Russell 2000 Growth Index3.3710.9117.7610.2214.588.499.26
Lipper Small Cap Growth Fund Index3.7712.2915.499.0413.096.988.17
Lipper Micro Cap Funds Index3.086.0719.798.8313.746.597.98
Morningstar Small Growth3.6011.2417.649.2413.337.618.14
Each Morningstar category average represents a universe of funds with similar objectives.
(As of 6/30/17)3 MOYTD1 YR3 YR5 YR10 YRSince Inception
(5/21/04)
Buffalo Emerging Opportunities Fund9.7017.5233.675.4613.776.888.20
Russell 2000 Growth Index4.399.9724.407.6413.987.829.26
Lipper Small Cap Growth Fund Index4.2010.9820.556.5612.486.468.13
Lipper Micro Cap Funds Index4.315.7726.546.4713.266.018.01
Morningstar Small Growth4.3310.1523.126.6712.817.058.11
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 6/30/17)

vs Russell 2000 Growth Index
Upside Capture92.37
Downside Capture101.48
Alpha-1.66
Beta0.98
Standard Deviation17.26
Sharpe Ratio0.30

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 6/30/17)

# of Holdings59
Median Market Cap$854.36 M
Weighted Average Market Cap$962.10 M
3-Yr Annualized Turnover Ratio63.28%
% of Holdings with Free Cash Flow56.45%
% of Holdings with No Net Debt45.16%
Active Share95.91%
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 6/30/17. 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 6/30/17. Market Cap percentages may not equal 100% due to rounding.

CAPITAL MARKET OVERVIEW

Equity markets continued their strong start to the year during the second quarter, primarily driven by strong corporate earnings growth. The Russell 3000 Index advanced 3.02% in the second quarter. As reported during the June 30 period, earnings from S&P 500 Index companies were up 14% year-over-year in the first quarter, the strongest growth reading since 2011.

Broadly speaking, growth stocks continued their outperformance relative to value stocks, while cyclical stocks that rallied to end 2016 underperformed as investors continue to discount the likelihood of government infrastructure spending and comprehensive tax reform.

The yield on the U.S. 10-year Treasury ended the June 30 period at 2.298%, a decline from its recent high of 2.609% in March due in large part to weaker inflation readings. In contrast, the outlook for growth and interest rate expectations improved in much of the rest of the world, which has driven the trade weighted U.S. dollar down 5.6% year to date. Oil entered bear market territory, with crude prices declining 9% during the quarter in response to stronger than expected inventory levels and rising U.S. production.

As mentioned above investors continued to favor growth over value, and the Russell 3000 Growth Index climbed 4.65% during the period compared to the more modest gain of 1.29% for the Russell 3000 Value Index. By size, microcaps were the best performers with the Russell Microcap Index gaining 3.83%. Meanwhile the large cap Russell 1000 Index gained 3.06%, followed by the Russell Midcap Index at 2.70% and the Russell 2000 Index finishing with a gain of 2.46% during the period. In general health care was the best performing sector as the chances for legislation to repeal or reform the Affordable Care Act appeared to diminish, and investors reacted by bidding up health care stocks. The technology sector was also a strong performer as the market continued to reward the strong earnings growth produced in this area. Conversely, energy was the worst performing sector driven by the decline in oil prices mentioned above.

PERFORMANCE COMMENTARY

The Buffalo Emerging Opportunities Fund posted a positive return of 9.70% in the quarter ending June 30, 2017, a result that outperformed the Russell 2000 Growth Index return of 4.39%.

Index performance this quarter was led by strong gains in healthcare and information technology, its two largest sectors, which returned 10.12% and 5.44%, respectively. This marked the second consecutive quarter where the Index gains were led by these two areas.

The start to the calendar year in the small cap growth universe has reversed much of the market action following the presidential election, where financials and industrials were strong performers based on expectations for more favorable domestic policies for these industries. As political policy reform hopes have faded, investors have returned to information technology and healthcare sectors where innovation drives revenue growth.

The Fund’s outperformance during the period was led by the information technology sector. The Fund’s technology holdings delivered a 19.76% return on average compared to the benchmark return of 5.44% for the sector. Leading the way for the Fund was Everspin Technologies, a first to market player in the magnetic random access memory (MRAM) market. MRAM has the combination of speed, endurance, and non-volatility that no other form of memory currently has. With applications in a wide range of industries ranging from data storage to automobile technology, this small player is addressing potential large markets. Thanks in part to favorable press on the company, the market began to discover this company’s growth opportunity and the stock appreciated significantly in the quarter.

Everspin is an example of the unique positioning of the portfolio as the Fund is positioned at the smaller end of the market cap spectrum within the Index. The Fund’s weighted average market cap was $962 million as of June 30th compared to the Index weighted average of $2,197 million. Everspin was an under the radar initial public offering (IPO) from October 2016 with an initial market capitalization below $200 million. While Everspin was at the low end of our market capitalization range, the Fund will continue to look to potentially benefit from smaller companies that do not get as much Wall Street coverage and are mostly
undiscovered by a large swath of investors.

Five9 also contributed significantly to the outperformance in the information technology sector during the period. The company is a leading provider of cloud-based software that operates customer service call centers. Five9 is operating in a space with a large global opportunity that includes 16 million agents working in call centers worldwide. The industry is ripe for disruption as legacy competitors have been slow to innovate. Additionally, two of Five9’s smaller peers were recently acquired by larger organizations, resulting in operational disruption. The combination of these factors should continue to bolster the outlook for Five9. This also provides an example of the type of technology investments the Fund typically looks for as Five9 is disrupting the status quo in potential large, global markets.

In the health care sector, a large individual contributor during the quarter was LHC Group. LHC is a leading provider of home healthcare services in 27 states. With the U.S. population increasing in age and healthcare cost pressures being applied by both public and private payers, home health care sits in the sweet spot at an average cost of less than $100 per patient, per day. The industry is moving further towards a compensation model based on quality scoring. LHC has landed near the top in these rankings and continues to show gains. As compensation is based on these metrics, LHC should continue to grow and take share from the smaller, regional based operators over the next several years.

OUTLOOK

Thus far in 2017 the market has favored growth-oriented companies and the Russell 2000 Growth Index has outpaced the Russell 2000 Value Index by over 10% YTD as of June 30th. We believe this is an indication of investors continuing to seek out investment stories with revenue growth opportunities given the stable economic environment 8+ years into the current recovery cycle.

We find it interesting that merger and acquisition activity (measured in U.S dollars) is down over 30% this year compared to 2016. Last year, the Fund benefited from takeout activity as five of its investments were acquired or merged into larger entities, which results in a price premium being paid to shareholders. Somewhat surprisingly the Fund has not had a single investment holding acquired year-to-date, but we continue to believe that many could be acquisition candidates given that many larger companies are starved for increased organic growth and look to buy smaller, faster growing companies in an effort to bolster their revenue growth profile. We believe that a clearer signal on tax policy and its direction might provide an environment more conducive to mergers and acquisitions which should potentially benefit the Fund.

As always, the Buffalo Emerging Opportunities Fund is primarily focused on identifying innovation within smaller emerging U.S. companies with North American revenue bases. U.S. consumer confidence and domestic small business confidence remain near all-time highs which should bode well for our smaller, U.S. centric companies.

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.

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 529 for the five-year, and 2 stars among 397 Small Growth funds for the ten-year period ending 7/31/17.

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.