Mid Cap Fund
Fund Objective & Investment Strategy
The investment objective of the Buffalo Mid Cap Fund is long-term growth of capital. The Fund normally invests at least 80% of its net assets in equity securities, consisting of common stocks, preferred stocks, convertible preferred stocks, warrants and rights of medium capitalization (“mid-cap”) companies. The Fund defines mid-cap companies as those companies that, at the time of purchase, have market capitalizations within the range of the Morningstar U.S. Mid Growth Index. As of June 30, 2021 the range of market capitalizations of the Morningstar U.S. Mid Growth Index was $4.3 billion to $93.2 billion.
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.
Our focus has always been on investing in secular growth companies we believe are attractively-priced with strong balance sheets. We remain convinced the inefficiencies inherent in the small and mid-cap market spectrum, in addition to where we are in the economic cycle, are best suited for disciplined, active management of the portfolio.
Chris Carter, Portfolio Manager
Overall Morningstar Rating™ of BUFMX based on risk-adjusted returns among 548 Mid-Cap 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||Since Inception|
|BUFFALO MID CAP FUND - Investor||3.45||11.81||31.72||19.41||17.11||13.63||10.57||10.00|
|BUFFALO MID CAP FUND - Institutional||3.49||11.94||31.88||19.60||17.29||13.80||10.73||10.17|
|Morningstar U.S. Mid Growth Index||13.10||15.75||36.11||23.74||22.92||17.24||13.01||11.15|
|Lipper Mid Cap Growth Index||9.70||14.27||31.58||20.01||20.52||15.95||12.16||10.39|
|Morningstar Mid-Cap Growth Category||8.23||14.78||37.21||19.77||19.95||15.82||11.85||9.62|
|As of 6/30/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO MID CAP FUND - Investor||5.60||10.47||42.85||21.27||18.26||12.17||10.43||10.02|
|BUFFALO MID CAP FUND - Institutional||5.68||10.54||43.11||21.45||18.43||12.34||10.60||10.19|
|Morningstar U.S. Mid Growth Index||11.33||9.52||43.24||24.79||22.48||15.33||12.32||10.94|
|Lipper Mid Cap Growth Index||6.97||8.78||40.83||21.00||20.42||14.04||11.59||10.21|
|Morningstar Mid-Cap Growth Category||7.00||12.40||55.69||19.34||20.72||13.98||11.21||9.51|
|BUFFALO MID CAP FUND - Investor||-5.83||13.93||29.25||5.85||-0.52||5.93||13.66||-7.30||37.98||34.18|
|BUFFALO MID CAP FUND - Institutional||-5.69||14.10||29.45||6.00||-0.37||6.08||13.82||-7.16||38.16||34.42|
|Morningstar U.S. Mid Growth Index||-2.29||15.81||34.07||9.77||-0.71||6.46||25.67||-3.16||36.01||46.17|
3 Year Risk Metrics
|BUFMX vs Morningstar U.S. Mid Growth Index (As of 6/30/21)|
Hypothetical Growth of $10,000
|(As of 6/30/21)|| |
|# of Holdings||65|
|Median Market Cap||$18.76 B|
|Weighted Average Market Cap||$27.65 B|
|3-Yr Annualized Turnover Ratio||42.42%|
|% of Holdings with Free Cash Flow||80.00%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|CBRE Group||CBRE||Real Estate||2.70%|
|CoStar Group||CSGP||Real Estate||2.65%|
|Bio-Techne Corp||TECH||Health Care||2.48%|
|TOP 10 HOLDINGS TOTAL||28.38%|
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) — In the 2nd quarter, the Buffalo Mid Cap Fund (BUFGX) returned 5.60%, lagging the benchmark Morningstar U.S. Mid Growth Index’s return of 11.33%. The Fund’s underperformance was driven by stock selection in the Information Technology and Consumer Discretionary sectors.
The quarter saw a reversal of 1st quarter’s trends, when optimism was abounding from economic reopening and declining COVID cases. Instead, more concerning headlines drove sentiment in this period – renewed shutdowns were announced outside the U.S., the more contagious Delta variant continued to spread, and economic data was more mixed. As a result, more economically-sensitive companies underperformed while secular growth outperformed. Our opinion is that more attractive prospective investment returns are available in growth companies with greater exposure to the economic cycle. This is driven in part by a recovery towards pre-COVID trend growth combined with more reasonable valuation. Nevertheless, while this view buttressed returns in the previous quarter, it was a headwind in this quarter, as the market took a more restrained view of economic growth.
MSCI reported another strong quarter with results ahead of expectations and raised guidance for the rest of the year. Profitability, while already strong, would be even higher if they weren’t investing to accelerate growth in Environmental/Social/Governance (ESG), climate, and thematic indices. Furthermore, with part of their index business being tied to market levels, strong equity markets bode well for future results.
Gartner reported a strong quarter with revenues rebounding and margins blowing away expectations. Current year guidance was raised by a substantial amount, and the trough in contract value growth appears to be behind them. Going forward, the company should continue to benefit from accelerating research growth and a return to in-person conferences.
IHS Markit was another top contributor in the quarter. Due to the company’s pending merger with S&P Global, moves in the stock are largely driven by results and sentiment shifts at each company. During the quarter, IHS reported strong results from their transportation and financial services segments that were above previous expectations for stand-alone performance. In addition, S&P Global reported a strong 1st quarter that led them to increase full year guidance. Also, equity markets rose during the quarter, and bond issuance came in stronger than expected, causing expectations for future results to be lifted.
The top three detractors from Fund performance were TripAdvisor, F5 Networks, and Lyft. Two of these, TripAdvisor and Lyft, were top contributors last quarter. TripAdvisor shares underperformed in the quarter, coming off a significant rally last quarter related to optimism over a new subscription business, TripAdvisor Plus. It is still early days for the newly introduced TripAdvisor Plus, a product that started the year in beta testing. As the market swung from optimism to pessimism over the economic reopening, driving a robust travel recovery, TripAdvisor shares sold off. Underperformance was not caused by any fundamental reason. This was simply the result of a change in investor perception in the quarter.
Next, shares of F5 Networks were a negative contributor in the quarter, as the company reported softer growth in its software segment. Its software segment is expected to drive the bulk of company growth in the future, as it gradually shifts away from selling hardware appliances. However, the company experienced a surge in hardware sales at the expense of growth in software. The reopening of offices led to a rebound in IT infrastructure spending that is quick to deploy, such as hardware. While the overall net impact of this had a positive impact on earnings for the quarter, investors were hesitant to accept it as good news, since the more strategically-important software business underperformed expectations.
Finally, Lyft gave back some of its earlier year gains during the quarter. The performance in the quarter was mostly the result of renewed regulatory concerns, as one of President Biden’s cabinet members suggested that drivers for gig-based platforms should be treated as employees rather than contractors. There is little legal standing for this interpretation in laws written today, which means that it would require a new law to be passed through a divided Senate. While the headline political risk is real, the likelihood of new legislation passing is low.
(As of 6/30/21) — During the 2nd quarter, the prevailing market narrative shifted from expectations for a broad and robust recovery in growth to worries about the sustainability of future growth and a preference for secular growth businesses. Confidence in economic growth was high to start the year and encouraged by a Federal Reserve that appeared determined to support growth recovery and full employment. This confidence waned in this 2nd quarter, as inflation worries grew, employment data was mixed, and the Federal Reserve shifted towards a more hawkish inflation view, recognizing that recent reports of inflation may not be completely transitory. In addition, some Federal Reserve members anticipated removing some stimulus earlier than previously expected, in acknowledgment of increasing inflation risks. We expect this to be an ongoing narrative in the market as the Fed manages two opposing risks: (1) undershooting growth targets in the recovery which will lead to an underperforming economy with lower employment and slower growth and (2) inflation taking off as it did a generation ago, leading to headline growth that does not translate into improvements in standards of living.
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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