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.
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 547 Mid-Cap Growth funds as of 5/31/21.
|As of 5/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO MID CAP FUND - Investor||4.82||8.08||40.20||20.44||17.37||11.85||10.06||9.95|
|BUFFALO MID CAP FUND - Institutional||4.91||8.17||40.47||20.63||17.55||12.02||10.23||10.11|
|Morningstar U.S. Mid Growth Index||0.91||2.34||38.56||22.79||20.74||14.47||11.79||10.60|
|Lipper Mid Cap Growth Index||1.40||4.16||38.04||19.62||19.19||13.37||11.27||10.01|
|Morningstar Mid-Cap Growth Category||1.65||6.24||46.40||19.80||19.05||13.43||11.06||9.30|
|As of 3/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO MID CAP FUND - Investor||4.61||4.61||65.92||20.43||17.12||11.96||9.40||9.85|
|BUFFALO MID CAP FUND - Institutional||4.60||4.60||66.18||20.60||17.28||12.12||9.56||10.01|
|Morningstar U.S. Mid Growth Index||-1.62||-1.62||73.26||22.37||20.59||14.32||11.16||10.47|
|Lipper Mid Cap Growth Index||1.69||1.69||72.37||20.03||19.39||13.27||10.74||9.96|
|Morningstar Mid-Cap Growth Category||3.96||3.96||81.95||20.29||19.16||13.38||10.47||9.24|
3 Year Risk Metrics
|BUFMX vs Morningstar U.S. Mid Growth Index (As of 3/31/21)|
Hypothetical Growth of $10,000
|(As of 3/31/21)|| |
|# of Holdings||68|
|Median Market Cap||$19.06 B|
|Weighted Average Market Cap||$26.08 B|
|3-Yr Annualized Turnover Ratio||46.45%|
|% of Holdings with Free Cash Flow||80.88%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|CoStar Group||CSGP||Real Estate||3.07%|
|Veeva Systems||VEEV||Health Care||2.77%|
|CBRE Group||CBRE||Real Estate||2.37%|
|Bio-Techne Corp||TECH||Health Care||2.12%|
|TOP 10 HOLDINGS TOTAL||27.95%|
CAPITAL MARKET OVERVIEW
(As of 3/31/21) — Equity markets continued to move higher in the 1st quarter of 2021, with the S&P 500 Index returning 6.17%. The period was marked by outperformance of value stocks as the market rotation that began in the last quarter of 2020 became even more pronounced. The vaccination rollout, combined with prospects for more fiscal stimulus, bolstered optimism towards companies that could benefit from the economy reopening. Additionally, an 80+ basis point move higher in the 10-Year U.S. Treasury yield during the quarter left sentiment towards growth stocks relatively more subdued.
The broad market Russell 3000 Index advanced 6.35% in the quarter. Value outperformed growth for the second straight quarter, with the Russell 3000 Value Index up 11.89% compared to the Russell 3000 Growth Index returning 1.19%. Relative performance was inversely-correlated with market cap size in the quarter, with the Russell Micro Cap Index up 23.89%, the small cap Russell 2000 Index up 12.70%, the Russell Midcap Index up 8.14%, and the large cap Russell 1000 Index returning 5.91%. The more cyclically-sensitive Energy, Financial, and Industrial sectors performed best in the quarter. Consumer Staples, Information Technology, and Utilities were the bottom three performing sectors. All sectors produced positive returns.
(As of 3/31/21) — The Buffalo Mid Cap Fund (BUFMX) returned 4.61% in the 1st quarter, outperforming the Morningstar U.S. Mid Growth Index’s return of -1.62%. Outperformance was driven by stock selection in most sectors with the largest impact from the Information Technology and Health Care sectors. The common thread driving stock selection was a focus on earnings acceleration potential as declining rates of COVID cases and increased vaccinations sparked an economic expansion that is expected to be durable. In addition, our valuation discipline paid off, as a significant number of stocks caught in the sell-off were among the most expensive.
TripAdvisor was among the leading contributors for the portfolio in the quarter. While the company’s current results remain impacted by COVID, the outlook for the future improved with the rollout of vaccines. In addition, TripAdvisor is starting a new subscription service that will provide travelers with discounts. This should address a key long-term weakness for the company by converting its large user base into sustainable growth.
Another top performer in the quarter was Lyft, which also benefited from vaccine rollout. The company released several positive updates during the quarter detailing improvements in ride volume. Lyft cut significant costs to preserve cash during the downturn, and they expect to maintain much of the expense savings even as the business grows once again. This should have the effect of driving the company to profitability quickly as business normalizes.
CBRE Group was another top contributor in the quarter. The company reported better than expected results across business lines and issued full year guidance that was ahead of expectations. The resilience of their outsourcing business has impressed investors, while the more cyclical sales and leasing advisory business also held up better than expected.
Verisk Analytics was the top detractor in the quarter. Disappointing quarterly results in addition to the underperformance of high quality, compounding growth companies drove underperformance. While the core insurance business performed better than expectations, their smaller energy and financials businesses continue to disappoint. We believe the risk/reward profile is favorable and that they will either improve the lagging businesses or divest them.
Guidewire Software was another detractor during the quarter. Shares were caught up in the growth selloff before they reported a somewhat mixed quarter. Headline numbers were good, but the cloud transition story continues to be messy. Their property and casualty (P&C) insurance customers are slow to move, but are still in the early innings of transitioning to cloud-based subscription deals.
(As of 3/31/21) — Economic growth is likely to be robust this year. Pent-up demand and easy comparisons from pandemic induced lockdowns will drive a rapid recovery in spending and hiring. On top of this, the new Biden administration has approved significant fiscal stimulus, and the Federal Reserve appears committed to an accommodative monetary policy until inflation picks up.
In the near term, growth will likely be better in cyclical companies that benefit from rapid economic growth and easy comparisons against pandemic depressed numbers. However, the style rotation this quarter has taken some of that into account, and valuations on some secular growth companies are starting to appear more reasonable. While we are mindful of macroeconomic conditions, we will continue to manage the portfolio from the bottom-up, investing in businesses with solid growth opportunities, durable competitive advantages, scalable business models, and good management teams, when they are trading at attractive valuations. Thank you for your continued support.
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.
In each Morningstar Category, the 10% of funds with the lowest measured risk are described as Low Risk, the next 22.5% Below Average, the middle 35% Average, the next 22.5% Above Average, and the top 10% High. Morningstar Risk is measured for up to three time periods (three, five, and 10 years). These separate measures are then weighted and averaged to produce an overall measure for the fund. Funds with less than three years of performance history are not rated. ©2021 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Style Box™ reveals a fund’s investment strategy by showing its investment style and market capitalization based on the fund’s portfolio holdings.