Small Cap Fund
Finding Premier Growth Companies
Portfolio Managers Jamie Cuellar and Bob Male discuss how their approach to finding companies, that are rapidly growing and benefit from long term trends, is the foundation for the Buffalo Small Cap Fund investment strategy.
“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
Overall Morningstar Rating™ based on risk-adjusted returns among 591 Small Growth funds as of 10/31/18.
Fund Objective & Investment Strategy
The investment objective of the Buffalo Small Cap Fund is long-term growth of capital. The Fund normally invests at least 80% of its net assets in equity securities, consisting of domestic common stocks and preferred stocks, of small capitalization (“small-cap”) companies — companies, at the time of purchase, with market capitalizations within the range of the Morningstar U.S. Small Growth Index.
The Fund managers seek to identify companies for the Small 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 attractive valuation, strong management, conservative debt, free cash flow, scalable business models, and competitive advantages.
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, Portfolio Manager
Featured Articles & Reports
|As of 10/31/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO SMALL CAP FUND||-6.52||7.64||8.37||13.30||6.14||13.12||9.20||11.48|
|Morningstar U.S. Small Growth Index||-6.96||4.78||6.85||12.03||8.85||14.39||9.16||5.94|
|Russell 2000 Growth Index||-9.39||1.11||4.13||10.72||8.75||13.89||9.01||5.99|
|Lipper Small Cap Growth Fund Index||-6.30||6.63||10.60||12.50||8.94||13.94||8.29||6.84|
|Morningstar Small Growth Category||-6.47||5.20||8.31||11.98||8.58||13.81||8.97||7.23|
|As of 9/30/18||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO SMALL CAP FUND||7.70||24.97||29.72||20.85||10.04||12.52||10.90||12.34|
|Morningstar U.S. Small Growth Index||7.61||20.07||26.30||19.32||12.34||13.15||10.82||6.67|
|Russell 2000 Growth Index||5.52||15.76||21.06||17.98||12.14||12.65||10.61||6.71|
|Lipper Small Cap Growth Fund Index||7.49||20.79||28.23||19.06||12.12||12.64||9.83||7.52|
|Morningstar Small Growth Category||7.00||18.94||24.44||18.39||11.75||12.57||10.49||7.90|
Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the fund may be lower of higher than the performance quoted and can be obtained here. Performance is annualized for periods greater than 1 year. Each Morningstar category average represents a universe of funds with similar objectives.
As of July 27, 2018 the Morningstar U.S. Small Growth Index has replaced the Russell 2000 Growth Index as the Fund’s primary benchmark. The Advisor believes that the new index is more appropriate given the Fund’s holdings.
3 Year Risk Metrics
|vs Morningstar U.S. Small Growth Index (As of 9/30/18)|
Hypothetical Growth of $10,000
This chart illustrates the performance of a hypothetical $10,000 investment made in the Fund on the Inception Date. Assumes reinvestment of dividends and capital gains. This chart does not imply future performance.
|(As of 9/30/18)|| |
|# of Holdings||78|
|Median Market Cap||$2.66 B|
|Weighted Average Market Cap||$3.40 B|
|3-Yr Annualized Turnover Ratio||43.12%|
|% of Holdings with Free Cash Flow||63.64%|
|% of Holdings with No Net Debt||46.75%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|TOP 10 HOLDINGS TOTAL||20.80%|
As of 9/30/18. Security weightings are subject to change and are not recommendations to buy or sell any securities. Sector Allocation may not equal 100% due to rounding.
As of 9/30/18. Market Cap percentages may not equal 100% due to rounding.
CAPITAL MARKET OVERVIEW
(As of 9/30/18) — U.S. economic strength and solid corporate earnings growth drove healthy equity returns in the 3rd quarter. The widely-followed S&P 500 Index had a total return of 7.71%, its best quarterly gain since 2013. In September, initial jobless claims fell to the lowest level since 1969, wages grew at the fastest rate since 2009, consumer confidence reached the highest level since 2000, and the National Federation of Independent Business (NFIB) survey of small business optimism was at an all-time high (the survey dates back to 1974). Against this strong economic backdrop, the Federal Reserve raised the targeted federal funds rate by another 25 basis points to a range of 2.00% to 2.25%. Slowly rising interest rates led to flat bond returns.
The divergence between domestic and international equity market performance continued during the quarter, with the MSCI EAFE Index advancing just 1.35%. The Russell 3000 Index gained 7.12% in the 3rd quarter. By style, growth continued to outperform value, with the Russell 3000 Growth Index increasing 8.88% compared to the Russell 3000 Value Index’s advance of 5.39%. Large caps did better than small caps as the Russell 1000 Index returned 7.42%, the Russell Midcap Index returned 5.00%, and the Russell 2000 Index returned 3.58% in the quarter. Every economic sector was positive this quarter, with Health Care and Industrials the top performers, while Materials and Energy lagged the indexes.
(As of 9/30/18) — Small capitalization stocks continued to be viewed as beneficiaries of increased trade war concerns in the 3rd quarter, boosting the Fund’s benchmark, the Morningstar U.S. Small Growth Index, by 7.61%. The Fund performed relatively well this quarter gaining 7.70%, slightly outperforming the benchmark. The Fund changed its primary performance benchmark to the Morningstar U.S. Small Growth Index from the Russell 2000 Growth Index, which gained 5.52% in the 3rd quarter.
Small cap growth stocks outperformed value stocks by almost 300 basis points during the quarter as the technology, healthcare, and consumer sectors were all solid performers during the quarter. On a relative basis, the Fund outperformed in Technology and Health Care but underperformed in Consumer Discretionary and
Twilio was the best performing stock in the portfolio during the quarter. The company beat 2nd quarter revenue estimates by 13% and raised revenue guidance for the year, as its market leading customer engagement platform continues to see increasing usage from its customer base. The company now enters a period of easier comparisons as last year’s growth decelerated due to a reduction in spend by a large customer. The company should benefit going forward from two new product cycles: the general availability of a new contact center product called Flex and an Internet of Things product called Twilio Wireless.
The Fund also benefited from gains in HMS Holdings, a healthcare company that focuses on the long-term trend of reducing the costs of healthcare. After struggling a bit in 2017, HMS has seen accelerating growth this year as its customers have become more aggressive in finding errors in billings, and as HMS has done a better job selling care management and customer engagement solutions obtained from acquisitions over the past two years. The company is also a big beneficiary of key trends in technology such as artificial intelligence, machine learning, and robotic process automation, which should improve their operating leverage going forward.
Nevro was the largest detractor from performance as the company’s stock languished this quarter. The company suffered from poor sales hiring trends impacting future growth and from intellectual property concerns with a key competitor. While the stock may continue to be depressed until better execution emerges, we believe the market is not adequately valuing the solid competitive position the company has in the spinal cord stimulation market.
(As of 9/30/18) — While the outlook for smaller capitalization companies remains constructive, the asset class has clearly been a recipient of additional fund flows, as some investors have allocated assets into small cap believing that these stocks are more immune to trade issues than larger cap companies. These additional flows may prove to be short term in nature, which could lead to enhanced volatility over the coming few quarters, if investors reallocate away from small caps. These inflows have pushed some parts of the small cap growth market, such as high growth software, to relatively expensive levels in our view. We have sold many stocks in this area including Zendesk, Hubspot, MongoDB, and Okta over the past couple of quarters believing that the high multiples did not leave much room for error and have attempted to replace these investment positions with stocks that have more reasonable valuations by our analysis. The small cap growth market has seen some pressure in the early part of the 4th quarter, as it appears some of this capital has already retreated from small caps.
We continue to be diligent in our process of finding companies with the potential to benefit from long-term trends while still trading at reasonable valuations. As always, we appreciate your confidence in our investment process over the long haul.
The opinions expressed are those of the Portfolio Manager(s) and are subject to change, are not guaranteed and should not be considered recommendations to buy or sell any security. Earnings growth is not representative of the fund’s future performance.
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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.
The Buffalo Small Cap Fund received 3 stars among 591 for the three-year, 2 stars among 516 for the five-year, and 2 stars among 392 Small Growth funds for the ten-year period ending 10/31/18.
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. ©2018 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.
Diversification does not assure a profit, nor does it protect against a loss in a declining market.
Active investing has higher management fees because of the manager’s increased level of involvement while passive investing has lower management and operating fees. Investing in both actively and passively managed mutual funds involves risk and principal loss is possible. Both actively and passively managed mutual funds generally have daily liquidity. There are no guarantees regarding the performance of actively and passively managed mutual funds. Actively managed mutual funds may have higher portfolio turnover than passively managed funds. Excessive turnover can limit returns and can incur capital gains.