Large Cap Fund
|As of 6/8/2023|
|Total Net Assets:||$94.29 Million (3/31/23)|
|Morningstar Category:||Large Cap Growth|
|Benchmark Index:||Russell 1000 Growth|
Fund Fact Sheet Q1 2023
PM Commentary Q1 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 1,123 Large Growth funds as of 4/30/23.
Morningstar Sustainability Rating™ of BUFEX out of 1,585 US Equity Large Cap Growth funds as of 3/31/23, based on 99% of AUM
Carbon Metric Rating of BUFEX as of 3/31/23 in the Large Growth category, based on 99% of AUM; long positions only
Historical Sustainability Score Rank of BUFEX
|As of 4/30/23||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||7.89||15.53||2.66||11.68||11.51||13.03||10.37||10.08||9.86|
|BUFFALO LARGE CAP FUND - Institutional||7.90||15.58||2.79||11.84||11.68||13.20||10.54||10.25||10.03|
|Russell 1000 Growth Index||6.61||15.49||2.34||13.62||13.80||14.46||11.80||11.22||9.98|
|Morningstar U.S. Large Growth Index||7.19||18.17||-1.56||5.23||9.01||12.58||10.21||-||-|
|Lipper Large Cap Growth Fund Index||6.12||15.68||1.57||10.32||11.28||12.96||9.93||9.83||8.71|
|Morningstar Large Growth Category||3.71||12.53||-0.09||10.05||10.26||12.03||9.71||9.99||8.63|
|As of 3/31/23||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||13.65||13.65||-10.08||15.83||11.14||12.97||10.63||10.54||9.83|
|BUFFALO LARGE CAP FUND - Institutional||13.68||13.68||-9.97||16.00||11.30||13.14||10.80||10.70||10.00|
|Russell 1000 Growth Index||14.37||14.37||-10.90||18.58||13.66||14.59||12.11||11.57||9.97|
|Morningstar U.S. Large Growth Index||17.56||17.56||-18.90||10.15||9.19||12.71||10.63||-||-|
|Lipper Large Cap Growth Fund Index||13.91||13.91||-12.66||14.91||11.13||12.93||10.26||10.13||8.68|
|Morningstar Large Growth Category||11.65||11.65||-12.67||14.80||10.21||12.07||10.05||10.31||8.63|
|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 3/31/23)|
Hypothetical Growth of $10,000
|(As of 3/31/23)||
|# of Holdings||78|
|Median Market Cap||$72.42 B|
|Weighted Average Market Cap||$758.63 B|
|3-Yr Annualized Turnover Ratio||45.03%|
|% of Holdings with Free Cash Flow||91.03%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net
|UnitedHealth Group||UNH||Health Care||3.85%|
|Costco Wholesale||COST||Consumer Staples||1.48%|
|TOP 10 HOLDINGS TOTAL||41.99%|
CAPITAL MARKET OVERVIEW
(As of 3/31/23) — Capital markets moved higher in the first quarter of 2023 as the S&P 500 Index gained 7.50% and the Bloomberg Aggregate Bond Index advanced 3.0%. Big swings in expectations for the Federal Reserve’s monetary policy drove market volatility during the period. Initially investors were concerned with data showing stubbornly high inflation and the prospect of additional interest rate hikes. However, during the final days of the quarter bank failures from Silicon Valley Bank, Signature Bank, and Credit Suisse, dramatically changed market expectations towards monetary policy and the impact that a banking crisis could have on the broader economy. As a result, shorter term Treasury yields fell, and large cap growth stocks rallied in a flight to quality. The view was that growth companies would be the biggest beneficiaries of lower rates, a reversal of the headwinds faced throughout 2022. Technology stocks were by far the leading contributors to broad market performance during the quarter while value stocks and dividend payers lagged. Excluding the technology sector, the S&P 500 Index return would have only been 2.70% during the period.
Recapping quarterly results, the broad-based Russell 3000 Index advanced 7.18%. Growth stocks significantly outperformed value stocks to start out the year, as the Russell 3000 Value Index returned just 0.91% versus a return of 13.85% for the Russell 3000 Growth Index. Relative performance improved going up in market capitalization (size) as large caps advanced more than small caps in the quarter. Larger cap stocks returned 7.46%, as measured by the Russell 1000 Index, compared to the smaller cap Russell 2000 Index return of 2.74%, while the Russell Microcap Index returned -2.83% in the quarter.
(As of 3/31/23) — The Buffalo Large Cap Fund advanced 13.65% during the quarter versus a gain of 14.37% for the Russell 1000 Growth Index. Our relative underperformance in the quarter entirely reflects not owning shares of Tesla, which represented about 2.4% of the Russell 1000 Growth Index and gained 68% during the quarter. If, for example, the fund had held a benchmark weighted position in Tesla during the period, the portfolio would have outperformed the index by 22 basis points, all other things equal. We chose to no longer hold Tesla given growing concerns about CEO stewardship and the troubling pattern around both statements and actions, which are incongruent with the type of authentic leadership we are drawn to. Moreover, as a fiduciary, we place great value on transparency and the consistent track records of management teams.
As you may know from prior shareholder letters, we believe fund performance relative to a peer group of other large cap growth funds is an important performance metric to consider over the long term. This peer relative performance combined with the fund’s risk profile is what determines our fund’s Morningstar “star rating”. In the quarter, the Buffalo Large Cap Fund outperformed the Morningstar Large Growth category average return by about 200 basis points +13.65% versus 11.65%. The Buffalo Large Cap Fund has now outperformed the Morningstar Large Growth peer group average return over the past 1-, 3-, 5-, 10-, and 15-year periods on an annualized basis.
While the Buffalo Large Cap Fund is not directly measured against the S&P 500 Index by prospectus, we choose to highlight its performance as a natural comparator for overall U.S. equity returns. As you may know, the core difference between Buffalo Large Cap and the S&P 500 Index is the latter has much larger weightings in more cyclical sectors of the U.S. economy, namely energy, financials and industrials. Given our focus on more secular growth companies, the fund handily outperformed the S&P 500 Index return of 7.50% during the quarter.
Apple (AAPL) – We consider Apple as the best positioned company in the technology hardware category. We believe its key advantage is the company’s vertically integrated platform of leading consumer technology products with strong brands and recurring revenue. Despite near-term macro challenges the company, like other mega-cap tech companies, was a safe haven for investors in the first quarter and shares advanced by about 27%. We continue to believe in the long-term secular drivers of Apple (iPhone, Mac and wearables) along with their ability to leverage scale into further margin benefits.
Microsoft (MSFT) – Despite a mixed earnings message, Microsoft’s shares outperformed the market (+20.5%) owing to the security and shelter of owning one of the premier growth companies in the world. The company’s share price was further buttressed by the rapid engagement of people around the world to OpenAI’s ChatGPT generative search engine (MSFT owns 49% of OpenAI) and the prospects of integrating ChatGPT into the company’s Bing search engine. The belief being that Microsoft will be able to benefit from accelerating share gains in the large web-based search and eCommerce marketplace currently, dominated by Google (GOOGL).
Nvidia (NVDA) – Nvidia is the leader in accelerated compute and is a critical enabler for deploying AI across a number of vertical industries. The company’s next generation datacenter accelerator GPU the H100 is ramping at the ideal time as generative AI becomes mainstream driving accelerating investments for both enterprises and public cloud providers in the leading AI chip and software company. After a rough 2022 with weakness across gaming and desktop computing, Nvidia’s shares rebounded strongly in the quarter, advancing 90% around its leadership in AI. The risk/reward is more balanced given the strong share price runup and for the shares to work further from here, the company will need to compound its revenue growth above 20% for the foreseeable future and keep making adroit decisions within their annual $8 billion in Research & Development (R&D) spending to stave off smart and well financed competitors.
UnitedHealth Group (UNH) – UnitedHealth is the largest integrated health benefits company in the world. Beyond the delivery of managed care and primary care physician services, the company is the most equipped and competitively advantaged healthcare technology provider with an unprecedented amount of healthcare outcomes and claims data that can be leveraged into improved clinical decision making.
We continue to believe UnitedHealth has a number of levers it can pull to produce durable EPS growth in the range of 13%-16% for the foreseeable future absent decisive regulatory changes in the structure of U.S. healthcare delivery. After strong outperformance in 2022, shares fell 11% in the quarter reflecting some uncertainty on Medicare Advantage rates and policies in addition to an investor shift to other healthcare industries during the quarter, such as medtech.
Northrop Grumman (NOC) – Northrop Grumman is a key prime contractor for the U.S. Department of Defense who we believe is aligned well with future growth areas for DoD such as autonomous aircraft, the modernization of the nuclear triad and hypersonic technology. Like other industrial companies, the shares underperformed in the quarter, falling 16%. Concerns about Northrop Grumman’s premium valuation and rotation to other less defensive sectors drove the under-performance.
Honeywell (HON) – Honeywell’s industrial business model is attractive given its minimal exposure to short-cycle and residential markets and heavier focus on secular growth trends of digital process automation, defense, building efficiency and commercial aerospace. Moreover, the company is benefiting from an increased mix of software as adjacencies to it’s core offerings where it has a legacy of domain expertise. We see HON well positioned to grow above peers and generate meaningful margin expansion over the long term. Like Northrop Grumman above and other industrial companies that performed well in the last quarter, Honeywell’s shares declined 10% this quarter owing to growing concerns about a macro economic slowdown and the impact to the industrial and manufacturing sectors.
(As of 3/31/23) — Ken Laudan, portfolio manager of the Buffalo Large Cap Fund, has a reminder pinned to his office wall called “The Shock Cycle”. The shock cycle occurs when investors become either overly optimistic or overly pessimistic about the future prospects of a particular stock or the stock market, in general.
During one phase of the “shock cycle” investors will tend to assume all good news is permanent, while ignoring bad news or assuming that bad news is positive. This typically leads to a period of rapid stock market appreciation as human emotion and confirmation bias rebukes the present reality. Conversely, in the opposite phase of the cycle, investors will tend to deny good news and overreact to so-called bad events until their beliefs once again come full circle reflecting all good news is permanent while searching for the next big thing in the stock market.
The key tenet of keeping the shock cycle reminder visible is to ensure fund management remains cognizant of the cycle in either of its phases, and importantly, to maintain a balanced perspective ensuring we carefully calibrate both positive and negative news/events when making any investment decision.
We continue to believe the risk/reward of the current market is skewed to the downside with the price/earnings ratio of the S&P 500 trading at 18x using what we believe are elevated earnings estimates, particularly as we have yet to enter the last phase of the bear market, the credit cycle downturn where revenue and earnings are most likely to be negatively impacted.
Accordingly, the portfolio remains overweight defensive sectors, such as healthcare, and underweight technology and consumer discretionary, while holding a higher-than-normal level of cash. We continue to avoid any investments in banks as credit cycle revisions are rarely a good time to own that group. However, we continue to monitor developments in the broader economy and the outlook for earnings revisions of our specific portfolio holdings.
Inflation has likely peaked, notwithstanding being a bit stickier than most would prefer. Coincident with peaking inflation, the Fed is very likely nearing the end of its interest rate-raising cycle with perhaps another 25 basis points of increase in the Fed Funds Rate at its May meeting.
We are still a bit early on this call, but we believe the recent banking crisis will further reduce market liquidity (money supply growth) as loan volumes within the U.S. will most certainly be more constrained throughout the next six to nine months. In fact, the most recent loan growth data shows a sharp decline of loans during the last week of March.
Combined with the lagging effect from the sharp rise in interest rates over the last 15 months, companies are likely to face a tougher revenue and earnings growth environment as the economy continues to weaken heading into the second half of the year.
As always, we appreciate your continued confidence in our investment strategy and approach. Our conviction comes from the belief that the investment process has historically demonstrated a track record of consistent outperformance through various market challenges and opportunities.
|Buffalo Large Cap Fund|
|Full Fund Holdings||12/31/22|
|Statement of Additional Information||3/8/23|
|Tax Guide - 2022||1/8/23|
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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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.