Large Cap Fund
|As of 11/27/2023|
|Total Net Assets:||$100.33 Million (9/30/23)|
|Morningstar Category:||Large Cap Growth|
|Benchmark Index:||Russell 1000 Growth|
Fund Fact Sheet Q3 2023
PM Commentary Q3 2023
Fund Objective & Investment Philosophy
The investment objective of the Buffalo Large Cap Fund is long-term growth of capital. The Fund normally invests in equity securities, consisting of common stocks, preferred stocks, convertible securities, warrants and rights of large capitalization (“large-cap”) companies. The Fund considers a company to be a large-cap company if, at time of purchase by the Fund, it has a market capitalization greater than or equal to the lesser of (1) $10 billion, or (2) the median market capitalization of the Russell 1000 Growth Index. The median market capitalization of the Russell 1000 Growth Index changes due to market conditions and also changes with the composition of the Index.
The Fund managers seek to identify companies for the Fund’s portfolio 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.
We don’t manage to our benchmark so we don’t have too much concentration in any one single trend. We also manage based on valuation, trimming positions when they approach their potential upside and adding to them as they get closer to the potential downside.
Ken Laudan, Portfolio Manager
Overall Morningstar Rating™ of BUFEX based on risk-adjusted returns among 1,126 Large Growth funds as of 10/31/23.
Morningstar Sustainability Rating™ of BUFEX out of 1,580 US Equity Large Cap Growth funds as of 8/31/23, based on 99% of AUM
Carbon Metric Rating of BUFEX as of 8/31/23 in the Large Growth category, based on 99% of AUM; long positions only
Historical Sustainability Score Rank of BUFEX
|As of 10/31/23||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||-5.62||23.29||19.95||7.74||11.98||12.19||14.06||9.10||9.93|
|BUFFALO LARGE CAP FUND - Institutional||-5.61||23.40||20.07||7.89||12.14||12.36||14.23||9.56||10.10|
|Russell 1000 Growth Index||-7.62||23.20||18.95||8.70||14.22||13.82||15.04||10.72||10.05|
|Lipper Large Cap Growth Fund Index||-7.95||22.25||19.38||5.25||11.92||11.89||13.29||9.33||8.76|
|As of 9/30/23||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||-3.44||23.65||26.77||6.94||10.18||12.60||12.30||9.69||9.98|
|BUFFALO LARGE CAP FUND - Institutional||-3.42||23.75||26.94||7.08||10.34||12.76||12.46||9.85||10.14|
|Russell 1000 Growth Index||-3.13||24.98||27.72||7.97||12.42||14.48||13.67||11.10||10.13|
|Lipper Large Cap Growth Fund Index||-3.14||24.34||27.89||4.76||10.18||12.54||11.97||9.74||8.86|
|BUFFALO LARGE CAP FUND - Investor||32.76||12.76||7.15||6.90||24.86||-1.63||31.77||28.08||26.08||-28.61|
|BUFFALO LARGE CAP FUND - Institutional||32.96||12.92||7.31||7.06||25.05||-1.48||31.98||28.28||26.27||-28.51|
|Russell 1000 Growth Index||33.48||13.05||5.67||7.08||30.21||-1.51||36.39||38.49||27.60||-29.14|
|Morningstar U.S. Large Growth Index||32.46||14.38||7.71||1.79||31.15||2.94||33.81||38.86||21.47||-40.36|
3 Year Risk Metrics
|BUFEX vs Russell 1000 Growth Index (As of 9/30/23)|
Hypothetical Growth of $10,000
|(As of 9/30/23)||
|# of Holdings||81|
|Median Market Cap||$97.27 B|
|Weighted Average Market Cap||$896.05 B|
|3-Yr Annualized Turnover Ratio||48.71%|
|% of Holdings with Free Cash Flow||92.59%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net
|Microsoft Corporation||MSFT||Information Technology||11.51|
|Apple Inc.||AAPL||Information Technology||9.68|
|Amazon.com, Inc.||AMZN||Consumer Discretionary||5.88|
|Alphabet Inc. Class A||GOOGL||Communication Services||5.24|
|NVIDIA Corporation||NVDA||Information Technology||4.37|
|Visa Inc. Class A||V||Financials||2.52|
|UnitedHealth Group Incorporated||UNH||Health Care||1.87|
|Meta Platforms Inc. Class A||META||Communication Services||1.84|
|Costco Wholesale Corporation||COST||Consumer Staples||1.73|
|Eli Lilly and Company||LLY||Health Care||1.19|
|TOP 10 HOLDINGS TOTAL||45.82%|
As of 9/30/23. 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.
As of 9/30/23. Market Cap percentages may not equal 100% due to rounding.
(As of 9/30/23) — For the third quarter, the Buffalo Large Cap Fund produced a return of -3.44% versus a
decline of 3.13% for the Russell 1000 Large Cap Growth Index and a -3.27% return for
the S&P 500 Index. The portfolio was somewhat negatively impacted by declines in two
medical device companies and two quick serve restaurants whose share price declines
were directly related to investors heighted concerns regarding potential implications
from increased uptake of weight loss drugs.
On a year-to-date basis, the Buffalo Large Cap Fund has delivered a return of 23.65%
though September 30th versus a gain of 24.34% for the Russell 1000 Growth Index.
The S&P 500 Index is up 13.07% year-to-date through the end of September. We
remind investors that we remain under-indexed to the Russell 1000 Growth to high
growth, high volatility stocks such as Tesla, which is up +103% year to date. Owing
to U.S. Securities and Exchange Commission (SEC) regulations regarding diversified
investment funds, we remain capped on our position weighting to Alphabet (GOOGL),
and Apple (AAPL), which have advanced +48.3% and 38.2% year-to-date, respectively.
Top absolute contributors to the fund’s return for the quarter were Alphabet, Nvidia, and
Alphabet, the parent company of Google, has the world’s largest search engine at 84%
share and generates nearly $225 billion of advertising related revenue annually. The
strong outperformance in the quarter and year-to-date reflects the company’s early
leadership in developing generative AI search and infrastructure technology, specifically
tensor processing units (TPU’s) which is the compute technology that gives AI the context
of various user questions so it can better come up with more predictive and accurate
answers. While Alphabet lost the initial thrust to generative AI to Microsoft (Open AI’s Chat
GPT) the company has subsequently started to take back the early leadership position
with their launch of Bard AI search tool. Shares have rebounded strongly (up 48.3%) over
the last two quarters as revenue and earnings per share have beaten expectations and as
investors have started to view Alphabet as an AI beneficiary, not casualty.
Nvidia is the leader in accelerated compute (e.g AI/ML) and is a critical enabler for
deploying AI across several vertical industries. The company’s next generation datacenter
graphics processing unit, the H100 continues to scale as generative AI becomes
a mainstream tool used by consumers in optimizing their internet search results.
Enterprises are also accelerating their generative AI product roadmaps looking to achieve
higher levels of productivity and further leveraging their own proprietary data to guide
improved product fit and service levels. After advancing 90% in the first quarter, Nvidia
shares have appreciated another 70% since then on the back of another large jump in
sequential revenue growth guidance.
Eli Lilly possesses the fastest revenue and earnings growth in the large cap
pharmaceutical category with projected revenue growth in the low to mid double-digits
and 20% plus earnings per share growth over the next three years. Lilly is an early leader
in the launch of GLP-1’s for both Type-2 diabetes and weight loss and is the clear number two player behind the global GLP-1 leader Novo Nordisk (NVO). Shares have responded
positively to the uptake and investor attention to this class of weight loss drugs with a gain
of 15% in the quarter on top of prior share price expansion of 31% coming into the most
The top absolute detractors from the fund’s performance for the Quarter were Apple,
Apple’s shares declined 11.6% in the quarter on concerns about its large reliance on
China for its supply chain for iPhones, as well as trepidation about the uptake of the
iPhone-15 in China and worldwide. We also believe that coming into the quarter shares
were richly valued, trading at 31x forward EPS, for a sub-10% revenue growth company.
Apple is still the dominant leader in IT consumer space with its leading iPhone share
and brand value along with its growing consumer services business via its app-store.
We would stress the company is in the middle of a lawsuit with the U.S. Department of
Justice (DoJ) regarding the traffic fees or traffic acquisition cost (TACs) it receives from
Google for being the preferred search engine that powers Safari on all the iPhones sold
by Apple. If the DoJ is successful in its anti-competitive suit against Apple, we estimate,
it would impact global revenues by 4% in a worst-case scenario. We would expect Apple
to appeal any loss in this decision.
Finally, Apple also has some minor level of exposure to European regulator efforts to
reduce the fees/commissions paid by web developers to be offered on the App Store
and a potential requirement to carry other app stores such as the Microsoft App store.
This will take awhile to play out and we’re also aware that Apple may be able to offset
any reduction in fees or App store utilization by re-categorizing fees from commissions
to an “IP Fee” structure to appear within the the Apple App Store.
Microsoft’s shares underperformed in the most recent quarter, declining 11.4% as the
company guided revenues a bit below Wall Street’s estimates for the upcoming quarter.
Management also expects flat operating margins for their new fiscal year related to
investments in AI within their gross margin cost structure. The company remains
well-positioned to be one of the top one or two intermediate to long term generative
AI beneficiaries. The company is now launching their gen AI feature with Office 365
(O365 cloud version) to the over 200 million monthly active users at a price point of $30
per user per month. This launch will be watched with some interest by the investment
community to get a sense for what sort of initial interest will be shown by enterprises in
engaging with AI tools.
(As of 9/30/23) — Looking ahead we believe that we are at an important inflection point in assessing the
global and U.S economic health. After strong equity market performance largely driven
by the big gains in the mega cap tech related companies, we now turn our attention to
signs of a soft or hard landing for the U.S. and global economies heading into year-end.
We believe, the next two to three months is a key period that will help determine if the
economic backdrop of higher rates for longer persists, which could very likely lead to a
recession, or if inflation begins to durably decelerate to the 2.0% to 2.5% level without
being triggered by an economic credit event or an escalation or expansion in geopolitical hot spots.
Without taking a strong binary bet on either of these unknowns, our large cap growth
portfolio remains positioned with a bar-bell approach…being invested in the key
secular growth companies within tech but also being over-weight defensive areas that
have delivered mixed performance YTD but offer what we feel are interesting and
attractive risk/reward opportunities.
As always, we appreciate your continued confidence in our investment strategy and
approach. It’s one that has historically demonstrated a track record of consistent
outperformance through various market challenges and 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 Morningstar Rating does not include any adjustment for sales loads. 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.
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The Buffalo Large Cap Fund received 4 stars among 1,126 for the 3-year, 4 stars among 1,039 for the 5-year, and 4 stars among 808 Large Growth funds for the 10-year period ending 10/31/23. Other share classes may have different performance characteristics.
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.