Emerging Opportunities Fund
May 21, 2004
Total Fund Assets
$92.83 Million (6/30/18)
Morningstar U.S. Small Growth
Overall Morningstar™ rating out of 607 Small Growth funds as of 8/31/18 (derived from a weighted average of the fund’s three-, five-, and ten-year risk adjusted return measure).
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
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 607 funds in the Small Growth category, as of 8/31/18.
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.
While the Fund’s investments in equity securities will consist primarily of domestic securities, the Fund may also invest up to 20% of its net assets in sponsored or unsponsored ADRs and equity securities of foreign companies that are traded on U.S. stock exchanges.
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
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
|As of 8/31/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||Since Inception|
|BUFFALO EMERGING OPPORTUNITIES FUND||10.11||19.91||29.33||16.50||11.20||13.95||9.48|
|Morningstar U.S. Small Growth Index||11.20||21.66||33.25||17.67||14.12||11.87||10.52|
|Russell 2000 Growth Index||8.90||18.53||30.72||16.36||14.20||11.57||10.58|
|Lipper Small Cap Growth Fund Index||10.42||22.62||36.02||17.60||13.94||11.45||9.88|
|Lipper Micro Cap Funds Index||7.20||15.35||26.15||15.74||12.16||10.58||9.03|
|Morningstar Small Growth Category||10.28||21.01||32.89||16.87||13.48||11.50||9.62|
|As of 6/30/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||Since Inception|
|BUFFALO EMERGING OPPORTUNITIES FUND||9.61||12.48||21.74||11.15||11.55||14.14||9.11|
|Morningstar U.S. Small Growth Index||7.89||11.57||23.70||11.84||13.66||11.35||10.06|
|Russell 2000 Growth Index||7.23||9.70||21.86||10.60||13.65||11.24||10.10|
|Lipper Small Cap Growth Fund Index||7.89||12.38||26.33||11.72||13.22||10.58||9.33|
|Lipper Micro Cap Funds Index||9.34||9.11||18.49||10.94||11.83||10.32||8.72|
|Morningstar Small Growth Category||8.53||11.05||22.70||11.04||12.76||10.85||9.08|
|vs Russell 2000 Growth Index|
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.
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.
|# of Holdings||64|
|Median Market Cap||$1.04 B|
|Weighted Average Market Cap||$1.24 B|
|3-Yr Annualized Turnover Ratio||68.50%|
|% of Holdings with Free Cash Flow||45.31%|
|% of Holdings with No Net Debt||35.94%|
|Holding||Ticker||Sector||% of Net Assets|
|Community Healthcare Trust||CHCT||Real Estate||3.00%|
|LHC Group||LHCG||Health Care||2.29%|
|Foundation Building Materials||FBM||Industrials||2.17%|
|TOP 10 HOLDINGS TOTAL||23.96%|
As of 6/30/18. 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 6/30/18. 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 6/30/18. Market Cap percentages may not equal 100% due to rounding.
CAPITAL MARKET OVERVIEW
(As of 6/30/18) — Supportive economic data drove positive domestic equity performance in the 2nd quarter. The unemployment rate declined to 3.8%, the lowest level in 18 years. Wages have continued to rise, with average hourly earnings up 2.7% as of May. Corporate earnings growth continued to be robust. The Federal Reserve increased their target rate by 0.25% and raised their forecast for growth and inflation again in June. Meanwhile, economic growth outside the U.S. slowed, with the divergence driving strength in the U.S. dollar. Increasing trade protectionism along with the dollar’s strength, led to the relative outperformance of domestically focused industries and smaller capitalization companies, which generally do less international business than large caps. Crude oil prices continued to rise, despite the strong dollar, driven by lower stockpiles in the U.S. and President Trump’s decision to withdraw from the Iran nuclear accord.
The Russell 3000 Index returned 3.89% in the quarter. Growth continued to outpace value, with the Russell 3000 Growth Index up 5.87% and the Russell 3000 Value Index up 1.71%. By size, the Russell Microcap Index led the way with a return of 9.97%, followed by the small cap Russell 2000 Index at 7.75%. The large cap Russell 1000 Index was up 3.57%, and the Russell Midcap Index was up 2.82%. Energy was the best performing sector, driven by strength in crude oil prices. The Consumer Discretionary, Information Technology, and Real Estate sectors also had strong quarters. Meanwhile, trade fears and rising input costs caused the underperformance of Industrials, and Financials were weaker as a result of the yield curve flattening.
(As of 6/30/18) — The Buffalo Emerging Opportunities Fund produced a return of 9.61% for the 2nd quarter, outperforming the Russell 2000 Growth Index (“the Index”) return of 7.23%. The Index, which is a proxy for domestic small capitalization (small cap) growth companies, was once again one of the top performers across all domestic equity categories for both the quarter and year to date.
The volatility in the market that existed in the 1st quarter seemingly disappeared during the 2nd quarter. The Index picked up where it left off in 2017 by advancing fairly consistently throughout the period.
Small cap outperformance has much to do with the recent volatility in foreign exchange markets and talks of potential trade wars between the U.S. and its trading partners. With small cap companies generally having the vast majority of their revenues generated domestically and in U.S. dollars, investors have shown a preference for small caps in the current political/global trade environment over larger cap companies, which are usually multinational and have significant non-U.S. dollar exposure. Additionally, the U.S. economy and small business sentiment continues to run at healthy levels.
At the end of the quarter, Russell reconstituted the Index, as it does every year. This year was particularly eventful as there were some major changes. Of particular note, Technology decreased from 20.7% of the Index to 15.4%, Consumer Discretionary increased from 16.1% to 17.8%, and Health Care increased from 15.7% to 16.3%. Ultimately, the reconstitution also resulted in a higher valuation (Price-to-NTM-Earnings from 31x to 37x) and lower quality (unprofitable constituents from 37% to 40% of index). While this was meaningful for the Index, it is even more important for the Fund as our management style has typically resulted in a larger technology weight, a smaller healthcare weight (much lower exposure to binary biotech stocks), and what we view as higher quality when compared to the Index. With an active share of 95% at quarter end, the Fund will continue to offer a distinct offering from the Index and peers.
The quarter was a mixed bag in terms of sector performance, though every major sector was positive. Consumer Discretionary (+10.3%) and Health Care (+9.6%) outperformed the index while Technology was close to in-line (+6.9%) and Industrials lagged (+4.5%).
The Fund’s return and outperformance versus the Index was primarily driven by stock selection within the Health Care and Technology sectors. Our Health Care holdings returned 28.6% for the quarter, while our Technology holdings returned 13.1%, on average. This outperformance was partially offset by under performance in Consumer Discretionary, which composed 15.8% of Fund assets and returned 4.0%. Cash was also a drag for the Fund in such a strong performing market.
Top Health Care performers for the quarter included OrthoPediatrics Corp. and LHC Group, Inc.
OrthoPediatrics is a medical device company that supplies anatomically-appropriate implants and devices for children with orthopedic conditions. The larger orthopedic device companies have not focused on the pediatrics market, allowing for an innovative company like OrthoPediatrics to gain significant mindshare with physicians looking for the best outcome for their pediatric patients. The company reported better than expected results driven by strong sales both domestically and internationally, particularly in its scoliosis products.
LHC Group is a provider of post-acute health care services through home nursing, hospice, community-based services, and long-term acute care hospitals. The company completed its merger with Almost Family on April 2, 2018 and reported strong earnings with improving trends. Home healthcare remains a very attractive alternative for patient preference and cost compared to acute care settings, and LHC Group has led the way in terms of quality of care in this setting.
Top Technology performers for the quarter included Cardlytics, Inc. and Everbridge, Inc.
Cardlytics uses consumer purchase data from over 2,000 financial institutions to help marketers identify likely buyers at scale. Cardlytics engages with financial institutions to show purchase incentives or rebates from advertisers to the financial institutions’ customers whenever they log in to their checking or credit card accounts. The company announced that it had signed an agreement for a national launch with JPMorgan Chase on May 15, 2018, resulting in increased investor growth expectations.
Everbridge is a provider of software that automates and accelerates organizations’ operational responses to critical events in order to keep people safe and businesses running. The company reported better than expected results and raised its annual guidance as average revenue per customer expanded due to product expansion, with existing customers and new customers signing up for more products than previous customers.
The Fund had another holding taken out during the quarter as Financial Engines will be acquired by Hellman & Freeman for $45 a share. This is the Fund’s second holding to be acquired this year and both have been purchased by private equity. That said, we continue to believe that strategic acquirers will look to acquire growth and could lead to an acceleration in mergers and acquisitions. Additionally, we believe corporate tax reform will contribute to the corporate buying spree as lower effective tax rates boost free cash flow and give larger companies increased dry powder with which to pursue potential acquisitions.
We added six new positions in the quarter and sold out of four, ending the quarter with 64 holdings.
(As of 6/30/18) — Our 1st quarter 2018 commentary proved prescient as we speculated that worries over a trade war would have little impact on the vast majority of our holdings and the small cap market broadly. Indeed, we believe the domestic focus of most small cap companies caused them to outperform their larger cap brethren in the quarter. We would certainly not be surprised if this trend continues for the foreseeable future. However, we also believe there is potential for a significant trade war, which could impact economic growth within the U.S. As always, we will be playing close attention to the valuations of our holdings, and we will use market volatility to trim or add to our holdings as risk/reward profiles improve or degrade.
The Buffalo Emerging Opportunities Fund is focused primarily on identifying innovation within U.S. companies with primarily North American revenue bases. 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.
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.
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Top-Down & Bottom-Up
We identify Top-Down broad, secular growth trends and search for companies from the Bottom-Up.
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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 3 stars among 607 for the three-year, 1 stars among 532 for the five-year, and 4 stars among 405 Small Growth funds for the ten-year period ending 8/31/18.
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.
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