Mid Cap Fund
Fund Objective & Investment Strategy
The investment objective of the Buffalo Mid Cap Fund is long-term growth of capital. The Mid Cap Fund normally invests at least 80% of its net assets in equity securities, consisting of domestic common stocks and preferred stocks of medium capitalization (“mid-cap”) companies, that, at the time of purchase, have market caps between $4.5B and $30B.
The Fund managers seek to identify companies for the Mid Cap 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.
Chris Carter, Portfolio Manager
Overall Morningstar Rating™ of BUFMX based on risk-adjusted returns among 566 Mid-Cap Growth funds as of 1/31/20.
|As of 1/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO MID CAP FUND - Investor||7.28||2.34||27.77||13.33||9.83||11.47||8.69||8.60|
|BUFFALO MID CAP FUND - Institutional||7.34||2.40||28.01||13.52||10.00||11.64||8.86||8.77|
|Morningstar U.S. Mid Growth Index||8.94||1.78||24.39||17.51||12.39||14.77||10.62||9.08|
|Lipper Mid Cap Growth Index||8.01||1.70||23.24||16.96||12.14||13.74||10.06||8.77|
|Morningstar Mid-Cap Growth Category||7.86||1.15||21.05||14.82||11.11||13.43||9.43||7.81|
|As of 12/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO MID CAP FUND - Investor||5.89||37.98||37.98||13.28||8.90||10.83||8.36||8.51|
|BUFFALO MID CAP FUND - Institutional||5.89||38.16||38.16||13.45||9.06||10.99||8.52||8.67|
|Morningstar U.S. Mid Growth Index||8.31||36.01||36.01||18.29||11.84||14.04||10.27||9.02|
|Lipper Mid Cap Growth Index||7.55||33.83||33.83||17.58||11.33||13.02||9.70||8.72|
|Morningstar Mid-Cap Growth Category||8.05||32.30||32.30||15.42||9.98||12.19||8.46||7.78|
3 Year Risk Metrics
|BUFMX vs Morningstar U.S. Mid Growth Index (As of 12/31/19)|
Hypothetical Growth of $10,000
|(As of 12/31/19)|| |
|# of Holdings||62|
|Median Market Cap||$13.75 B|
|Weighted Average Market Cap||$19.18 B|
|3-Yr Annualized Turnover Ratio||51.99%|
|% of Holdings with Free Cash Flow||88.71%|
|% of Holdings with No Net Debt||29.03%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|CoStar Group||CSGP||Real Estate||3.17%|
|Palo Alto Networks||PANW||Technology||2.32%|
|CBRE Group||CBRE||Real Estate||2.26%|
|TOP 10 HOLDINGS TOTAL||25.26%|
CAPITAL MARKET OVERVIEW
(As of 12/31/19) — The combination of a U.S. Federal Reserve (Fed) interest rate cut, an improving economic outlook, and easing trade tensions, sent equity markets sharply higher in the 4th quarter. The S&P 500 Index advanced 9.10% during the period, which brought the full-year (2019) gain to 31.49%. The Fed cut interest rates three times in 2019, erasing the brief yield curve inversion and assuaging fears of a recession. The economy continued to add new jobs at a strong pace and unemployment declined to 3.5%. Consumer spending remained healthy, and there is optimism for better business investment following the announced “phase one” trade deal with China.
Similar to the S&P 500 Index, the broad-based Russell 3000 Index returned 9.04% during the quarter. Growth outperformed value, as the Russell 3000 Growth Index returned 10.62% compared to a return of 7.41% for the Russell 3000 Value Index. Smaller companies outperformed larger companies, as one would expect in a “risk-on” period. The Russell Microcap Index surged 13.45% and the Russell 2000 Index advanced 9.94%. Large company benchmarks such as the Russell 1000 Index advanced 9.04% while the Russell Midcap Index produced a return of 7.06%. Technology and Health Care were the best performing sectors in the quarter, while more defensive areas of the market lagged such as Real Estate and Utilities. Higher long-term interest rates weighed on high-quality bond proxies – the safe haven 10-year U.S. Treasury Bond produced a return of -1.74% during the quarter.
(As of 12/31/19) — In the 4th quarter of 2019, the Buffalo Mid Cap Growth Fund returned 5.89%, lagging the benchmark Morningstar U.S. Mid Growth Index return of 8.31%. The Fund’s underperformance was due to selection in the Health Care, Consumer Discretionary, and Industrial sectors.
Among the top contributors during the quarter were MSCI, Lam Research, and IHS Markit. MSCI was boosted by earnings that beat investor expectations, the announcement of a 10-year contract renewal with BlackRock, and in response to the strong performance of international equities (which drives a large percentage of their asset-based fees). Lam Research shares gained on a stronger earnings outlook and the belief that the semiconductor capital spending cycle has bottomed. IHS Markit presented a 2020 outlook that was well received by investors, as was their capital allocation plan. The company expects to generate increasing amounts of free cash flow and plans to initiate a dividend and increase share repurchases.
The biggest detractors in the period were Expedia, RealPage, and Verisk Analytics.
Expedia shares traded lower when management’s outlook for growth and margins were reduced, citing Google’s increasing competition in travel as a primary cause. In a stunning move, the company’s board differed with management’s assessment of the company’s growth potential, leading to the resignation of the CEO and CFO, which, given the board’s more optimistic view of growth, led to a partial recovery in the stock.
RealPage also detracted from performance during the quarter as project implementation delays continue to cause revenues to slip into future periods. We believe these delays are driven by larger, more complicated deals and better product penetration into their clients and not by any lack of demand or competitive issues. Eventually, they should be able to convert pipeline into revenues quicker, boosting revenue growth and rewarding shareholders.
Verisk reported solid earnings during the period, but company management also announced a negative verdict in a patent infringement lawsuit. They plan to appeal the ruling and look for alternative, non-infringing ways to continue offering customers a similar product. Given that the affected aerial imagery / roof reports represented about 1% of revenues, we do not consider the setback to be material even in a worst case scenario.
(As of 12/31/19) — At the start of 2019 the market was coming off a significant sell-off from the 4th quarter of 2018. Federal Reserve interest rate increases and rising trade tensions with China drove fears of decelerating economic growth. However, the Fed reversed course by cutting interest rates three times over the last year. While the tensions with China did result in a trade war of sorts, it was deescalated with a “Phase One” trade deal agreement near the end of the year. In 2020, trade relations with China and the negotiation of a more comprehensive trade deal will continue to be a risk. In addition, the Manufacturing PMI Index has recorded several consecutive readings below 50, which has historically been a good warning indicator of weaker economic growth and a possible recession in the near future. However, it is possible that the interest rate cuts by the Federal Reserve and “Phase One” trade resolution between the U.S. and China will help the economy avoid recession. This backdrop, combined with robust investment returns in 2019, has sharpened our focus on the health of the economy and sustainability of earnings growth in 2020.
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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