Fund Objective & Investment Philosophy
The investment objective of the Buffalo Growth Fund is long-term growth of capital. The Fund invests in common stocks and other equity securities, including preferred stock, convertible securities, warrants and rights, with a goal of maintaining at least 75% of the Fund’s portfolio in companies with market capitalizations greater than the median of the Morningstar U.S. Growth Index or $5 billion, whichever is lower. The median market capitalization of the Morningstar U.S. Growth Index changes due to market conditions and also changes with the composition of the index. As of June 30, 2021, the median market capitalization of companies in the Morningstar U.S. Growth Index was approximately $6.8 billion.
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, whichever is lower.
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.
The Growth Fund invest in secular trend leaders: attractively-priced, financially-strong, well-managed companies across all market cap segments, which we believe are favorably positioned to harvest the lion’s share of big secular growth trends.
Dave Carlsen, CFA, Co-Portfolio Manager
Overall Morningstar Rating™ of BUFGX based on risk-adjusted returns among 1,128 Large Growth funds as of 8/31/21.
|As of 8/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||11.33||19.24||27.81||20.03||19.65||16.39||12.25||9.93||11.54|
|BUFFALO GROWTH FUND - Institutional||11.33||19.34||27.98||20.20||19.83||16.56||12.42||10.10||11.70|
|Morningstar U.S. Growth Index||16.07||23.48||31.94||26.34||25.76||19.83||14.06||10.48||-|
|Lipper Large Cap Growth Fund Index||12.31||20.74||27.87||23.97||23.78||18.29||12.80||9.71||10.24|
|Morningstar Large Growth Category||11.01||18.75||28.75||22.10||22.19||17.57||12.53||10.13||10.16|
|As of 6/30/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||11.17||12.07||37.51||19.98||19.37||14.68||12.06||9.43||11.35|
|BUFFALO GROWTH FUND - Institutional||11.21||12.15||37.71||20.16||19.55||14.85||12.23||9.60||11.52|
|Morningstar U.S. Growth Index||13.90||14.60||44.24||26.24||24.91||18.14||13.47||9.10||-|
|Lipper Large Cap Growth Fund Index||11.80||13.56||41.90||24.24||23.62||16.69||12.31||8.75||10.05|
|Morningstar Large Growth Category||10.28||12.38||41.70||22.56||21.98||15.99||12.13||9.21||10.00|
|BUFFALO GROWTH FUND - Investor||-0.06||11.86||35.40||8.88||2.64||4.86||22.81||0.51||31.91||28.29|
|BUFFALO GROWTH FUND - Institutional||0.09||12.03||35.60||9.05||2.80||5.02||22.99||0.66||32.11||28.49|
|Morningstar U.S. Growth Index||0.74||17.27||33.34||12.66||5.54||3.16||29.52||0.78||34.90||44.65|
3 Year Risk Metrics
|BUFGX vs Morningstar U.S. Growth Index (As of 6/30/21)|
Hypothetical Growth of $10,000
|(As of 6/30/21)|| |
|# of Holdings||52|
|Median Market Cap||$107.93 B|
|Weighted Average Market Cap||$721.19 B|
|3-Yr Annualized Turnover Ratio||20.65%|
|% of Holdings with Free Cash Flow||86.54%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Home Depot||HD||Consumer Discretionary||2.48%|
|TOP 10 HOLDINGS TOTAL||43.71%|
CAPITAL MARKET OVERVIEW
(As of 6/30/21) — Equity markets moved higher for the fifth consecutive quarter, as the S&P 500 Index returned 8.55%, raising the year-to-date return to 15.25%. The COVID-19 vaccine rollout has helped fuel an economic comeback while corporate earnings are improving. The vaccine adoption around the world is encouraging, and over 50% of the U.S. population is now vaccinated. Capital markets continued to be supported by significant spending from Congress and aggressive monetary policy from the Federal Reserve (the Fed). The 2nd quarter was marked by outperformance of growth stocks, overcoming investor concerns of rising inflation and potential interest rate hikes in the prior quarter. Hawkish comments from the Fed replaced inflation worries with concerns about the magnitude and duration of the economic recovery. Long duration growth companies were beneficiaries as yields on the 10-Year and 30-Year Treasuries declined during the period after climbing for the previous four months.
The broad market Russell 3000 Index advanced 8.24% in the quarter. Growth stocks outperformed Value stocks, as the Russell 3000 Growth Index surged 11.38% compared to the Russell 3000 Value Index gain of 5.16%. Relative performance was correlated with market cap size in the quarter, as the large cap Russell 1000 Index returned 8.54%, the Russell Midcap Index advanced 7.50%, the small cap Russell 2000 Index returned 4.29%, and the Russell Microcap Index finished 4.14% higher.
All economic sectors produced positive returns during the period with the exception of Telecom Services. Real Estate, Information Technology, and Energy led the advance followed by Financials and Health Care. More defensive areas, such as Telecom Services, Utilities, and Consumer Staples, trailed on a relative basis.
(As of 6/30/21) — The Buffalo Growth Fund (BUFGX) gained 11.17% in the 2nd quarter, but trailed the Morningstar U.S. Growth Index’s gain of 13.90%. Strong stock selection in Health Care and Industrials was offset by underperformance in the Fund’s Technology and Consumer Discretionary holdings. In short, our valuation discipline was the root of the relative underperformance in the quarter. Long-term Treasury yields fell in the quarter after jobs reports surprised to the downside, inflation reports surprised to the upside, and Federal Reserve communications turned slightly more hawkish. Within equity markets, the main beneficiaries of lower long-term interest rates were long-duration (high valuation) growth stocks, where the Fund is underweight relative to the Index.
Microsoft Corporation was the top contributor to performance in the 2nd quarter. The company reported a strong quarter driven by rapid growth in Azure revenues, as their enterprise customers accelerated cloud migrations. Furthermore, forward guidance appears conservative considering the strong commercial bookings in the quarter.
Alphabet Inc. was another top contributor. A recovery in advertising spending led to the company reporting earnings that were 67% ahead of expectations. Strength was broad-based, driven by the search business, YouTube, and Google Cloud.
Amazon.com continues the trend of top contributors benefiting from strong cloud growth, with AWS revenues up 32%. Ecommerce sales showed resiliency, and advertising revenues rebounded. Revenue from physical stores was the only weak spot but should improve going forward, barring a rebound in COVID cases.
Two of the top detractors in the period, TripAdvisor Inc. and Booking Holdings, were caught up in general travel industry weakness. The rise of the Delta variant drove some countries to reinstate previously-abandoned lockdown measures, causing investors to push out their projections for a broad travel recovery. Furthermore, the decline in interest rates led investors to sell economically-sensitive companies to fund the purchase of companies with higher secular growth profiles.
Global Payments also detracted from the Fund’s performance. Despite reporting a strong quarter, investors were concerned the company didn’t raise annual guidance by the amount of the beat, implying a slowdown in the 2nd half of the year. Additionally, investors responded to changing interest rates by rotating from payment stocks to banks and/or faster growing “fintech” companies.
(As of 6/30/21) — The most prominent debates among investors are whether inflation is transitory or resilient and whether economic growth is self-sustaining or likely to fizzle when stimulus is removed. The year started with increasing optimism about the recovery, and we saw the 10-Year Treasury yield increase from 0.9% to 1.7%. Since then, we’ve been surprised by bad jobs data, labor shortages, port closures, and shipping bottlenecks, as well as increasing COVID cases driven by the Delta variant. As a result, the 10-Year Treasury yield dropped to 1.3%.
In our view, demand is strong and capacity is holding back economic growth. We expect job growth to improve as enhanced unemployment benefits roll off, schools reopen to in-person learning (providing would-be workers with child care), and offices continue to reopen. While the Delta variant is concerning, early indications are that vaccines are effective at preventing hospitalizations and deaths. As vaccination rates improve worldwide, supply constraints should ease. We believe that the global reopening has been delayed and that as these supply side bottlenecks ease, economic growth will remain relatively strong.
So, what are we doing about it? The answer is not much. We believe the portfolio is well-positioned for an environment of increased economic optimism and higher long-term interest rates. But this is a result of our bottom-up process, not the implementation of any top-down view. We are under-exposed to hyper-growth companies with sky high valuation multiples because we don’t think they currently present us with an attractive risk/reward profile. While we are mindful of macroeconomic fluctuations, they do not drive our investment process. We will continue to invest in businesses with solid growth opportunities, durable competitive advantages, scalable business models, and good management teams, when they are trading at attractive valuations, in our opinion. We thank you for your continued support.
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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