Large Cap Fund
|As of 5/24/2022|
|Total Net Assets:||$113.48 Million (3/31/22)|
|Morningstar Category:||Large Cap Growth|
|Benchmark Index:||Russell 1000 Growth|
Fund Fact Sheet Q1 2022
PM Commentary Q1 2022
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 1,137 Large Growth funds as of 4/30/22.
Morningstar Sustainability Rating™ of BUFEX out of 1,596 US Equity Large Cap Growth funds as of 3/31/22, based on 100% of AUM
Carbon Metric Rating of BUFEX as of 3/31/22 in the Large Growth category, based on 96% of AUM; long positions only
Historical Sustainability Score Rank of BUFEX
|As of 4/30/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||-11.93||-19.66||-7.92||12.51||13.67||14.09||9.63||8.88||10.14|
|BUFFALO LARGE CAP FUND - Institutional||-11.89||-19.61||-7.77||12.69||13.84||14.26||9.80||9.05||10.31|
|Russell 1000 Growth Index||-12.52||-20.03||-5.35||16.68||17.28||15.56||11.61||10.24||10.28|
|Morningstar U.S. Large Growth Index||-17.80||-28.41||-18.68||10.29||14.05||13.80||10.33||-||-|
|Lipper Large Cap Growth Fund Index||-14.39||-22.59||-12.71||13.07||15.19||13.79||10.04||8.76||8.99|
|Morningstar Large Growth Category||-12.94||-21.19||-12.09||12.19||14.08||13.19||9.76||9.07||8.97|
|As of 3/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO LARGE CAP FUND - Investor||-9.76||-9.76||10.23||18.63||16.83||15.18||10.94||9.11||10.65|
|BUFFALO LARGE CAP FUND - Institutional||-9.73||-9.73||10.42||18.81||17.01||15.36||11.11||9.27||10.82|
|Russell 1000 Growth Index||-9.04||-9.04||14.98||23.60||20.88||17.04||12.92||10.48||10.84|
|Morningstar U.S. Large Growth Index||-13.55||-13.55||5.79||19.01||19.27||15.95||12.03||-||-|
|Lipper Large Cap Growth Fund Index||-11.35||-11.35||6.79||20.00||19.03||15.26||11.33||9.12||9.57|
|Morningstar Large Growth Category||-10.76||-10.76||5.75||18.74||17.65||14.65||11.04||9.51||9.51|
|BUFFALO LARGE CAP FUND - Investor||17.23||32.76||12.76||7.15||6.90||24.86||-1.63||31.77||28.08||26.08|
|BUFFALO LARGE CAP FUND - Institutional||17.41||32.96||12.92||7.31||7.06||25.05||-1.48||31.98||28.28||26.27|
|Russell 1000 Growth Index||15.26||33.48||13.05||5.67||7.08||30.21||-1.51||36.39||38.49||27.60|
|Morningstar U.S. Large Growth Index||17.98||32.46||14.38||7.71||1.79||31.15||2.94||33.81||38.86||21.47|
3 Year Risk Metrics
|BUFEX vs Russell 1000 Growth Index (As of 3/31/22)|
Hypothetical Growth of $10,000
|(As of 3/31/22)||
|# of Holdings||70|
|Median Market Cap||$98.85 B|
|Weighted Average Market Cap||$910.62 B|
|3-Yr Annualized Turnover Ratio||31.80%|
|% of Holdings with Free Cash Flow||87.32%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net
|Costco Wholesale||COST||Consumer Staples||1.70%|
|TOP 10 HOLDINGS TOTAL||44.07%|
CAPITAL MARKET OVERVIEW
(As of 3/31/22) — The equity market, as measured by the S&P 500 Index, suffered its second quarterly decline since the onset of the COVID-19 pandemic, over two years ago, producing a return of -4.60% during the January–March period. Weak capital market performance can be largely attributed to the Federal Reserve’s decision to raise interest rates and reduce the size of its balance sheet, also known as quantitative tightening. Other headwinds, including the war in Ukraine, significant inflation, and persistent supply chain bottlenecks, only added to the backdrop of uncertainty for domestic and global markets.
The broad-based Russell 3000 Index fell -5.28% in the quarter. Value stocks outperformed growth stocks by a large amount, as the Russell 3000 Value Index returned -0.85% compared to a decline of -9.25% for the Russell 3000 Growth Index. Large cap stocks fell less than smaller cap stocks during the quarter, as the Russell 1000 Index declined -5.13%, followed by a return of -5.68% for the Russell Midcap Index, and -7.53% for the small cap Russell 2000 Index. Energy stocks surged during the period on rising oil prices while the more defensive Utilities and Telecommunication Services sectors were also modestly positive. The Consumer Discretionary and Technology areas of the market were the largest underperformers due to inflation and rising rates.
(As of 3/31/22) — The Fund declined 9.76% during the period versus a decline of 13.55% for the Morningstar U.S. Large Growth Index. Favorable relative performance reflects continued better stock selection within the Healthcare and Technology sectors. The Fund also outperformed the Morningstar U.S. Large Growth category average of other large cap growth funds (our peer group) by nearly 100 basis points. While our large cap growth fund is not measured directly against the S&P 500 Index, we highlight its performance as you may use it as a natural comparator for equity returns.
As we’ve stated previously, there are key investment style differences between how we build a growth portfolio versus the components of the S&P 500 Index. Recall, the S&P 500 has a dramatically higher weighting in lower growth and more cyclically-oriented sectors such as the Energy, Industrial, and Financial Services sectors. On the other hand, the Fund is more focused on high-quality, secular (not cyclical) growth stories that are disrupting and transforming large markets within the global economy. These are frequently highly innovative companies that have the ability to invest retained earnings at a high rate of return, owing to incredibly attractive business models that offer durable growth opportunities.
1) Palo Alto Networks
3) Aon Plc
Palo Alto Networks (PANW) is the leading global cybersecurity software firm, with a broad portfolio of products for both large and medium sized enterprises who want a cloud or hybrid cloud/on-premise security solution. Shares rose nearly 12% in the quarter and represented one of our largest overweight stock positions. Cybersecurity remains one of the highest spending priorities for chief information officers (CIOs) given the heightened cyber and ransom wear attacks and the need to protect data and networks. The deteriorating relationship between the West and Russia only raises the risk of accelerating cyber-attacks and the need for both governments and business around the world to make needed investments.
Costco (COST) is also one of our largest overweight investment positions, and shares rose 2.1% in the quarter, reflecting its dominant position in the food and staples warehouse category, which is less likely to be negatively impacted by rising interest rates or a recession.
Aon (AON), a relatively smaller weight in the Fund, returned 8.5% this quarter, reflecting a strong pricing environment within the property and casualty insurance brokerage market and the company’s large commitment to repurchase shares.
Visa (V) shares rose a modest 2.4% in the quarter as the company’s financial performance and outlook continued to remain strong, with the possibility of revenue and earnings upside from the return of cross boarder travel from pent-up consumer and business demand for overseas travel.
Tesla (TSLA), beyond reporting robust vehicle deliveries during each of the three months in the quarter, also benefited thematically as the leading electric vehicle manufacturer amidst an environment of rising gasoline prices.
1) Meta Platforms (formerly Facebook)
Of the group, Meta Platforms (FB) had the biggest detraction to results, negatively impacting Fund performance by 138 basis points. The company reported weaker than expected advertising revenues related to new consumer privacy restrictions with Apple’s new IDFA policy and from retailers who had limited available inventory to promote, owing to supply chain constraints.
Microsoft (MSFT) shares declined 8% owing to weakness across the technology and software sector during the first three months of the year. Company fundamentals remain positive as they continue to take share in Cloud hosting, and their core Office and gaming franchises remain the global leaders in their respective categories.
Netflix (NFLX), the global leader in streaming video reported lower than expected new subscriber adds during the quarter with renewed concerns about the competition in streaming. As a result, we trimmed its weighting to a small, minimum position until we see durable signs of reaccelerating acquiring subscriber growth along with some increased confidence that recent sub price increases will not materially impact sub churn. We continue to believe strong secular growth tailwinds should benefit Netflix over the long term as the company accounts for less than 10% of TV time in the U.S.. A strong content calendar in 2022 should help gross sub adds but we remain in wait and see mode here.
Intuit (INTU) and Paypal (PYPL) also negatively impacted performance in the most recent quarter, owing to different nuances around reported numbers. Intuit reported a weaker start to the tax preparation season (TurboTax) but remained optimistic the tax season would wind up similar to last year, while Paypal continued to face headwinds from a soft eCommerce environment during the holiday season and an uncertain eCommerce recovery coming into 2022, given a lack of government stimulus benefits relative to 2021.
Regarding Intuit, we remain overweight relative to our benchmark, owing to the strong competitive position within the small business eco-system within the U.S., buoyed by a growing platform of small business solutions beyond the prodigious QuickBooks franchise. The company is essentially becoming the enabler of digital work solutions for small business around the U.S. and Western Europe — a massively large addressable and under-penetrated market. We will continue with diligence around Intuit’s Credit Karma division, evaluating what a possible recession may portend for that business segment, but otherwise, we really like the long-term opportunity with our investment in Intuit.
(As of 3/31/22) — The broad equity and bond markets continue to be highly volatile given a number of discrete variables and risk factors. We highlighted a number of these in our recent year-end shareholder letter but we added a new risk factor during the March quarter, with the tragic and devastating invasion of Ukraine by Russia. While we mostly deal with risk and event factors in investment terms within these shareholder updates, it would be inappropriate for us not to stress the incalculable human toll of this unnecessary tragedy that clearly usurps any financial or investment implication. We can’t express enough our heartfelt concern for those innocent human beings in Ukraine who have died or been unjustly dislocated from their homes and community.
Overall, the Buffalo Large Cap Fund continues to have a defensive bias, as it increasingly appears the Fed may indeed be behind the curve on taming inflation, at least over the short term with the most recent March consumer price index (CPI) data indicating inflation continues to increase, now at 8.5% on annual basis. The market is pricing in nine interest rate hikes over the course of 2022, but the delayed timing of these rate hikes may make it difficult to achieve a soft landing of continued strong employment, coupled with dramatically more stable pricing. While we are bottom’s up investors, we remain macro aware.
There are three drivers to the ongoing inflation pressures: 1) supply chain related to a shortage of parts and products that most everyone has read about. Goldman Sachs indicated that autos accounted for 50% of the overshoot in core inflation via used car price increases 2) commodity related inflation as oil, gas, and metals such as nickel become in short supply, mostly related to Russia’s invasion of Ukraine and 3) wage inflation.
Of these three inflation drivers, the most troubling for equity and bond markets is wage inflation and the risk that we’ve possibly entered a wage/price spiral. Remarkably, in the U.S., we currently have two job openings for every job seeker. This ratio of job openings to job seekers is unprecedented by any historical standard in country’s economic history and it could potentially cause the Fed to further accelerate the pacing of its planned rate hikes. Time will tell, but we are watching this closely. In the meantime, we will continue with a skew toward a defensive posture within the large cap growth portfolio.
As equity valuations continue to offer more attractive entry points, with some high growth stocks down 50% or more from recent high’s in 2021, we will selectively take advantage of strong franchises, with recurring revenue, high cash flow returns on invested capital, and pristine balance sheets. The software industry is one example of this and is an area we are looking with more interest.
As always, we appreciate your continued interest in the 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.
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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.