Emerging Opportunities Fund

Ticker
  BUFOX

Inception Date
  May 21, 2004

Total Fund Assets
  $93.81 Million  (9/30/17)

Expense Ratio
  1.49%

Benchmark Index
  Russell 2000 Growth

MORNINGSTAR RATING

Overall Morningstar™ rating out of 598 Small Growth funds as of 10/31/17 (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 598 funds in the Small Growth category, as of 10/31/17.

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 10/31/173 MOYTD1 YR3 YR5 YR10 YRSince Inception
(5/21/04)
Buffalo Emerging Opportunities Fund5.9425.9336.999.6213.948.128.54
  Russell 2000 Growth Index6.9518.6231.0010.5115.368.169.63
  Lipper Small Cap Growth Fund Index7.1020.2728.079.6513.806.718.57
  Lipper Micro Cap Funds Index7.0113.5029.2510.0214.186.698.37
  Morningstar Small Growth6.3117.9228.989.8414.027.358.47
As of 9/30/173 MOYTD1 YR3 YR5 YR10 YRSince Inception
(5/21/04)
Buffalo Emerging Opportunities Fund6.8225.5326.8511.5913.148.018.57
  Russell 2000 Growth Index6.2216.8120.9812.1714.288.479.57
  Lipper Small Cap Growth Fund Index5.8917.5218.6110.6612.596.928.44
  Lipper Micro Cap Funds Index6.5112.6621.8111.4713.496.948.36
  Morningstar Small Growth5.6215.9320.4011.1513.027.578.39
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
(As of 9/30/17)

vs Russell 2000 Growth Index
Upside Capture96.60
Downside Capture98.79
Alpha0.00
Beta0.91
Sharpe Ratio0.69

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.

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 9/30/17)

# of Holdings60
Median Market Cap$934.60 M
Weighted Average Market Cap$1.04 B
3-Yr Annualized Turnover Ratio66.96%
% of Holdings with Free Cash Flow58.33%
% of Holdings with No Net Debt40.00%
Active Share96.05%
HoldingTickerSector% of Net Assets
Kornit DigitalKRNTIndustrials2.81%
Motorcar Parts of AmericaMPAAConsumer Discretionary2.59%
8x8EGHTCommunications2.46%
CommerceHubCHUBKTechnology2.29%
InstructureINSTTechnology2.27%
OmnicellOMCLHealth Care2.21%
VaronisVRNSTechnology2.18%
Del Taco RestaurantsTACOConsumer Discretionary2.12%
NautilusNLSConsumer Discretionary2.10%
MGP IngredientsMGPIConsumer Staples2.08%
TOP 10 HOLDINGS TOTAL23.11%
View Full Holdings

As of 6/30/17. 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 winning streak in the 3rd quarter of 2017 with the S&P 500 Index posting its 8th consecutive quarterly gain. Investors have been encouraged by the synchronized upswing in global economic growth. For the first time since 2007, all 45 countries tracked by the Organization for Economic Cooperation and Development (OECD) are on pace to grow this year, with the growth rates expected to accelerate in 33 of those countries. This economic backdrop, in conjunction with strong corporate earnings and a renewed focus on tax reform, helped the reflation trade regain momentum in the quarter.

The reflation trade, also known as the “Trump trade” pushed shares of banks, industrials, and smaller companies higher while expectations of another interest rate increase by the Federal Reserve drove relative weakness in Treasury bonds and their stock market proxies, such as utility companies. The U.S. dollar also strengthened during the period against most major foreign currencies. Furthermore, strong demand and slowing production of oil in the U.S. drove West Texas Intermediate crude prices up 12.2% in the period.

The Russell 3000 Index, a broad market performance benchmark, produced a total return of 4.57% during the quarter. Growth stocks outperformed value stocks, as the Russell 3000 Growth Index advanced 5.93% compared to a gain of 3.27% for the Russell 3000 Value Index. Shares of smaller-capitalized companies generally outperformed larger companies during the quarter. The Russell Microcap Index and the smaller-cap Russell 2000 Index climbed 6.65% and 5.67% respectively during the period, while the Russell Midcap Index advanced by 3.47% and the larger-cap Russell 1000 Index increased by 4.48%. Technology and energy were the best performing sectors, while consumer staples and consumer discretionary sectors lagged.

PERFORMANCE COMMENTARY

The Buffalo Emerging Opportunities Fund (Fund) posted a return of 6.82% in the quarter which outperformed the Russell 2000 Growth Index (Index) return of 6.22%. Every major sector of the Index posted positive returns in the quarter, straddling the overall Index return of the quarter. The three largest sector weightings in the Index, Healthcare, Information Technology and Industrials, saw gains of 7.22%, 6.33% and 7.16%, respectively.

Year to date, the Fund has posted a return of 25.53% compared to the Index return of 16.81%. The two leading sectors within the Index have been Healthcare and Information Technology, which have produced returns of 33.95% and 19.21% respectively. This continues the reversal from the end of calendar 2016 when Financials and Industrials led the way, coming out of the presidential election. 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 where the portfolio
delivered a 15.25% return on average compared to the Index return of 6.33%. The top contributor for the Fund during the quarter was Exa Corporation. Exa has developed simulation software for the automotive and aerospace industries and recently extended into the energy sector for simulating the drilling of shale oil wells. The software simulates testing for aerodynamics, thermal effects, and noise, among other things, for transportation industry customers. On September 28th, European-based Dassault Systems announced their intent to acquire Exa for $24.25 per share. This marked the first buyout announcement of one of the Fund’s holdings this year compared to 2016, in which five holdings were acquired.

We continue to believe that in the latter innings of an economic expansion, larger firms will look for different avenues to grow their revenues and acquiring smaller, faster-growing companies is often a strategy. One of the Fund’s holdings being acquired can provide a boost to returns given the takeout premium typically involved. In the case of Exa, the announced acquisition price was a 43% premium to the previous day’s closing price.

Zagg Inc. also contributed to the Fund’s returns in the quarter. Zagg is the leading provider of cell phone and tablet accessories, primarily screen protectors and portable battery chargers, under brand names such as InvisibleShield and Mophie. Zagg commands close to 50% market share in the categories in which it competes and is expected to potentially benefit from the strong Apple iPhone refresh cycle. With smartphone prices nearing $1,000 in some cases, we believe people will continue to look for ways to protect their investment in these devices.

OUTLOOK

The market has delivered strong results so far this year with a number of the major indices posting double digit returns. The march higher continued in a very even fashion across the indices in the 3rd quarter. Growth has outperformed value significantly, with the Russell 2000 Growth Index outperforming the Russell 2000 Value Index by over 10%.

We believe this is an indication of investors continuing to seek out stories with revenue growth opportunities, as we continue in a stable economic environment with a market 8+ years into the recovery. Continued economic growth, a stable geopolitical environment, and a clearer picture on tax reform could be a catalyst to close out a strong year for the markets.

The Buffalo Emerging Opportunities Fund is focused primarily on identifying innovation within U.S. companies with North American revenue bases. U.S. consumer confidence and small business confidence remained near all-time highs at the end of the period, which could bode well for smaller, U.S.-centric companies that are a focus of the Fund. We remain aware of valuations and fundamentals and continue to monitor the risk/reward profile of our holdings. As a result, we often make changes, based on market moves intra quarter, that provide either an opportunity to trim or add to positions, based on the inefficiencies that exist at the smaller end of the market capitalization spectrum.

We ended the quarter with 60 holdings, adding six holdings while moving on from eight. 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.

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 598 for the three-year, 2 stars among 530 for the five-year, and 2 stars among 397 Small Growth funds for the ten-year period ending 10/31/17.

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.