Large Cap Fund
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 Morningstar U.S. Large Growth Index. The median market capitalization of the Morningstar U.S. Large Growth Index changes due to market conditions and also changes with the composition of the Index. As of June 30, 2021, the median market capitalization of companies in the Morningstar U.S. Large Growth Index was approximately $84.1 billion.
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 1,128 Large Growth funds as of 8/31/21.
|As of 8/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||12.01||22.64||29.10||21.33||20.69||17.45||12.27||9.53||11.38|
|BUFFALO LARGE CAP FUND - Institutional||12.07||22.76||29.30||21.52||20.88||17.63||12.44||9.69||11.22|
|Morningstar U.S. Large Growth Index||17.83||24.18||28.93||25.80||25.45||20.08||14.00||9.83||-|
|Lipper Large Cap Growth Fund Index||12.31||20.74||27.87||23.97||23.78||18.29||12.80||9.71||10.24|
|Morningstar Large Growth Category||11.01||18.75||28.75||22.10||22.19||17.57||12.53||10.13||10.16|
|As of 6/30/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||10.92||14.49||39.97||21.72||20.59||15.49||12.04||8.76||11.00|
|BUFFALO LARGE CAP FUND - Institutional||10.97||14.56||40.16||21.90||20.77||15.67||12.21||8.93||11.17|
|Morningstar U.S. Large Growth Index||15.42||14.58||42.02||24.95||24.44||18.53||13.46||8.46||-|
|Lipper Large Cap Growth Fund Index||11.80||13.56||41.90||24.24||23.62||16.69||12.31||8.75||10.05|
|Morningstar Large Growth Category||10.28||12.38||41.70||22.56||21.98||15.99||12.13||9.21||10.00|
|BUFFALO LARGE CAP FUND - Investor||-5.60||17.23||32.76||12.76||7.15||6.90||24.86||-1.63||31.77||28.08|
|BUFFALO LARGE CAP FUND - Institutional||-5.46||17.41||32.96||12.92||7.31||7.06||25.05||-1.48||31.98||28.28|
|Morningstar U.S. Large Growth Index||1.56||17.98||32.46||14.38||7.71||1.79||31.15||2.94||33.81||38.86|
3 Year Risk Metrics
|BUFEX vs Morningstar U.S. Large Growth Index (As of 6/30/21)|
Hypothetical Growth of $10,000
|(As of 6/30/21)|| |
|# of Holdings||66|
|Median Market Cap||$107.63 B|
|Weighted Average Market Cap||$697.37 B|
|3-Yr Annualized Turnover Ratio||19.87%|
|% of Holdings with Free Cash Flow||80.60%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Kansas City Southern||KSU||Industrials||2.43%|
|TOP 10 HOLDINGS TOTAL||42.02%|
CAPITAL MARKET OVERVIEW
(As of 6/30/21) — Equity markets moved higher for the fifth consecutive quarter, as the S&P 500 Index returned 8.55%, raising the year-to-date return to 15.25%. The COVID-19 vaccine rollout has helped fuel an economic comeback while corporate earnings are improving. The vaccine adoption around the world is encouraging, and over 50% of the U.S. population is now vaccinated. Capital markets continued to be supported by significant spending from Congress and aggressive monetary policy from the Federal Reserve (the Fed). The 2nd quarter was marked by outperformance of growth stocks, overcoming investor concerns of rising inflation and potential interest rate hikes in the prior quarter. Hawkish comments from the Fed replaced inflation worries with concerns about the magnitude and duration of the economic recovery. Long duration growth companies were beneficiaries as yields on the 10-Year and 30-Year Treasuries declined during the period after climbing for the previous four months.
The broad market Russell 3000 Index advanced 8.24% in the quarter. Growth stocks outperformed Value stocks, as the Russell 3000 Growth Index surged 11.38% compared to the Russell 3000 Value Index gain of 5.16%. Relative performance was correlated with market cap size in the quarter, as the large cap Russell 1000 Index returned 8.54%, the Russell Midcap Index advanced 7.50%, the small cap Russell 2000 Index returned 4.29%, and the Russell Microcap Index finished 4.14% higher.
All economic sectors produced positive returns during the period with the exception of Telecom Services. Real Estate, Information Technology, and Energy led the advance followed by Financials and Health Care. More defensive areas, such as Telecom Services, Utilities, and Consumer Staples, trailed on a relative basis.
(As of 6/30/21) — During the 2nd quarter, the Buffalo Large Cap Fund (BUFEX) generated a 10.92% return, with large cap growth, as an asset class, broadly outperforming both mid and small cap growth, as investors grappled with growing inflation concerns and rising cases of COVID-19 around the globe. It seems like we are approaching maximum uncertainty regarding the direction of the U.S. economy, owing to the nuances of how novel the current pandemic-dominated business cycle is turning out to be, coupled with concomitant ambiguity on inflation being either transitory or secular.
The Fund underperformed the Morningstar U.S. Large Growth Index, which rose 15.42%, principally owing to the Fund’s large underweighting within the Technology sector at the beginning of the quarter (1300 basis points) and the tech sector’s strong 16% return in the quarter. Our Fund did outperform the S&P 500 Index in the June quarter by 237 basis points, as the S&P 500 has a lower tech weighting.
Importantly, we made a conscious decision during the quarter to expand the Fund’s exposure to the Technology sector, with that category now representing 52% of the Fund, which is more in-line with our benchmark’s 55% weight. Any further changes from here will be dependent on finding more attractive valuation entry points and the more macro sensitivity to possible regime changes regarding interest rates at the Fed.
Intuit, the leading small business financial and accounting software, and it’s TurboTax software, also the most popular with individual do-it-yourself filers, was a top contributor in the 2nd quarter. The company recently acquired Credit Karma as a new product offered across its platform. The company’s 28% share price return resulted from the company’s small business QuickBooks segment, seeing accelerating revenue growth of 20% in the 2nd quarter, up from 11% in 1st quarter 2021. Intuit also benefited in the quarter from better-than-expected performance in the company’s new Credit Karma division with over 100 bps of operating margin expansion.
DocuSign, the world’s leading e-Signature provider, was another top contributor in the quarter, as it continues to automate the entire agreement process within a cloud-based platform. DocuSign generated the fourth-highest revenue growth rate of any software company in 2Q21, expanding billings 54% and revenues by an “eye-popping” 61%, as new customer adds came in ahead of expectations. Operating margins also increased a strong 260 basis points. The strong financial performance helped drive the shares higher 39% in the quarter.
Cloudflare, a global provider of solutions for cloud-based internet security, was another top contributor in the quarter. Cloudflare’s share price increased 40% in the June quarter from our recent initial purchase in late April. There continue to be two large favorable trends playing to Cloudflare’s strengths – 1) the growth in cloud computing and 2) the exponential rate of cyber and ransomware attacks from Russia and China based organizations, mostly. The increased publicity and magnitude of the attacks has driven the shares of all cyber-security firms higher. The most prominent of the attacks was the ransomware infiltration into the largest meat processing company in North America on Memorial Day. We see no real end to the key trends aiding the strong growth of Cloudflare, although we are a bit more cautious on the opportunity in China given geopolitical uncertainties.
Delta Airlines, a large U.S.-based airline, was our largest detractor in the 2nd quarter, down nearly 7%, owing mostly to rotation away from profit taking associated with the strong performance over the preceding six months. Nothing in the structural fundamentals drove the underperformance.
Bookings Holding, a large global internet travel site, also saw some profit-taking pressure during the quarter, stemming from the big share price bounce from last November when we received positive vaccine clinical trial results.
Finally, Sysco Corporation shares, similar to Delta and Bookings, experienced some investor rotation shift out of recovery trade holdings back into secular growth technology companies. Sysco also had a generally positive investor day during the quarter, where management expressed a lot of confidence in the company being able to consistently grow faster than competitors while also offering positive but beatable guidance, in our opinion.
(As of 6/30/21) — We see the 2nd half of 2021 quite wobbly from an economic perspective. As we stated earlier, we believe the U.S. economic backdrop is very opaque given the unique nature of the COVID-centric economic cycle and the impossible task of predicting how existing and new variants will affect the global economy. With well-known and elevated concerns surrounding price stability with both inflation and deflationary concerns, it makes being an equity growth investor a bit more challenging than within a typical economic cycle. Accordingly, we see plausible risks to projected revenue and earnings in the 2nd half of the year, as supply chains remain strained and COVID case rates accelerate globally, owing to the Delta variant.
In the meantime, it seems the Fed remains committed to maintaining the lower bound on interest rates in 2021 and 2022 while supporting increased monetary stimulus when they see the need.
With the 10-year Treasury Bond’s yield back down 1.19%, it’s clear the broad market has sided with the Fed’s “transitory” perception of rising prices. In our opinion, it will take until October or November prior to having a clear sense of both the COVID recovery outlook and the inflation/deflation debate. Both outcomes will have implications both up and down for equity valuations.
A Personal Note from the New Fund Manager – Ken Laudan
I would like to introduce myself to all Buffalo Funds Large Cap shareholders. I was appointed to oversee the Large Cap Fund on April 12, 2021, following the departure of the prior manager, Alex Hancock, who left the firm after 19 years to pursue a personal investment opportunity.
I have been an institutional growth money manager for over 19 years, including the past 15 months at the Buffalo Funds. My approach to growth investing follows the concept of focusing on high quality, durable growth companies that address six key factors:
1) Has a large and growing addressable market
2) Is potentially a key beneficiary of a durable secular theme or super-cycle trend
3) Has a minimum of 5% to 7% organic revenue growth outlook over next 3 to 5 years
4) Capable of doubling earnings per share over the next 5 years
5) Top quartile cash flow returns on invested capital (e.g. >15%)
6) Pristine balance sheet strength – low debt levels give us the best chance of outperforming in both up and down markets.
While not every holding in our Fund may possess all of these factors, the overall portfolio will indeed reflect all of these key investment characteristics that I have followed for most of my investment career. I believe this investment approach will position the Fund to potentially outperform the benchmark index.
I’m inspired to invest in the best mix of U.S. and, in some cases, global large cap growth companies, who are led by management teams who want to change the world in a durable and positive way.
I am gratified by your confidence in overseeing the growth and stewardship of this important legacy fund within the Buffalo Funds.
~ Ken Laudan, portfolio manager for the Buffalo Large Cap Fund
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.
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