Fund Objective & Investment Process
The investment objective of the Buffalo Growth Fund is long-term growth of capital. The Growth Fund invests in domestic common stocks and other U.S. equity securities, including preferred stock, convertible securities, warrants and rights, with a goal of maintaining at least 75% of the equity weighting of the Fund’s portfolio in companies with market capitalizations greater than $5 billion or the median of the Morningstar U.S. Growth Index, whichever is lower. Capitalization of the Morningstar U.S. Growth Index changes due to market conditions and index composition.
With respect to the remaining 25% of the equity weighting of the Fund’s portfolio, the Fund may invest in companies of any size, including, but not limited to, those with market capitalizations less than the lower of the median of the Morningstar U.S. Growth Index or $5 billion.
The Fund managers seek to identify companies that are expected to experience growth based on the identification of long-term, measurable secular trends, and which, as a result, the managers believe 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 those which the managers believe have favorable attributes, including attractive valuation, strong management, conservative debt, free cash flow, scalable business models, and competitive advantages.
Dave Carlsen, CFA, Co-Portfolio Manager
Overall Morningstar Rating™ of BUFGX based on risk-adjusted returns among 1,237 Large Growth funds as of 4/30/20.
|As of 4/30/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||-5.88||-4.16||4.21||12.28||9.68||11.94||9.83||6.54||10.11|
|BUFFALO GROWTH FUND - Institutional||-5.84||-4.12||4.36||12.44||9.84||12.11||9.99||6.70||10.27|
|Morningstar U.S. Growth Index||-0.64||2.68||12.85||17.33||13.38||14.46||10.86||3.65||-|
|Lipper Large Cap Growth Fund Index||-2.95||-0.69||9.35||15.33||12.31||13.00||9.74||4.16||8.52|
|Morningstar Large Growth Category||-5.24||-3.48||5.34||12.72||10.51||12.28||9.55||5.43||8.49|
|As of 3/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||-16.01||-16.01||-3.90||8.17||7.20||10.82||8.81||5.79||9.56|
|BUFFALO GROWTH FUND - Institutional||-16.01||-16.01||-3.79||8.32||7.35||10.98||8.97||5.95||9.72|
|Morningstar U.S. Growth Index||-11.50||-11.50||1.45||12.80||9.97||12.96||9.54||2.49||-|
|Lipper Large Cap Growth Fund Index||-13.47||-13.47||-0.55||11.21||9.26||11.57||8.57||3.03||7.95|
|Morningstar Large Growth Category||-15.48||-15.48||-3.72||8.65||7.64||10.99||8.40||4.42||7.95|
3 Year Risk Metrics
|BUFGX vs Morningstar U.S. Growth Index (As of 3/31/20)|
Hypothetical Growth of $10,000
|(As of 3/31/20)|| |
|# of Holdings||55|
|Median Market Cap||$57.44 B|
|Weighted Average Market Cap||$299.26 B|
|3-Yr Annualized Turnover Ratio||26.81%|
|% of Holdings with Free Cash Flow||89.09%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Abbott Labs||ABT||Health Care||2.73%|
|Danaher Corp||DHR||Health Care||2.32%|
|TOP 10 HOLDINGS TOTAL||28.53%|
CAPITAL MARKET OVERVIEW
(As of 3/31/20) — Global equity markets fell sharply in the 1st quarter of 2020 in reaction to the global spread of COVID-19. As the case count increased exponentially, the only effective response was for countries to go into lockdown. The economic impact of these actions became clear as the quarter progressed and virtually all asset classes suffered as a result. From February 19 through March 23, the U.S. stock market, as measured by the S&P 500 Index, declined around 34%, which was the fastest meltdown in history. Central banks and governments responded quickly to this event, with the U.S. Federal Reserve (the “Fed”) cutting interest rates twice in March and announcing unlimited quantitative easing. The U.S. Senate passed a $2 trillion stimulus package, providing assistance to individuals and businesses in distress. Optimism around these efforts helped the market rally into quarter end, leaving the S&P 500 Index down 19.60% from the start of the year.
The broad market Russell 3000 Index declined 20.90% in the 1st quarter. Growth outperformed value, with the Russell 3000 Growth Index declining 14.85% compared to the Russell 3000 Value Index decline of 27.32%. By capitalization size, large cap stocks held up best, with a -20.22% return in the quarter, represented by the Russell 1000 Index. The Russell Mid Cap Index fell -27.07%, followed by the smaller cap Russell 2000 Index which declined -30.61%. Best performing sectors were the Technology, Health Care, and Consumer Staples sectors. The Energy sector was hit hardest as falling demand and rising supply from Saudi Arabia caused oil prices to crater. The economically-sensitive Financial and Industrial sectors were also among the worst performing sectors in the quarter.
(As of 3/31/20) — The Buffalo Growth Fund (BUFGX) declined 16.01% versus the Morningstar U.S. Growth Index’s decline of 11.50% and the Morningstar Large Cap Growth Peer Group decline of 15.48%. The Consumer Discretionary, Technology, Financials, and Health Care sectors in the Fund accounted for most of the relative underperformance. Cyclically-dependent stocks performed worst in the Fund and Index. Consumer Discretionary and Information Technology stocks were particularly hard hit, as the coronavirus pandemic brought the world economy to a standstill.
Amazon continues to have significant runway for growth as it continues to find ways to evolve its business model.
Equinix is the largest provider of colocation data centers in the world. While the company reported a strong quarter in February, the increased reliance of remote connectivity for work and school played a strong role in company’s stock price performance during the quarter. The company continues to be well position for secular growth going forward as more software services move to the cloud. Additionally, the company has developed network-dense locations in major cities that would be extremely difficult for competitors to replicate.
Disney has been negatively impacted by the global pandemic, which is keeping Disney’s theme parks, resorts, retail stores, global theatrical exhibition, and live sports
broadcasts largely closed or postponed through the end of June 2020. While it is unknown how long the COVID-19 pandemic will last, Disney’s portfolio of offerings are unreplaceable brands. In early April, Disney reported 50 million subscribers to its Disney+ streaming products, as consumers sought entertainment content while sheltering at home. We believe that once the economy “normalizes”, Disney’s stock price will continue to recover from its recent lows.
Wells Fargo, one of the largest banks in the U.S., declined largely due to the impact of the COVID-19 pandemic on the global economy and lower interest rates, as the Fed cut its benchmark lending rate to zero during the quarter. Despite the difficult near-term environment, the company remains profitable and should maintain adequate capital levels, even after modeling for the Fed’s severely adverse stress test in a worst case scenario. We are monitoring developments closely, but current valuation of the company’s stock makes a relatively compelling risk-reward trade-off longer term.
(As of 3/31/20) — The fiscal and monetary response to the COVID-19 pandemic has been relatively swift and expansive, with indications that if conditions do not improve, world leaders and global central banks will do whatever is necessary to revive growth. Their efforts so far are encouraging and markets have begun to stabilize. In the near term, everyone seems focused on the pace and magnitude of the virus spread, resulting in high stock
correlations. Upcoming earnings results seem far less important than an assessment of 2021-2022 earnings power. Over the intermediate term, the revival of global growth
will depend on how soon the pandemic can be contained through a combination of better testing, improved therapies, vaccine development, and maybe seasonal curtailment. Time will tell.
In the meantime, global economic uncertainty and low investor confidence are weighing on the market and near-term corporate fundamentals. This is opening up attractive buying opportunities for some of our favorite secular growth beneficiaries on the wish list. We are not blindly buying on lower stock prices, but instead we are mindful of the macroeconomic backdrop, the sensitivity of our companies to
discretionary spending and the negative effect unfavorable leverage can have on corporate profit cycles in bad-times scenarios. We keep a keen eye on the degree of contraction that current prices discount and the degree to which management teams can protect profits and shed risk. Our work is beginning to tell us that reward and growing upside opportunity trumps downside risk in many instances. We are patiently waiting for these good-odds situations and will strike when we get them.
Economic conditions may ebb and flow, but our focus is steady – to invest in attractively-priced, financially-strong, well-managed companies that can benefit from innovative strategies and disruptive megatrends.
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.
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