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.
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 1,232 Large Growth funds as of 7/31/20.
|As of 7/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||15.71||10.90||16.78||16.58||12.77||14.26||10.18||7.46||10.64|
|BUFFALO GROWTH FUND - Institutional||15.74||10.97||16.96||16.75||12.94||14.43||10.34||7.62||10.81|
|Morningstar U.S. Growth Index||19.90||23.11||31.93||22.27||16.58||17.51||11.34||4.77||-|
|Lipper Large Cap Growth Fund Index||19.71||18.88||28.44||19.90||15.39||15.95||10.28||5.19||9.21|
|Morningstar Large Growth Category||19.16||15.38||23.56||17.51||13.67||15.15||10.12||6.39||9.15|
|As of 6/30/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||24.48||4.56||11.95||14.99||11.94||14.52||10.21||6.90||10.42|
|BUFFALO GROWTH FUND - Institutional||24.58||4.64||12.13||15.16||12.11||14.70||10.38||7.06||10.58|
|Morningstar U.S. Growth Index||29.86||14.92||25.28||20.75||15.78||17.45||11.23||4.16||-|
|Lipper Large Cap Growth Fund Index||28.18||10.92||21.75||18.37||14.60||15.91||10.14||4.72||8.94|
|Morningstar Large Growth Category||27.43||7.84||17.34||15.95||12.84||15.12||9.96||5.96||8.90|
3 Year Risk Metrics
|BUFGX vs Morningstar U.S. Growth Index (As of 6/30/20)|
Hypothetical Growth of $10,000
|(As of 6/30/20)|| |
|# of Holdings||53|
|Median Market Cap||$76.74 B|
|Weighted Average Market Cap||$443.25 B|
|3-Yr Annualized Turnover Ratio||25.99%|
|% of Holdings with Free Cash Flow||92.31%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Abbott Labs||ABT||Health Care||3.14%|
|Danaher Corp||DHR||Health Care||2.65%|
|Baxter Intl||BAX||Health Care||2.64%|
|TOP 10 HOLDINGS TOTAL||35.87%|
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 Growth Fund (BUFGX) returned 24.48% during the quarter, trailing the Morningstar U.S. Growth Index’s gain of 29.86%. Stock selection in the Consumer Discretionary sector and the drag from un-invested cash were the leading causes of relative underperformance. Within the Consumer Discretionary sector, most of the underperformance was driven by not owning Tesla, a relatively large benchmark position, which was up over 100% in the quarter. Across the entire portfolio, underexposure to companies with no earnings and stocks, with what we believe to be sky-high valuation multiples, hurt relative performance. With interest rates expected to be “lower for longer”, sales growth was rewarded over profitability and valuation-sensitivity during the market rebound. Regarding our un-invested cash, while not a level we consider elevated, cash averaged 3.6% of Fund assets, and any allocation to cash holds back performance when the market is up almost 30%.
Microsoft was the top contributor for the Fund during the quarter, returning 29%. The company’s business has been insulated from COVID-19 slowdowns, driven by an increase in remote work and learning. Growth in its cloud services and Office 365 products has remained strong, and we believe the company’s growth outlook is solid, regardless of the trajectory of the pandemic.
Amazon was another top contributor, with shares up 41%. The ongoing shift to ecommerce accelerated during the quarter as consumers avoided brick-and-mortar stores during the pandemic. Furthermore, the company’s web services division is also well positioned to benefit from the growing need for cloud computing in a world with more people working from home.
The Fund’s biggest detractors were both victims of the low interest rate environment. Wells Fargo was down 9% in the quarter, and, without a sharp rebound in economic activity, with the potential to drive interest rates higher, the outlook for banks is uninspiring. As a result, we eliminated the position from the Fund to invest in more attractive near term opportunities, by our analysis. CME Group was also hurt by lower interest rates, as lower volatility in interest rates during the period led to lower volumes, as market participants did not feel a need to hedge interest rate exposures.
(As of 6/30/20) — After a turbulent start to the year, the focus remains on the trajectory of the pandemic and the associated economic fallout. Unfortunately, the gradual reopening of the economy has led to a surge in new virus cases. We expect state and local governments to resist shutting down economies again with strict shelter in place orders. However, as hospital utilization approaches capacity in some regions, stricter quarantines may be called for, dealing a setback to the economic recovery. On the positive side, several vaccines appear to show promise in immunizing people from the virus. The availability of a vaccine or cure would, obviously, be a welcome development and lead to more rapid and broader economic growth.
We are also paying attention to the upcoming elections, and, while Democrats are currently expected to have a good day on the first Tuesday in November, it is not clear to us that this outcome is being discounted in the share prices of some companies that could be affected by policy changes.
While the timing and trajectory are unclear, the pandemic will end someday and the economy will recover. When that happens, economic growth will broaden and the scarcity value of growth in equity markets will diminish. The recent outperformance of “growth at any price” cannot continue forever, and a reversal in market leadership is likely to be painful for investors that have ignored valuations. While we expect volatility to remain high, it will not change our investment philosophy. 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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