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™ of BUFSX based on risk-adjusted returns among 584 Small Growth funds as of 8/31/19.
Fund Objective & Investment Strategy
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.
Bob Male, Portfolio Manager
Featured Articles & Reports
|As of 8/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||6.89||27.60||-5.75||15.85||9.56||11.24||9.39||11.58|
|BUFFALO SMALL CAP FUND - Institutional||6.90||27.69||-5.63||16.01||9.71||11.40||9.55||11.75|
|Morningstar U.S. Small Growth Index||5.70||20.74||-6.38||12.81||9.45||13.82||10.08||6.11|
|Russell 2000 Growth Index||4.06||16.30||-11.02||10.62||8.06||13.06||9.50||5.96|
|Lipper Small Cap Growth Fund Index||4.31||21.99||-4.41||14.18||10.09||13.50||9.44||7.05|
|Morningstar Small Growth Category||3.98||18.37||-7.91||12.43||8.93||13.18||9.52||7.23|
|As of 6/30/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||6.44||29.68||5.30||19.66||9.00||12.53||8.85||11.77|
|BUFFALO SMALL CAP FUND - Institutional||6.48||29.77||5.46||19.84||9.17||12.70||9.01||11.93|
|Morningstar U.S. Small Growth Index||2.47||22.38||3.47||15.78||9.50||14.84||9.09||6.23|
|Russell 2000 Growth Index||2.75||20.36||-0.49||14.69||8.63||14.41||8.90||6.18|
|Lipper Small Cap Growth Fund Index||5.18||25.09||6.95||17.66||10.33||14.69||8.71||7.24|
|Morningstar Small Growth Category||4.12||21.82||3.22||16.12||9.18||14.47||8.97||7.44|
3 Year Risk Metrics
|BUFSX vs Morningstar U.S. Small Growth Index (As of 6/30/19)|
Hypothetical Growth of $10,000
|(As of 6/30/19)|| |
|# of Holdings||78|
|Median Market Cap||$2.26 B|
|Weighted Average Market Cap||$2.99 B|
|3-Yr Annualized Turnover Ratio||47.61%|
|% of Holdings with Free Cash Flow||63.64%|
|% of Holdings with No Net Debt||50.65%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Bio Techne||TECH||Health Care||2.17%|
|Air Transport Services||ATSG||Industrials||2.11%|
|TOP 10 HOLDINGS TOTAL||23.00%|
CAPITAL MARKET OVERVIEW
Central banks and trade policies continued to drive financial markets during the period. The threat of increasing tariffs against China and Mexico contributed to the sell-off early in the quarter, and the June rally was largely a result of dovish central bank commentary, leading investors to anticipate rate cuts in the coming months.
The Russell 3000 Index returned 4.10% in the quarter. By style, growth outpaced value, with the Russell 3000 Growth Index up 4.50% and the Russell 3000 Value Index up 3.68%. Large caps generally outperformed small caps in the quarter. The Russell 1000 Index returned 4.25%, just ahead of the Russell Mid Cap Index return of 4.13%. The Russell 2000 returned 2.10% during the quarter. Financials were the best performing sector, followed by Materials and Information Technology. Energy was the only sector to post a negative return, driven by a decline in oil prices. Health Care and Real Estate also underperformed relative to the broad market.
The Buffalo Small Cap Fund (the “Fund”) gained 6.44% during the quarter, significantly outperforming the Morningstar U.S. Small Growth Index (the “Index”), which gained 2.47%. Health Care and Technology were the Fund’s top-performing sectors relative to the Index, providing almost 4% of outperformance. Stock selection within Telecom and the portfolio’s underweight position to Energy also contributed significantly to the outperformance. Poor stock selection in Consumer Discretionary and Consumer Staples were the largest sources of underperformance relative to the Index during the quarter.
Pros Holdings was the Fund’s top contributor, with the stock increasing 50% during the quarter. The company is a leading provider of AI-powered software that helps customers optimize revenue. It has rapidly grown its subscription revenue and has significant room for more growth among its customers in the air travel, eCommerce, and B2B sectors.
Repligen was the second best-performing position for the Fund during the quarter, with the stock increasing 46%. The company is a pure-play bioprocessor with products that serve the makers of biologic drugs. During the quarter, Repligen announced acceleration in the organic growth of its core business, as well as a large and accretive acquisition in the process analytics space, which helped to drive the share price higher.
Kornit Digital was also a top contributor during the quarter, with the stock gaining 33%. The company is a leader in digital ink printers used by companies in the textile industry. The company has reported improved customer adoption as the transition from analog to digital printing in textiles is in its infancy, as well as traction with newer systems, which increase throughput and are made for other materials like polyester.
At Home Group, a retailer of home furnishings, was the worst performing investment during the quarter. In June, during the company’s earnings report, management cited headwinds to its business including tariff impacts, markdowns on seasonal products, and a slowing sales outlook, all of which led to investor pessimism and a large decline in the stock.
We note that small caps have lagged large caps by around 7% for the 12 month period ending June 30, 2019, with the Morningstar U.S. Large Growth Index advancing 11.43% versus the Morningstar U.S. Small Growth Index’s advance of 3.47%. This dispersion in performance has helped create an environment in which the valuations of small cap stocks are now more attractive than large cap stocks and could help to drive relative outperformance of smaller cap stocks in coming quarters.
Within this context, we have been managing the Fund actively, seeking to deploy capital into ideas which we believe have the most favorable risk/reward trade-offs. The portfolio ended the period with 77 positions (excluding cash), up from 72 at the end of the 1st quarter. We will continue with our strategy of identifying investment candidates among small cap companies with strong secular growth opportunities that can benefit from long term trends and trade at attractive valuations. As always, we appreciate your continued confidence in our investment capabilities over the long term.
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. ©2019 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.
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