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 11/30/19.
|As of 11/30/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||3.58||28.76||19.68||17.01||11.14||13.61||9.91||10.37|
|BUFFALO GROWTH FUND - Institutional||3.66||28.94||19.87||17.19||11.31||13.78||10.07||10.53|
|Morningstar U.S. Growth Index||5.65||31.30||19.86||19.98||13.09||15.01||10.16||-|
|Lipper Large Cap Growth Fund Index||6.33||29.89||19.46||19.46||12.39||13.72||9.37||8.58|
|Morningstar Large Growth Category||6.09||28.57||17.63||17.33||11.35||13.49||9.38||8.69|
|As of 9/30/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO GROWTH FUND - Investor||-0.26||22.88||4.80||14.42||11.20||13.03||9.74||10.23|
|BUFFALO GROWTH FUND - Institutional||-0.22||23.01||4.95||14.59||11.37||13.20||9.91||10.40|
|Morningstar U.S. Growth Index||-1.01||22.49||2.42||16.88||12.75||14.67||10.07||-|
|Lipper Large Cap Growth Fund Index||-0.42||21.16||2.76||15.96||12.04||13.37||9.27||8.33|
|Morningstar Large Growth Category||-0.47||20.54||1.87||14.62||11.04||13.13||9.33||8.47|
3 Year Risk Metrics
|BUFGX vs Morningstar U.S. Growth Index (As of 9/30/19)|
Hypothetical Growth of $10,000
|(As of 9/30/19)|| |
|# of Holdings||54|
|Median Market Cap||$61.00 B|
|Weighted Average Market Cap||$248.44 B|
|3-Yr Annualized Turnover Ratio||23.62%|
|% of Holdings with Free Cash Flow||91.23%|
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 9/30/19) — The U.S. stock market continued to advance in the 3rd quarter, as expectations for accommodative monetary policy appeared to outweigh concerns of slowing economic growth. The S&P 500 Index returned 1.70% in the period, bringing the year-to-date return to 20.55% through quarter-end. Weak economic data led the Federal Reserve to cut interest rates twice in the quarter, driving rates lower and bond prices higher. U.S. markets outperformed international markets on the strength of the U.S. dollar.
The Russell 3000 Index gained 1.16% in the quarter. Value narrowly outperformed growth, with the Russell 3000 Value Index up 1.23% and the Russell 3000 Growth Index advancing 1.10%. Large caps generally outperformed small caps in the quarter. The Russell 1000 Index returned 1.42%, the Russell Midcap Index returned 0.48%, and the Russell 2000 Index posted a loss of 2.40%. Defensive sectors led the way in the period, with Utilities up 9.34%, Real Estate up 7.69%, and Consumer Staples up 6.12%. Energy was the worst performing sector with a total return of -6.61%. Health Care was also weak, returning -2.25% on increasing political concerns.
(As of 9/30/19) — The Buffalo Growth Fund (the “Fund”) returned -0.26% during the quarter, slightly outperforming the Morningstar U.S. Growth Index (the “Index”) which returned -1.01%. The Index experienced significant volatility, bottoming in early August, followed by gains through the end of September, to finish slightly lower for the quarter.
Sector returns varied considerably, with investor uncertainty about U.S. trade policy and future economic growth leading to significant return dispersion across sectors. The Real Estate sector was up the most, returning nearly 9%. Telecom Services, Consumer Staples, and Materials also produced positive sectors returns. Energy declined the most, nearly -20%, while Consumer Discretionary and Health Care also produced negative sector returns. Industrials and Technology were relatively flat.
The top contributing sectors for the Fund relative to the benchmark were Consumer Discretionary, Financials, and Technology. Consumer Staples and Health Care were relative laggards. Health Care lagged due, in part, to growing uncertainty about the prospect for pricing legislation and health care reform.
Among the top contributors during the period were Alphabet and Home Depot. Alphabet’s stock price rallied after the company reported 2nd quarter revenue growth reaccelerated to 20%+, thus reaffirming the growth thesis, after disappointing investor expectations in the previous quarter. Mobile advertising strength led the reacceleration and expense growth slowed to the delight of investors. Home Depot, one of the largest home improvement retailers in the U.S., experienced strong valuation multiple expansion after its 2nd quarter results proved better than feared. A growing investor appetite for U.S. revenue exposure and companies that can benefit from easing Federal Reserve interest rate policy and a strong jobs environment also propelled the stock.
Align Technology, a producer of clear dental aligners, was the largest detractor during the quarter. In July, the company reported better-than-expected 2nd quarter revenues with an increase of over 20%, but lowered their 3rd quarter revenue outlook to a high-teens growth rate, citing consumer softness in China and slower young adult case volume growth in the U.S.
(As of 6/30/19) — 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.
Countering this healthy backdrop are 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 generally 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.
We believe a volatile, more discerning market could materialize through the remainder of 2019. The volatility may favor judicious growth stock investors where a steady hand and active management with an eye toward quality, improving profit cycle dynamics, and relatively-attractive risk-adjusted returns could hold an advantage.
Economic conditions may ebb and flow, but our focus remains steadfast on investing in what we believe are attractively-priced, financially-strong, well-managed companies benefiting from 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.
The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating™ for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating™ metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.
In each Morningstar Category, the 10% of funds with the lowest measured risk are described as Low Risk, the next 22.5% Below Average, the middle 35% Average, the next 22.5% Above Average, and the top 10% High. Morningstar Risk is measured for up to three time periods (three, five, and 10 years). These separate measures are then weighted and averaged to produce an overall measure for the fund. Funds with less than three years of performance history are not rated. ©2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Style Box™ reveals a fund’s investment strategy by showing its investment style and market capitalization based on the fund’s portfolio holdings.