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 553 Mid-Cap Growth funds as of 7/31/20.
|As of 7/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO MID CAP FUND - Investor||14.76||10.14||15.45||13.93||9.01||11.30||8.48||8.79|
|BUFFALO MID CAP FUND - Institutional||14.81||10.26||15.58||14.10||9.17||11.46||8.64||8.96|
|Morningstar U.S. Mid Growth Index||24.47||20.18||24.24||19.91||14.25||15.69||10.98||9.81|
|Lipper Mid Cap Growth Index||21.42||12.54||16.93||16.50||12.56||13.99||10.22||9.12|
|Morningstar Mid-Cap Growth Category||21.05||10.84||15.27||14.49||11.13||13.64||9.63||8.08|
|As of 6/30/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO MID CAP FUND - Investor||22.66||3.77||11.66||12.15||8.00||11.40||8.52||8.49|
|BUFFALO MID CAP FUND - Institutional||22.72||3.83||11.79||12.31||8.15||11.57||8.68||8.65|
|Morningstar U.S. Mid Growth Index||34.66||11.77||17.32||17.81||12.98||15.45||10.89||9.42|
|Lipper Mid Cap Growth Index||30.93||5.03||11.23||14.37||11.23||13.95||10.13||8.76|
|Morningstar Mid-Cap Growth Category||30.27||3.60||9.65||12.58||9.92||13.57||9.51||7.74|
3 Year Risk Metrics
|BUFMX vs Morningstar U.S. Mid Growth Index (As of 6/30/20)|
Hypothetical Growth of $10,000
|(As of 6/30/20)|| |
|# of Holdings||72|
|Median Market Cap||$12.96 B|
|Weighted Average Market Cap||$19.81 B|
|3-Yr Annualized Turnover Ratio||42.68%|
|% of Holdings with Free Cash Flow||87.50%|
|% of Holdings with No Net Debt||34.72%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|CoStar Group||CSGP||Real Estate||3.22%|
|Moody's Corp||MCO||Financial Services||2.30%|
|Veeva Systems||VEEV||Health Care||2.14%|
|Kansas City Southern||KSU||Industrials||2.13%|
|TOP 10 HOLDINGS TOTAL||26.40%|
CAPITAL MARKET OVERVIEW
(As of 6/30/20) — Equity markets rebounded sharply in the 2nd quarter following steep losses in the previous period. The S&P 500 Index produced a return of 20.54%, marking the best quarterly performance results in 20 years. Stimulus efforts by the Federal Reserve (the “Fed”) and the U.S. Treasury Department to limit COVID-related economic damage helped equity markets find a floor in late March. Declining COVID-19 case counts, optimism about treatment and potential vaccines, along with better-than-expected economic data also contributed to improved investor sentiment during the period. Although confirmed virus cases began spiking again in the final days of June, it was not enough to undo the best quarterly market results since the dot-com boom.
The broad market Russell 3000 Index advanced 22.03% in the quarter, and Growth outperformed Value as the Russell 3000 Growth Index moved up 27.99% during the period, compared to the Russell 3000 Value Index’s advance of 14.55%. Relative performance was inversely-correlated by market cap as the Russell Micro Cap Index advanced 30.54%, well above the large cap Russell 1000 Index’s return of 21.82%. Meanwhile the small cap Russell 2000 Index and the Russell Mid Cap Index were up 25.42% and 24.61%, respectively. The best performing sectors were Technology, Consumer Discretionary, and Energy while the less cyclically exposed, more defensive areas like Utilities, Telecommunication, and Consumer Staples lagged in the quarter.
(As of 6/30/20) — In the 2nd quarter of 2020, the Buffalo Mid Cap Growth Fund (BUFMX) returned 22.66%, lagging the benchmark Morningstar U.S. Mid Growth Index return of 34.66%. The Fund’s underperformance was due to stock selection in the Information Technology, Health Care, and Consumer Discretionary sectors. The quarter was defined by a significant rally across the board, however, companies less impacted, or even helped by shutdowns in the period, saw their share prices increase rapidly. Several companies in the benchmark more than doubled in value, with a speculative fervor that included little regard for how price paid today impacts returns over a long-term holding period. We anticipate that these speculative gains will be reconciled in the coming quarters and our more disciplined approach to price paid for future growth will be rewarded.
Among the top contributors during the second quarter were Veeva Systems, Splunk, and MarketAxess Holdings. Digital product delivery was a common thread for each of these three top performers. The market rewarded companies whose revenue models were unaffected by a nationwide shutdown during the pandemic.
Veeva Systems was boosted by strong 1st quarter results and guidance that surpassed consensus expectations. Veeva’s core business of providing software to the life sciences industry was helped by shutdowns as companies prioritized digital capabilities to support work from home.
Splunk shares rallied on quarterly results that benefited from accelerating digital transformation adoption by customers. Many customers of Splunk completed multi-year projects in just months spurred by office closures due to the shutdown.
MarketAxess benefited from volatility in fixed income markets as well as the shutdown, which helped to accelerate market share growth for its electronic platform for fixed income trading.
With the Fund up significantly in the quarter, there were not many positions detracting from performance and none significantly. TripAdvisor and Universal Display, two newly initiated positions, were the largest detractors. Each company is dependent upon a return to normalized economic activity on the part of the U.S. consumer, which was challenged as COVID-19 daily case counts increased in June.
Universal Display is a technology company that licenses and sells materials for making OLED screens, used in TVs and other electronics such as tablets and mobile phones. It is a beneficiary of growing penetration of OLED TVs, where LCD display is still the market share leader.
TripAdvisor is reliant on travel, where it sells advertising space alongside its review content and earns fees as a booking platform for restaurants and excursions. The drop off in revenue has been severe due to the pandemic. However, the company shares represent a significant opportunity as a more normal travel environment should return in coming years.
(As of 6/30/20) —The rally back from market lows in March was unprecedented, surprising in both magnitude and timing. The last several recessions and ensuing bear markets, have lasted several quarters, averaging about a year in duration. Provided the rally holds its gains and does not retest March lows, the peak to trough decline from this bear market will have lasted only about one month. The key premise for the quick market recovery is that the COVID-19 virus is like a natural disaster rather than a structural economic imbalance. In natural disasters, destruction is quick, and rebuilding happens immediately afterwards, spurring economic growth. In a structural economic imbalance, such as the financial crisis, entire sectors of the economy overshoot normal growth, resulting in years of rightsizing and adjustment that detract from economic growth. The biggest risk is that the market rally has assumed damage to future profits that will be short-lived and will steadily recover from lows set during the period. The future path of the COVID-19 virus must prove this to be true, otherwise we may see the narrative for the market change from short-lived losses towards a more structural imbalance, which would challenge the recent rally.
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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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. ©2020 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.