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 1,223 Large Growth funds as of 1/31/20.
|As of 1/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||7.34||1.82||24.59||17.09||12.58||14.15||10.10||7.52||10.48|
|BUFFALO GROWTH FUND - Institutional||7.35||1.82||24.76||17.26||12.75||14.32||10.26||7.68||10.65|
|Morningstar U.S. Growth Index||11.09||3.34||26.43||20.61||14.78||15.87||10.58||4.18||-|
|Lipper Large Cap Growth Fund Index||10.16||2.33||25.01||19.65||14.12||14.55||9.71||4.52||8.74|
|Morningstar Large Growth Category||8.92||1.79||23.05||17.42||12.92||14.15||9.69||6.01||8.82|
|As of 12/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||7.35||31.91||31.91||17.65||11.88||13.54||9.77||7.55||10.44|
|BUFFALO GROWTH FUND - Institutional||7.40||32.11||32.11||17.82||12.04||13.71||9.94||7.71||10.61|
|Morningstar U.S. Growth Index||10.13||34.90||34.90||20.76||13.90||14.83||10.09||3.74||-|
|Lipper Large Cap Growth Fund Index||10.09||33.39||33.39||20.52||13.20||13.66||9.28||4.18||8.67|
|Morningstar Large Growth Category||9.35||31.71||31.71||18.10||11.98||12.89||8.65||6.34||8.77|
3 Year Risk Metrics
|BUFGX vs Morningstar U.S. Growth Index (As of 12/31/19)|
Hypothetical Growth of $10,000
|(As of 12/31/19)|| |
|# of Holdings||58|
|Median Market Cap||$61.19 B|
|Weighted Average Market Cap||$268.06 B|
|3-Yr Annualized Turnover Ratio||26.69%|
|% of Holdings with Free Cash Flow||87.93%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Abbott Labs||ABT||Health Care||2.82%|
|Home Depot||HD||Consumer Discretionary||2.56%|
|Baxter Intl||BAX||Health Care||2.41%|
|Danaher Corp||DHR||Health Care||2.34%|
|TOP 10 HOLDINGS TOTAL||30.80%|
CAPITAL MARKET OVERVIEW
(As of 12/31/19) — The combination of a U.S. Federal Reserve (Fed) interest rate cut, an improving economic outlook, and easing trade tensions, sent equity markets sharply higher in the 4th quarter. The S&P 500 Index advanced 9.10% during the period, which brought the full-year (2019) gain to 31.49%. The Fed cut interest rates three times in 2019, erasing the brief yield curve inversion and assuaging fears of a recession. The economy continued to add new jobs at a strong pace and unemployment declined to 3.5%. Consumer spending remained healthy, and there is optimism for better business investment following the announced “phase one” trade deal with China.
Similar to the S&P 500 Index, the broad-based Russell 3000 Index returned 9.04% during the quarter. Growth outperformed value, as the Russell 3000 Growth Index returned 10.62% compared to a return of 7.41% for the Russell 3000 Value Index. Smaller companies outperformed larger companies, as one would expect in a “risk-on” period. The Russell Microcap Index surged 13.45% and the Russell 2000 Index advanced 9.94%. Large company benchmarks such as the Russell 1000 Index advanced 9.04% while the Russell Midcap Index produced a return of 7.06%. Technology and Health Care were the best performing sectors in the quarter, while more defensive areas of the market lagged such as Real Estate and Utilities. Higher long-term interest rates weighed on high-quality bond proxies – the safe haven 10-year U.S. Treasury Bond produced a return of -1.74% during the quarter.
(As of 12/31/19) — The Buffalo Growth Fund (the “Fund”) returned 7.35% during the quarter, underperforming the Morningstar U.S. Growth Index (the “Index”) which returned 10.13%. Although absolute performance was strong during the period, the Fund’s relative underperformance was primarily due to stock selection within Health Care and holding some cash in a rising market. Additionally, the improved economic picture, alleviated trade tensions between the U.S. and China, and dovish monetary policy from the Fed helped cyclical stocks rebound in the quarter, an underweighted area for the Fund.
Sectors that had positive relative performance during the quarter were Consumer Staples, Materials, Real Estate, Information Technology, and Energy. Health Care produced a positive return for the quarter, but our underweight to the managed care industry led to relative underperformance, as that area rallied as “Medicare for All” discussions diminished. The Fund also underperformed within Financials and Industrials as banks and cyclical stocks rallied during the quarter on better economic data.
Top contributors during the period were Microsoft and Apple. Microsoft’s stock rallied steadily throughout 2019 as the company has been successfully transitioning to the cloud to increase recurring subscription revenue from Azure and Office 365. We believe these two drivers of growth for Microsoft provide a tailwind to offset the declining PC market trend. Meanwhile, Apple, which had been relatively weak during early summer due to concerns about the iPhone cycle and slowing sales in China, rebounded during the second half of the year. We anticipate that revenue growth should re-accelerate given the product launches announced last fall, particularly the 5G iPhone that is expected to be available in 2020.
In terms of individual stock results, The Home Depot was the largest detractor from performance during the quarter. At the company’s Investor Meeting in November, management guided 2020 revenue and margins lower due to an unfavorable product mix and shrink (theft), which disappointed investors. The company is implementing initiatives to address both issues, which we believe will set operating margin back on a rising trajectory in 2021.
(As of 12/31/19) — The market environment appears fertile for active growth stock investing. Interest rates, inflation, and unemployment remain relatively low by historical standards, providing a healthy backdrop for corporate earnings growth. Meanwhile, global central bankers have recently pledged additional stimulus measures to keep the long-running economic expansion alive. Concerns included relatively high valuations and deteriorating leading indicators on global trade. “Easy money” policies for much of the past 10 years, and rising expectations for more to come, have led to asset inflation and elevated growth stock valuations. Meanwhile, global trade tensions are weighing on consumer and business confidence where recent surveys point to a slowdown amongst global purchasing managers.
Based on these factors, we believe a more discerning market could materialize throughout 2020 with an increase in volatility. An uptick in volatility may favor active management and judicious growth stock investors where a steady hand and an eye toward quality, improving profit cycle dynamics, and attractive risk-adjusted return potential could hold an advantage. Economic conditions may ebb and flow, but our focus remains steadfast on investing in attractively-priced, financially-strong, well-managed companies benefiting from long-term secular growth opportunities.
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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