Fundamental Growth Investors
Portfolio Managers Bill Kornitzer and Nicole Kornitzer discuss how they attempt to find the most appropriate stocks to invest in from the thousands of companies worldwide.
“Unlike many of our peers, we aren’t trying to pick stocks that are going to be the best performers in the next week or the next quarter, but trying to strive for the best long term performance on a risk adjusted basis over time.”
~ Bill Kornitzer, CFA
Overall Morningstar Rating™ based on risk-adjusted returns among 364 Foreign Large Growth funds as of 1/31/19.
Portfolio Manager Insights
Trump Tariffs & the Current State of International Markets
In a recent Q&A, BUFIX portfolio managers provided insightful answers to questions posed regarding the current state of the international markets.
- What’s your take on the current status of the international market in relation to the U.S. cycle?
- What is your opinion on President Trump’s recent announcement regarding tariffs?
Fund Objective & Investment Strategy
The investment objective of the Buffalo International Fund is long-term growth of capital.
The International Fund invests primarily in equity securities of established companies that are economically tied to various countries throughout the world (excluding the U.S.).
For purposes of the International Fund’s investments, “foreign securities” means those securities issued by companies:
- Organized under the laws of, or with a principal office in, a country other than the U.S. and issue securities for which the principal trading market is in a country other than the U.S.; or
- That derive at least 50% of their revenues or profits from goods produced or sold, investments made, or services provided in a country other than the U.S., or have at least 50% of their assets in a country other than the U.S.
- Under normal circumstances, the International Fund does not expect its investments in emerging markets to exceed 35% of its net assets.
In selecting securities for the International Fund, the Fund managers use a bottom-up approach in choosing investments, seeking companies expected to experience growth based on the identification of long-term, measurable industry, technological, global or other trends.
Companies are screened using in-depth, in-house research to identify those which the Fund managers believe have favorable attributes, including:
- attractive valuation
- strong management
- conservative debt
- free cash flow
- scalable business models
- competitive advantages
In making portfolio selections the Fund managers will also consider the economic, political and market conditions of the various countries in which the Fund may invest.
When it comes to investing internationally, we believe our approach to stock selection is distinct. We are focused on finding good companies and aren’t constrained by benchmark alignment to countries or industries.
Our approach is based on finding companies with sound business models, exposure to long-term secular growth trends, and attractive risk/return growth and valuation characteristics, which we can own for the long-term.
Nicole Kornitzer, Portfolio Manager
|As of 1/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||Since Inception|
|BUFFALO INTERNATIONAL FUND||0.43||6.63||-8.11||11.47||5.86||11.06||3.86|
|Morningstar Global Markets ex-US Index||3.58||7.48||-12.46||9.94||3.75||9.12||1.53|
|Lipper International Fund Index||1.39||6.95||-13.71||7.63||2.98||8.68||1.26|
|Morningstar Foreign Large Growth Category||2.07||7.21||-12.76||7.80||3.79||9.20||1.44|
|As of 12/31/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||Since Inception|
|BUFFALO INTERNATIONAL FUND||-13.27||-8.85||-8.85||6.75||3.48||9.23||3.30|
|Morningstar Global Markets ex-US Index||-11.57||-14.17||-14.17||4.85||1.37||7.37||0.89|
|Russell Global ex-US Index||-11.85||-14.69||-14.69||4.41||0.97||7.25||0.55|
|Lipper International Fund Index||-13.16||-14.94||-14.94||3.10||0.70||6.80||0.66|
|Morningstar Foreign Large Growth Category||-13.87||-14.08||-14.08||3.21||1.38||7.43||0.83|
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower of higher than the performance quoted and can be obtained here. Performance is annualized for periods greater than 1 year. Each Morningstar category average represents a universe of funds with similar objectives.
As of July 27, 2018 the Morningstar Global Markets ex-U.S. Index has replaced the Russell Global (ex-US) Index as the Fund’s primary benchmark. The Advisor believes that the new index is more appropriate given the Fund’s holdings.
3 Year Risk Metrics
|vs Morningstar Global Markets ex-US Index (As of 12/31/18)|
Hypothetical Growth of $10,000
This chart illustrates the performance of a hypothetical $10,000 investment made in the Fund on the Inception Date. Assumes reinvestment of dividends and capital gains. This chart does not imply future performance.
|(As of 12/31/18)|| |
|# of Holdings||80|
|Median Market Cap||$21.51 B|
|Weighted Average Market Cap||$46.51 B|
|3-Yr Annualized Turnover Ratio||11.00%|
Top 10 Holdings
|Name of Holding||Ticker||Country||Sector||% of Net|
|Sartorius Stedim Biotech||DIM||France||Health Care||2.71%|
|Taiwan Semiconductor Manufacturing Ltd||TSM||Taiwan (China)||Technology||2.41%|
|Carl Zeiss Meditec||AFX||Germany||Health Care||2.26%|
|Fresenius SE & Co KGaA||FRE||Germany||Health Care||2.08%|
|Interxion Holding N.V.||INXN||Netherlands||Technology||1.99%|
|Davide Campari-Milano||CPR IM||Italy||Consumer Staples||1.99%|
|TOP 10 HOLDINGS TOTAL||24.84%|
As of 12/31/18. Security weightings are subject to change and are not recommendations to buy or sell any securities. Sector Allocation may not equal 100% due to rounding.
Top 10 Countries
|COUNTRY||% of Portfolio|
|Taiwan, Province of China||2.4%|
|TOP 10 TOTAL||82.1%|
CAPITAL MARKET OVERVIEW
(As of 12/31/18) — The 4th quarter of 2018 was a tumultuous period for global equity markets, and steep declines during the period dragged full year returns into negative territory. The Morningstar Global Markets ex-U.S. Index declined -11.53% during the quarter, while the S&P 500 Index declined -13.52%.
The main source of investor anxiety in the quarter was the maturing global business cycle; as the quarter went on, it became more clear that global growth has peaked. Though global growth remains positive, European economies posted slowing growth, and China entered a period of economic contraction toward the end of the quarter. Though Chinese authorities implemented various measures to stimulate growth, investor confidence in their ability to reaccelerate economic growth has been weak thus far.
(As of 12/31/18) — For the 4th quarter of 2018, the Buffalo International Fund produced a return of -13.27%, underperforming the Morningstar Global Markets ex-U.S. Index’s return of -11.57%. The Fund’s underperformance versus the benchmark was primarily driven by stock selection. However, our sector allocations also had a negative impact due to our overweight of the three weakest performing sectors: technology, consumer discretionary and healthcare.
Top contributors in the period included ICICI Bank, Linde AG, and Jardine Matheson.
ICICI Bank Limited, India’s #2 bank and its largest private bank, benefited from improving retail loan growth and fewer problems in its corporate loan book.
Linde AG and Praxair won needed approval from the U.S. antitrust enforcers for their proposed merger, and were able to finalize their bid to create the world’s largest supplier of industrial gases, a development which drove Linde’s stock during the period.
Jardine Matheson Holdings Limited, a Singapore-based holding company focused in Asia, whose eight business segments include transportation services, luxury hotels, retailing, restaurants, and agribusiness, among others, announced the future disposal of a stake in an insurance company for $2.2 billion, news which was well-received by investors.
Detractors in the period included Wirecard, Fresenius SE, and Sartorius Stedim Biotech.
Wirecard, which was a top contributor in the prior quarter, followed strong declines in the global technology sector as well as the German market.
Fresenius, a global dialysis and hospital management company, had positive news about a prior legal battle with a former acquisition target. However, the stock declined later in the quarter after a surprise preannouncement in December about expected weakness in both its U.S. dialysis service business and its German hospital business. The weakness was due to mostly external factors, and we believe the stock reaction was overdone.
Sartorius Stedim Biotech, which develops and manufactures laboratory equipment for the manufacturing of biological drugs, disappointed investors by the amendment of a joint venture agreement with Lonza to supply cell culture to make it non-exclusive. We feel the impact is short-term in nature and does not change the growth drivers for the company long term.
(As of 12/31/18) — While global growth has further slowed recently, we expect the continued growth in the U.S. to continue to filter toward foreign economies, and we don’t yet see a potential recession. Equity markets have been on an upswing since the U.S. Federal Reserve took a more dovish stance, suggesting less monetary policy tightening in 2019 than previously expected. Diminishing concerns over the trade war with China have also been a boost to investor confidence. The Chinese economy, however, remains a potential pain point, with recent slower growth signaling that China hasn’t been a near term driver of global economic growth, and a slowdown there may weigh on global corporations with significant exposure to the country.
China has recently become more stimulative, both fiscally and monetarily, with new infrastructure projects, a lowering of both reserve requirements and interest rates for banks, as well as tax cuts for consumers. We expect these measures to begin to bubble through the global system as we move toward the 2nd half of the year. Of course, trade tensions continue as China and the U.S. continue to negotiate. However, the rhetoric has calmed down and markets have taken that as a sign both parties want to get a deal done.
The United Kingdom’s planned exit from the European Union (BREXIT) is also still on the table, but details on how that may occur are unknown.
We will be monitoring these dynamics on the industries, companies, and countries in which we invest, and will continue to pay close attention to risk, while taking advantage of short-term volatility to invest in those companies that we believe have solid long-term prospects.
While not immune to a global economic slowdown, we believe our approach to investing positions us to identify companies than can grow throughout the economic cycle. Our view is that stocks outside the U.S. have become even less expensive relative to their domestic counterparts, and the heightened level of U.S. trade tension that continues may actually increase the potential for internationally-based companies to increase market share. We hope to use any significant market dislocation caused by slowing economic growth or trade concerns to add to positions in companies whose long-term prospects remain unchanged, in our view.
Economic conditions may ebb and flow, but our focus remains steadfast on investing in attractively-priced, financially-strong, well-managed companies with innovative strategies fueled by secular growth trends. We believe this discipline should lead to superior risk-adjusted returns over the long term.
The opinions expressed are those of the Portfolio Manager(s) and are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security. Earnings growth is not representative of the fund’s future performance.
International Fund News
In this report, we provide insights into several areas that show the potential for increasing returns of international stocks over the long term.
Bill Kornitzer, BUFIX co-portfolio manager, discusses the accelerated pace of the growth of global economies outside the U.S. and why, given where valuations are today, there are many opportunities to invest internationally at this time.
BUFIX portfolio managers recently held a live Q&A session for investment advisors, who posed questions regarding the current state of the international markets.
Our International Fund portfolio managers provide a detailed analysis of various global factors they view as key drivers of growth in international markets and discuss why today’s investing environment could be ideal for investors looking to expand their international exposure.
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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.
The Buffalo International Fund received 5 stars among 364 for the 3-year, 5 stars among 315 for the 5-year, and 5 stars among 228 Foreign Large Growth funds for the 10-year period ending 1/31/19.
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. ©2018 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.