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
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™ of BUFOX based on risk-adjusted returns among 577 Small Growth funds as of 8/31/20.
|As of 8/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO EMERGING OPPORTUNITIES FUND - Investor||16.52||13.74||27.59||16.45||14.06||17.29||9.24||9.61|
|BUFFALO EMERGING OPPORTUNITIES FUND - Institutional||16.55||13.91||27.85||16.64||14.24||17.47||9.40||9.77|
|Morningstar U.S. Small Growth Index||13.90||14.04||20.52||14.56||12.95||15.07||9.76||9.98|
|Morningstar Small Growth Category||14.62||10.59||18.96||13.64||12.02||14.12||9.22||8.97|
|As of 6/30/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO EMERGING OPPORTUNITIES FUND - Investor||40.64||5.02||12.76||13.53||10.54||15.95||9.08||9.17|
|BUFFALO EMERGING OPPORTUNITIES FUND - Institutional||40.77||5.13||12.94||13.70||10.70||16.13||9.24||9.34|
|Morningstar U.S. Small Growth Index||32.84||4.35||8.79||11.67||9.51||14.09||9.47||9.49|
|Morningstar Small Growth Category||32.19||-0.10||4.46||10.08||8.28||12.94||8.85||8.41|
3 Year Risk Metrics
|BUFOX vs Morningstar U.S. Small Growth Index (As of 6/30/20)|
Hypothetical Growth of $10,000
|(As of 6/30/20)|| |
|# of Holdings||62|
|Median Market Cap||$1.06 B|
|Weighted Average Market Cap||$1.56 B|
|3-Yr Annualized Turnover Ratio||34.86%|
|% of Holdings with Free Cash Flow||59.68%|
|% of Holdings with No Net Debt||46.77%|
Top 10 Holdings
|Holding||Ticker||Sector||% of Net|
|LHC Group||LHCG||Health Care||2.74%|
|Hamilton Lane||HLNE||Financial Services||2.59%|
|Community Healthcare Trust||CHCT||Real Estate||2.59%|
|Kinsale Capital Group||KNSL||Financial Services||2.52%|
|Air Transport Services Group||ATSG||Industrials||2.26%|
|TOP 10 HOLDINGS TOTAL||26.57%|
CAPITAL MARKET OVERVIEW
(As of 6/30/20) — Equity markets rebounded sharply in the 2nd quarter following steep losses in the previous period. The S&P 500 Index produced a return of 20.54%, marking the best quarterly performance results in 20 years. Stimulus efforts by the Federal Reserve (the “Fed”) and the U.S. Treasury Department to limit COVID-related economic damage helped equity markets find a floor in late March. Declining COVID-19 case counts, optimism about treatment and potential vaccines, along with better-than-expected economic data also contributed to improved investor sentiment during the period. Although confirmed virus cases began spiking again in the final days of June, it was not enough to undo the best quarterly market results since the dot-com boom.
The broad market Russell 3000 Index advanced 22.03% in the quarter, and Growth outperformed Value as the Russell 3000 Growth Index moved up 27.99% during the period, compared to the Russell 3000 Value Index’s advance of 14.55%. Relative performance was inversely-correlated by market cap as the Russell Micro Cap Index advanced 30.54%, well above the large cap Russell 1000 Index’s return of 21.82%. Meanwhile the small cap Russell 2000 Index and the Russell Mid Cap Index were up 25.42% and 24.61%, respectively. The best performing sectors were Technology, Consumer Discretionary, and Energy while the less cyclically exposed, more defensive areas like Utilities, Telecommunication, and Consumer Staples lagged in the quarter.
(As of 6/30/20) — The Buffalo Emerging Opportunities Fund (BUFOX) generated a return of 40.64% in the quarter compared to the Morningstar U.S. Small Growth Index return of 32.84% and the Russell 2000 Growth Index return of 30.58%.
These unprecedented times produced a historic market rally in the 2nd quarter, following the sell-off during the 1st quarter. The Russell 2000 Growth Index troughed in late March, declining 43% from its previous high, but has since posted a rebound of 65% at the time of this writing. After all that has been experienced in the 1st half of 2020, the Index is nearly flat year-to-date and just about 5% shy of all-time highs.
The Fund’s outperformance in the quarter was driven by solid returns versus the benchmark in the Consumer Discretionary, Financials, and Information Technology sectors. Outsized gains were produced in several positions including Cerence and Lovesac.
Cerence, the dominant provider of artificial intelligence (AI) for the global car industry, returned 165% on investors comfort in a rebound in global new car sales. Additionally, car sales could benefit from individual preference to avoid mass transportation. Cerence has a greater than 50% market share in AI software in cars and appears poised to grow with both the penetration of consumer facing software in more brands and models of cars, along with increasing sophistication and offerings that allows Cerence to potentially realize more revenue per vehicle.
Shares of Lovesac advanced 376% in the quarter as investors were pleasantly surprised by the level of sales growth from the furniture brand. With 90 stores closed, the company drove strong sales growth through an e-commerce only model. The sactional, a sustainable modular couch, allows consumers to switch arrangements, replace covers, and replace pieces without purchasing a new couch every five years or so. The company’s brand awareness continues to grow, and partnerships with larger retail stores could provide more runway for growth.
(As of 6/30/20) — While there remains uncertainty and controversy around COVID-19, there can be no argument about the scale and breadth of the Federal government’s fiscal response. Through a plethora of corporate lending programs, the well-publicized stimulus checks to individuals, enhanced unemployment benefits, and the payroll protection program, the Federal government has used its seemingly unending balance sheet to provide more stable economic footing. The graphic below shows that personal income in the U.S. has spiked since March 2020. This can be attributed to continued employment of most of the population, enhanced unemployment benefits for the unemployed, stimulus checks, and small business owners who received payroll protection program (PPP) forgivable loans. The PPP forgivable loans will likely end up being pure profit for a number of those business owners that were not adversely impacted by the pandemic.
As we look to the future, Congress is discussing another round of stimulus as enhanced unemployment benefits are scheduled to wind down at the end of July. This could involve another round of stimulus checks and continued enhanced unemployment benefits among other programs designed to boost the economy.
On the COVID-19 front, the market has seemed to dismiss the risks of the second wave and potential for restricted business activities after things came back online throughout May and June. We believe the most relevant data point to watch is hospitalizations related to COVID-19. The number hovers around 60,000, which is in-line with the late April peak levels but is much higher than the drop in mid-June to 27,000.
Despite the rise in the stock market off the March lows, plenty of money remains on the sideline. As seen in the graphic below, total assets in money market funds are at all-time highs, an increase of 70% from the average levels seen over the past 10 years. There appears to be plenty of dry powder should the market pull back or if those currently on the sideline choose to put capital back into equities.
Pile on the November elections and investors have several things to contemplate. Regardless, our job continues to be finding attractive small cap companies that have not been fully appreciated by the market or are mispriced due to recent results or events. We believe less investor interest in our segment of the market creates opportunity for us to uncover value. Given the volatility seen in the first half of 2020, this is perhaps even more true today.
The Fund typically invests at the smaller end of the small cap growth spectrum, and the managers continue to seek companies with sustainable growth due to secular growth trends or innovative or disruptive products. The Buffalo Emerging Opportunities Fund is focused primarily on identifying innovation within U.S. companies with primarily North American revenue bases. The Fund ended the quarter with 62 holdings, and management added six new positions and eliminated two holdings in the quarter. With an active share of greater than 95%, the Fund will continue to offer a distinct offering from 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.