|As of 9/29/2022|
|Total Net Assets:||$151.08 Million (6/30/22)|
|Morningstar Category:||Large Cap Growth|
|Benchmark Index:||Russell 3000 Growth|
Fund Fact Sheet Q2 2022
PM Commentary Q2 2022
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 Russell 3000 Growth Index at the time of purchase or $5 billion, whichever is lower. The median market capitalization of the Russell 3000 Growth Index changes due to market conditions and also changes with the composition of the index.
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 Russell 3000 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 1,140 Large Growth funds as of 8/31/22
Morningstar Sustainability Rating™ of BUFGX out of 1,604 US Equity Large Cap Growth funds as of 7/31/22, based on 97% of AUM
Carbon Metric Rating of BUFGX as of 6/30/22 in the Large Growth category, based on 99% of AUM; long positions only
Historical Sustainability Score Rank of BUFGX
|As of 8/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||-3.59||-24.90||-23.36||7.56||10.91||11.91||9.14||9.96||10.01|
|BUFFALO GROWTH FUND - Institutional||-3.54||-24.82||-23.24||7.72||11.08||12.07||9.30||10.12||10.18|
|Russell 3000 Growth Index||-1.38||-23.13||-19.44||13.95||14.23||14.75||10.92||10.91||9.81|
|Morningstar U.S. Growth Index||-1.21||-29.26||-28.51||11.50||13.47||13.94||10.29||-||-|
|Lipper Large Cap Growth Fund Index||-3.02||-26.97||-25.99||10.63||12.09||13.35||9.41||9.40||8.64|
|Morningstar Large Growth Category||-2.69||-24.96||-23.75||10.16||11.46||12.74||9.16||9.81||8.66|
|As of 6/30/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||-21.02||-28.32||-22.16||6.21||10.23||11.93||8.77||9.10||9.89|
|BUFFALO GROWTH FUND - Institutional||-21.00||-28.26||-22.05||6.37||10.39||12.09||8.93||9.27||10.05|
|Russell 3000 Growth Index||-20.83||-28.15||-19.78||11.84||13.63||14.41||10.40||10.20||9.60|
|Morningstar U.S. Growth Index||-25.33||-34.26||-28.42||8.96||12.70||13.62||9.74||-||-|
|Lipper Large Cap Growth Fund Index||-22.09||-30.93||-25.59||8.73||11.86||13.15||9.03||8.70||8.47|
|Morningstar Large Growth Category||-20.82||-29.12||-23.86||8.10||11.01||12.51||8.74||9.05||8.48|
|BUFFALO GROWTH FUND - Investor||11.86||35.40||8.88||2.64||4.86||22.81||0.51||31.91||28.29||21.69|
|BUFFALO GROWTH FUND - Institutional||12.03||35.60||9.05||2.80||5.02||22.99||0.66||32.11||28.49||21.85|
|Russell 3000 Growth Index||15.21||34.23||12.44||5.09||7.39||29.59||-2.12||35.85||38.26||25.85|
|Morningstar U.S. Growth Index||17.27||33.34||12.66||5.54||3.16||29.52||0.78||34.90||44.65||24.79|
3 Year Risk Metrics
|BUFGX vs Russell 3000 Growth Index (As of 6/30/22)|
Hypothetical Growth of $10,000
|(As of 6/30/22)||
|# of Holdings||49|
|Median Market Cap||$81.23 B|
|Weighted Average Market Cap||$703.80 B|
|3-Yr Annualized Turnover Ratio||22.41%|
|% of Holdings with Free Cash Flow||87.76%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net
|Open Lending Corp||LPRO||Financials||1.76%|
|TOP 10 HOLDINGS TOTAL||50.14%|
CAPITAL MARKET OVERVIEW
(As of 6/30/22) — The stock market extended year-to-date losses during the 2nd quarter. Inflation, rising interest rates, and economic uncertainty continued to be major headwinds for investors as recession talks gained traction. The S&P 500 Index fell -16.10% during the quarter, bringing the total return for the first half of the year to -19.96%. News headlines, which included energy shortages, the war in Ukraine, China’s COVID lockdowns, and the potential for softer corporate earnings next quarter, added to the pessimistic market sentiment. However, the Federal Reserve’s hawkish stance on inflation, expectations for additional interest rate increases, and a reduction in the size of its balance sheet, continued to signal confidence in the U.S. economy moving forward.
The broad-based Russell 3000 Index declined -16.70% in the quarter. Value stocks fell less than growth stocks as the Russell 3000 Value Index returned -12.41%, versus a return of -20.83% for the Russell 3000 Growth Index. Relative performance slightly favored market cap size as large caps outperformed small caps in the quarter. Larger cap stocks, as measured by the Russell 1000 Index, returned -16.67% compared to the smaller cap Russell 2000 Index return of -17.20% and the Russell Microcap Index return of -18.96%. There were no advancing economic sectors for the quarter, but Consumer Staples, Energy, Utilities, and Healthcare held up better on a relative basis. Consumer Discretionary, Information Technology and Communication Services areas lagged.
(As of 6/30/22) — The Buffalo Growth Fund (BUFGX) declined -21.02% in the 2nd quarter, which was generally in-line with the Russell 3000 Growth Index’s return of -20.83%. Positive stock selection in the Information Technology and Consumer Discretionary sectors was largely offset by an underweight position in Consumer Staples, which declined much less than the total Index. The Fund doesn’t currently hold any Consumer Staples companies, given a lack of long-term secular growth in the sector. In short, it was an ugly quarter in the markets, and there weren’t many places for a growth investor to hide.
The top contributors in the quarter were two holdings that were added to the portfolio late in the period, DoubleVerify Holdings and Azenta, Inc. DoubleVerify is an advertising technology company that provides digital media measurement. They monitor and measure online advertising campaigns to assure that ads are being viewed by actual people (not bots or fraud), and that ads aren’t being placed on sites or next to content that could be harmful to their brand. We expect DoubleVerify to benefit from digital continuing to gain share of ad budgets and an increasing focus on return on investment (ROI) and brand safety.
Azenta (formerly Brooks Automation) is a life sciences company offering cold-chain sample management solutions and genomic services across areas such as drug development, clinical research, and advanced cell therapies for the industry’s top pharmaceutical, biotech, academic, and healthcare institutions. We expect the company to continue growing rapidly, driven by growth in R&D outsourcing, increasing demand for cold storage, and growing markets for cell and gene therapies. Additionally, Azenta has a large cash position that provides some optionality from future acquisitions.
With almost everything trading lower in the quarter, the Fund’s biggest detractors were among our largest positions. Amazon.com reported disappointing results in the quarter. Cost inflation hurt margins, and the company admitted to adding too much capacity in response to pandemic driven e-commerce demand. On the bright side, Amazon Web Services continues to grow rapidly. We find the current valuation compelling and continue to hold a large position in the stock.
Despite outperforming the market, Microsoft was the second largest detractor in the period, due to its large position size. The company is a prime beneficiary of workplace digital transformation and the move from on-premise IT infrastructure to the cloud. As the world economy continues to emerge from the pandemic, Microsoft is well-positioned to gain share of rising IT budgets.
(As of 6/30/22) — Financial conditions have tightened substantially this year. The Federal Funds rate has risen from 0.0-0.25% to 1.5-1.75% and is expected to rise another 75 basis points in July. 10-year Treasury yields have increased from 1.5% to 3.0%, and mortgage rates have risen considerably as well. Decelerating economic growth and higher interest rates have driven severe multiple compression, especially in growth stocks, with a bear market beginning on June 13.
Tighter monetary policy is beginning to have an impact on demand, which will help tame inflation. Given the current strength of the job market and consumer balance sheets, the Federal Reserve should be able to focus on getting inflation under control without worrying about the other half of its dual mandate (full employment) for the foreseeable future. As of this writing, the consensus in the market seems to be that inflation is currently peaking and will moderate from here. Current concerns are that the Federal Reserve will make a policy mistake by raising rates beyond neutral in a recessionary environment.
While it is impossible to pinpoint a market bottom, bear markets and recessions have historically been a good time to invest in equity markets for long-term investors. We are excited about the valuations being offered by the market on strong, growing businesses that we have considered too expensive in the past. 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.
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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Morningstar Sustainability Rating™
The Morningstar Sustainability Rating™ is intended to measure how well the issuing companies of the securities within a fund’s portfolio holdings are managing their financially material environmental, social and governance, or ESG, risks relative to the fund’s Morningstar Global Category peers. The Morningstar Sustainability Rating calculation is a five -step process. First, each fund with at least 67% of assets covered by a company-level ESG Risk Score from Sustainalytics receives a Morningstar Portfolio Sustainability Score. The Morningstar Portfolio Sustainability Score is an asset weighted average of company-level ESG Risk Scores. The Portfolio Sustainability Score ranges between 0 to 100, with a higher score indicating that a fund has, on average, more of its assets invested in companies with high ESG Risk. Second, the Historical Sustainability Score is an exponential weighted moving average of the Portfolio Sustainability Scores over the past 12 months. The process rescales the current Portfolio Sustainability Score to reflect the consistency of the scores. The Historical Sustainability Score ranges between 0 to 100, with a higher score indicating that a fund has, on average, more of its assets invested in companies with high ESG Risk, on a consistent historical basis. Third, the Morningstar Sustainability Rating is then assigned to all scored funds within Morningstar Global Categories in which at least thirty (30) funds receive a Historical Sustainability Score and is determined by each fund’s Morningstar Sustainability Rating Score rank within the following distribution: High (highest 10%), Above Average (next 22.5%), Average (next 35%), Below Average (next 22.5%), and Low (lowest 10%). Fourth, Morningstar applies a 1% rating buffer from the previous month to increase rating stability. This means a fund must move 1% beyond the rating breakpoint to change ratings. Fifth, they adjust downward positive Sustainability Ratings to funds with high ESG Risk scores. The logic is as follows: If Portfolio Sustainability score is above 40, then the fund receives a Low Sustainability Rating. If Portfolio Sustainability score is above 35 and preliminary rating is Average or better, then the fund is downgraded to Below Average. If the Portfolio Sustainability score is above 30 and preliminary rating is Above Average, then the fund is downgraded to Average. If the Portfolio Sustainability score is below 30, then no adjustment is made. The Morningstar Sustainability Rating is depicted by globe icons where High equals 5 globes and Low equals 1 globe. Since a Sustainability Rating is assigned to all funds that meet the above criteria, the rating it is not limited to funds with explicit sustainable or responsible investment mandates. Morningstar updates its Sustainability Ratings monthly. The Portfolio Sustainability Score is calculated when Morningstar receives a new portfolio. Then, the Historical Sustainability Score and the Sustainability Rating is calculated one month and six business days after the reported as-of date of the most recent portfolio. As part of the evaluation process, Morningstar uses Sustainalytics’ ESG scores from the same month as the portfolio as-of date. Please click on http://corporate1.morningstar.com/SustainableInvesting/ for more detailed information about the Morningstar Sustainability Rating methodology and calculation frequency. Sustainalytics is an independent ESG and corporate governance research, ratings, and analysis firm. Morningstar, Inc. holds a non-controlling ownership interest in Sustainalytics.
Morningstar Low Carbon Designation™
The Morningstar® Low Carbon Designation™ is intended to allow investors to easily identify low-carbon funds across the global universe. The designation is an indicator that the companies held in a portfolio are in general alignment with the transition to a low-carbon economy. The designation is given to portfolios that have low carbon-risk scores and low levels of exposure to fossil fuels. To determine carbon-risk scores and fossil fuel involvement, Morningstar uses Sustainalytics' company-level data. The Morningstar® Portfolio Carbon Risk Score™ measures the risk that companies in a portfolio face from the transition to a low-carbon economy. The Morningstar® Portfolio Fossil Fuel Involvement™ percentage assesses the degree to which a portfolio is exposed to thermal coal extraction and power generation as well as oil and gas production, power generation, and products & services. To receive a Morningstar Portfolio Carbon Risk Score, at least 67% of portfolio assets must have a carbon-risk rating from Sustainalytics. The percentage of assets covered is rescaled to 100% before calculating the score. To receive the designation, a portfolio must meet two criteria: 1) a 12-month trailing average Morningstar Portfolio Carbon Risk Score below 10 and 2) a 12-month trailing average exposure to fossil fuels less than 7% of assets, which is approximately a 33% underweighting to the global equity universe. Funds receive the Low Carbon designation based on the most recent quarterly calculations of their 12- month trailing average Morningstar Portfolio Carbon Risk Scores and Morningstar Portfolio Fossil Fuel Involvement. Funds holding the Low Carbon designation that no longer meet the criteria will not receive the designation for the subsequent quarter. All Morningstar Portfolio Carbon Metrics, including the Morningstar Portfolio Carbon Risk Score, Morningstar Portfolio Fossil Fuel Involvement, and the Morningstar Low Carbon Designation, are calculated quarterly. Please visit http://corporate1.morningstar.com/SustainableInvesting/ for more detail information about the Morningstar Low Carbon Designation and its calculation. Sustainalytics is an independent ESG and corporate governance research, ratings, and analysis firm. Morningstar, Inc. holds a non-controlling ownership interest in Sustainalytics.