Small Cap Fund
Quick Facts
| Investor | Institutional | |
| Ticker: | BUFSX | BUISX |
| Daily Pricing: | ||
| As of 6/24/2022 | ||
| NAV: | $13.66 | $13.73 |
| $ Change: | $0.36 | $0.36 |
| % Change: |
2.71% | 2.69% |
| YTD: |
-28.59% | -28.53% |
| Inception Date: | 4/14/1998 | 7/1/2019 |
| Expense Ratio: | 1.01% | 0.86% |
| Total Net Assets: | $979.06 Million (3/31/22) | |
| Morningstar Category: | Small Cap Growth | |
| Benchmark Index: | Russell 2000 Growth | |
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Related Material: Fund Fact Sheet Q1 2022 PM Commentary Q1 2022 Summary Prospectus |
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An actively-managed portfolio of smaller-capitalization, rapidly-growing companies that can benefit from positive, long-term trends remains an excellent way to exploit an inefficient market.
Bob Male, Co-Portfolio Manager
“I think what really differentiates us is our process, where we combine the top-down work of looking at trends provided with the bottoms-up fundamental research we do on each company.”
~ Jamie Cuellar, CFA
Listen to the Portfolio Managers discuss their Investment Philosophy
Morningstar Rating
Overall Morningstar Rating™ of BUFSX based on risk-adjusted returns among 585 Small Growth funds as of 5/31/22.
Investment Style
Fund Objective & Investment Philosophy
The investment objective of the Buffalo Small Cap Fund is long-term growth of capital. The Small Cap 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 small capitalization (“small-cap”) companies. The Small Cap Fund defines small-cap companies as those that, at the time of purchase, have market capitalizations within the range of the Russell 2000 Growth 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 attractive valuation, strong management, conservative debt, free cash flow, scalable business models, and competitive advantages.
Recent Recognition
- Kiplinger Top-Performing Mutual Fund (3 Years) – January 24, 2022
- Kiplinger Top-Performing Mutual Fund (3 Years, 20 Years) – November 18, 2021
- Kiplinger Top-Performing Mutual Fund (20 Years) – October 20, 2021
- Kiplinger Top-Performing Mutual Fund (20 Years) – September 21, 2021
- Kiplinger Top-Performing Mutual Fund (20 Years) – August 18, 2021
- Kiplinger Top-Performing Mutual Fund (3 Years, 5 Years, 10 Years, 20 Years) – July 28, 2021
- Kiplinger Top-Performing Mutual Fund (3 Years, 5 Years, 20 Years) – June 17, 2021
- Kiplinger Top-Performing Mutual Fund (3 Years, 20 Years) – May 13, 2021
- Kiplinger Top-Performing Mutual Fund (3 Years, 20 Years) – April 22, 2021
- Kiplinger Top-Performing Mutual Fund (1 Year, 20 Years) – March 23, 2021
- Investor’s Business Daily 2021 Best Mutual Funds Award Winner – March 22, 2021
- Kiplinger Top-Performing Mutual Fund (1 Year, 20 Years) – February 23, 2021
- Kiplinger Top-Performing Mutual Fund (1 Year, 20 Years) – January 19, 2021
Featured Articles & Reports
BARRON'S
September 29, 2021
KANSAS CITY BUSINESS JOURNAL
BARRON'S
April 19, 2021
FINANCIAL ADVISOR MAGAZINE
March 9, 2021
Performance (%)
| As of 5/31/22 | 3 MO | YTD | 1 YR | 3 YR | 5 YR | 10 YR | 15 YR | 20 YR | Since Inception |
|---|---|---|---|---|---|---|---|---|---|
| BUFFALO SMALL CAP FUND - Investor | -13.74 | -27.13 | -29.86 | 14.49 | 13.33 | 12.38 | 8.49 | 9.68 | 11.76 |
| BUFFALO SMALL CAP FUND - Institutional | -13.73 | -27.07 | -29.77 | 14.66 | 13.49 | 12.54 | 8.66 | 9.84 | 11.93 |
| Russell 2000 Growth Index | -13.53 | -24.79 | -25.71 | 6.18 | 6.87 | 10.55 | 7.22 | 8.21 | 5.87 |
| Morningstar U.S. Small Growth Index | -15.13 | -27.95 | -27.55 | 4.57 | 7.03 | 10.35 | 7.24 | - | - |
| Lipper Small Cap Growth Fund Index | -12.51 | -22.91 | -19.49 | 9.58 | 11.23 | 11.97 | 7.84 | 8.45 | 7.25 |
| Morningstar Small Growth Category | -13.21 | -24.23 | -22.34 | 9.47 | 10.04 | 11.51 | 7.98 | 8.98 | 7.34 |
| As of 3/31/22 | 3 MO | YTD | 1 YR | 3 YR | 5 YR | 10 YR | 15 YR | 20 YR | Since Inception |
|---|---|---|---|---|---|---|---|---|---|
| BUFFALO SMALL CAP FUND - Investor | -15.79 | -15.79 | -16.93 | 19.34 | 17.54 | 13.51 | 10.00 | 10.22 | 12.52 |
| BUFFALO SMALL CAP FUND - Institutional | -15.72 | -15.72 | -16.79 | 19.52 | 17.72 | 13.68 | 10.17 | 10.38 | 12.69 |
| Russell 2000 Growth Index | -12.63 | -12.63 | -14.33 | 9.88 | 10.33 | 11.21 | 8.81 | 8.57 | 6.58 |
| Morningstar U.S. Small Growth Index | -13.37 | -13.37 | -13.87 | 9.56 | 11.63 | 11.49 | 9.12 | - | - |
| Lipper Small Cap Growth Fund Index | -11.96 | -11.96 | -6.60 | 13.90 | 14.61 | 12.55 | 9.33 | 8.81 | 7.90 |
| Morningstar Small Growth Category | -12.78 | -12.78 | -9.02 | 13.87 | 13.69 | 12.20 | 9.51 | 9.38 | 8.03 |
| Year | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
|---|---|---|---|---|---|---|---|---|---|---|
| BUFFALO SMALL CAP FUND - Investor | 19.93 | 44.15 | -6.55 | -4.46 | 6.22 | 27.07 | -5.78 | 40.97 | 66.36 | 4.85 |
| BUFFALO SMALL CAP FUND - Institutional | 20.11 | 44.36 | -6.41 | -4.32 | 6.37 | 27.26 | -5.64 | 41.17 | 66.60 | 4.97 |
| Russell 2000 Growth Index | 14.59 | 43.30 | 5.60 | -1.38 | 11.32 | 22.17 | -9.31 | 28.48 | 34.63 | 2.83 |
| Morningstar U.S. Small Growth Index | 14.50 | 41.86 | 2.46 | -0.18 | 9.61 | 23.77 | -5.67 | 27.60 | 43.52 | -1.00 |
3 Year Risk Metrics
| BUFSX vs Russell 2000 Growth Index (As of 3/31/22) | |
|---|---|
| Upside Capture | 138.19 |
| Downside Capture | 97.31 |
| Alpha | 8.53 |
| Beta | 1.09 |
| Sharpe Ratio | 0.72 |
Hypothetical Growth of $10,000
Portfolio
Portfolio Characteristics
| (As of 3/31/22) | |
|---|---|
| # of Holdings | 76 |
| Median Market Cap | $1.99 B |
| Weighted Average Market Cap | $3.02 B |
| 3-Yr Annualized Turnover Ratio | 63.65% |
| % of Holdings with Free Cash Flow | 68.42% |
| Active Share | 91.82% |
Top 10 Holdings
| Name of Holding | Ticker | Sector | % of Net Assets |
|---|---|---|---|
| Calix | CALX | Technology | 2.50% |
| ICF Intl | ICFI | Industrials | 2.40% |
| Tenable Holdings | TENB | Technology | 2.17% |
| MaxLinear | MXL | Technology | 2.17% |
| DoubleVerify Holdings | DV | Technology | 1.93% |
| MasTec | MTZ | Industrials | 1.90% |
| Halozyme Therapeutics | HALO | Health Care | 1.89% |
| Syneos Health | SYNH | Health Care | 1.89% |
| Everi Holdings | EVRI | Consumer Discretionary | 1.87% |
| Advanced Drain Systems | WMS | Industrials | 1.87% |
| TOP 10 HOLDINGS TOTAL | 20.59% | ||
Sector Weighting
Market Capitalization
Management
Commentary
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.
PERFORMANCE COMMENTARY
(As of 3/31/22) — The Buffalo Small Cap Fund (BUFSX) declined -15.79% for the quarter, underperforming the Morningstar U.S. Small Growth Index’s return of -13.37%. Relative weakness in the Technology sector was responsible for most of the underperformance. Although the portfolio performed relatively well in software where we believed valuations were most extended, the communications equipment, IT services, and semiconductor industries all underperformed the Index and drove the underperformance in that sector.
TOP CONTRIBUTORS
Contributors to results that somewhat offset negative performance included HealthEquity and TransMedics Group. HealthEquity uses a technology-enabled platform that provides solutions for managing healthcare savings accounts (HSAs), health reimbursement arrangements (HRAs), flexible spending accounts (FSAs), COBRA, commuter benefits, and employer-sponsored programs. The company is experiencing strong growth in HSA accounts, and interchange fees are increasing as consumers begin to increase healthcare spending after a lull during COVID. The company continues to be a share gainer in HSAs and is a beneficiary of higher interest rates, as the company retains part of the yield generated from customer deposits into HSAs.
TransMedics Group is a commercial-stage medical technology company that developed the Organ Care System (“OCS”) to replace a decades-old standard of care (cold storage) used in organ transplantation. The OCS transforms organ preservation from a static state to a dynamic environment that enables new capabilities, including organ optimization and assessment, which increases the supply of viable organs for transplant. The company recently reported a strong quarter driven by a very good uptake for heart and liver indications.
TOP DETRACTORS
The two largest detractors from performance at the security level in the quarter were Calix and Vicor. Calix, a leading provider of broadband access communication systems and software to communication service providers (CSPs), was one of the Fund’s best performing stocks in 2021 but shares sold off in Q1, as the market punished last year’s winners early in the quarter. Despite the pullback, we believe the company is in the early stages of a multi-year cyclical upturn and therefore have added to the investment position on the share price weakness.
Within semiconductors, Vicor, which designs, develops, manufactures and markets modular power components and complete power systems, experienced weakness in the quarter due to supply chain issues and competitive concerns. We continue to hold a small position in the company and believe the stock may become more timely in the back half of the year once additional manufacturing capacity comes online.
Within IT services, two “adtech” investments, DoubleVerify and Digital Turbine, declined due to concerns about the ad cycle given the macroeconomic environment. There is also investor concern that there has been an oversupply of “adtech” companies coming to market after an active IPO and de-SPAC calendar in 2021. DoubleVerify and Digital Turbine are growing faster than peers, enjoy strong profitability, and have unique competitive positions and remain portfolio positions.
Energy, while not a large part of the small cap marketplace, also contributed to relative underperformance during the period. Energy significantly outperformed, producing a sector return of nearly +14% versus a decline of -13.37% for the full benchmark. The high cyclicality, poor cash flow characteristics, combined with a lack of favorable long-term trend drivers (all features we typically avoid through our investment approach) makes most Energy companies unattractive in our view, and therefore our underweight position was a drag on relative performance.
OUTLOOK
(As of 3/31/22) — Inflation is running at levels not seen in decades and is the Federal Reserve primary concern. Factors fueling inflation include a tight labor market, supply chain disruptions, Russian sanctions due to the war, and a strong demand backdrop. As the Federal Reserve (the “Fed”) continues to raise interest rates and begins quantitative tightening, inflation levels will hopefully move lower and economic growth could moderate. Furthermore, any easing in supply chain disruptions should contribute to lower inflation levels as well.
Small cap growth stocks are discounting higher interest rates and valuation levels in certain parts of the market are becoming more attractive. As the supply chain disruptions ease and labor productivity and participation rates continue to improve, a rotation back into attractively-priced, well-managed small cap growth stocks should occur.
The hawkish Fed policy and geo-political uncertainty has increased investor angst, which is creating attractive opportunities for long-term investors. While the Buffalo Small Cap Fund historically underperforms during market rotations away from growth towards value and during macro risk-off markets, as stock pickers, we find resolve in environments like these where growth has been mispriced, by our analysis. As always, we will continue to look for companies that are well-managed with scalable attractive business models that benefit from long-term trends. We are well positioned to take advantage of the movement back into small cap growth stocks and are looking forward to moving past some of these issued caused by the pandemic. We continue to appreciate your interest in the Fund.
Literature
| Buffalo Small Cap Fund Documents | Last Updated |
|---|---|
| Fact Sheet | 3/31/22 |
| Quarterly Commentary | 3/31/22 |
| Full Fund Holdings | 3/31/22 |
| Summary Prospectus | 7/29/21 |
| Prospectus | 7/29/21 |
| Statement of Additional Information | 7/29/21 |
| Annual Report | 3/31/22 |
| Semi-Annual Report | 9/30/21 |
| Tax Guide - 2021 | 1/3/22 |
Fundamental Approach
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.
Proprietary Philosophy
We construct our portfolios based on our own proprietary investment strategy.
Disciplined Investing
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.
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