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 587 Small Growth funds as of 4/30/19.
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 4/30/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO SMALL CAP FUND||13.66||29.02||16.86||20.28||10.17||13.20||9.10||11.84|
|Morningstar U.S. Small Growth Index||9.04||22.90||12.57||17.23||11.06||15.76||9.52||6.30|
|Russell 2000 Growth Index||8.22||20.71||6.91||15.64||10.22||15.24||9.31||6.24|
|Lipper Small Cap Growth Fund Index||10.98||23.98||14.14||18.23||11.55||15.32||9.00||7.25|
|Morningstar Small Growth Category||8.94||21.39||11.32||16.82||10.34||15.15||9.26||7.48|
|As of 3/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO SMALL CAP FUND||21.83||21.83||12.19||18.01||7.47||13.95||8.38||11.58|
|Morningstar U.S. Small Growth Index||19.43||19.43||8.94||16.74||9.58||16.99||8.99||6.18|
|Russell 2000 Growth Index||17.14||17.14||3.85||14.87||8.41||16.52||8.71||6.11|
|Lipper Small Cap Growth Fund Index||18.93||18.93||9.71||17.09||9.33||16.27||8.34||7.07|
|Morningstar Small Growth Category||17.01||17.01||7.70||15.88||8.45||16.24||8.73||7.32|
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 3/31/19)|
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 3/31/19)|| |
|# of Holdings||72|
|Median Market Cap||$2.32 B|
|Weighted Average Market Cap||$2.94 B|
|3-Yr Annualized Turnover Ratio||50.23%|
|% of Holdings with Free Cash Flow||65.28%|
|% of Holdings with No Net Debt||55.56%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Monolithic Power Systems||MPWR||Technology||2.10%|
|Bio Techne||TECH||Health Care||2.09%|
|Ligand Pharmaceuticals||LGND||Health Care||2.02%|
|Air Transport Services Group||ATSG||Industrials||1.97%|
|TOP 10 HOLDINGS TOTAL||21.17%|
As of 3/31/19. 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 3/31/19. Market Cap percentages may not equal 100% due to rounding.
CAPITAL MARKET OVERVIEW
(As of 3/31/19) — Equity markets rebounded sharply to start 2019. The widely followed S&P 500 Index returned 13.65% in the 1st quarter, its best quarterly performance in 10 years. The market advance can be largely attributed to the Federal Reserve’s decision to put quarterly short term interest rate hikes on hold and end its balance sheet runoff. Additionally, prospects for a trade agreement between the U.S. and China appeared to improve, and the U.S. Government reopened after its longest shut down in history.
The Russell 3000 Index advanced 14.04% in the 1st quarter. Growth outperformed value, with the Russell 3000 Growth Index returning 16.18% compared to a return of 11.93% for the Russell 3000 Value. By size, midcaps led the way this quarter with the Russell Midcap Index returning 16.54%, followed by a return of 14.58% for the small cap Russell 2000 Index and 14.00% for the large cap Russell 1000 Index. Technology, Real Estate, and Industrials were the best performing sectors, while Health Care and Financials were relative underperformers.
Small cap stocks rebounded from the deep selloff in the 4th quarter of 2018 as recession fears lessened over the past three months and investors scooped up oversold stocks. Energy, Technology, and Real Estate led the move higher as oil prices rose and 4th quarter earnings and 2019 outlooks for most technology companies were better than expected. All sectors of the small cap index rose during the period, though Financials and Industrials were notable laggards as were the more defensive sectors like Consumer Staples, Telecom Services, and Utilities.
(As of 3/31/19) — The Buffalo Small Cap Fund (the “Fund”) gained 21.83% during the quarter, comparing favorably to the Morningstar U.S. Small Cap Growth Index’s (the “Index”) gain of 19.43%. Technology and Telecom led returns, providing about 345 basis points of relative outperformance while Health Care and Consumer Staples were also meaningful contributors. Real Estate was the largest detractor from performance, as the Fund’s investments in the sector failed to keep pace with the Index’s almost 24% gain for the sector. Overall, stock selection drove the Fund’s outperformance for the period, while the sector allocation impact was a detractor from relative performance.
Paylocity was the largest contributor to performance, as the stock enjoyed a 50% gain in the quarter. The company has proven to be an extremely consistent provider of outsourced payroll and human capital software to small and medium-sized businesses, growing revenues between 23% and 28% for the past 9 quarters. The stock also got a boost during the quarter as a mid-market competitor, Ultimate Software, received an offer to be taken private.
The next largest positive contributor was Bandwidth, Inc. The company provides telecom services and software to enterprises, many of whom are involved in high growth areas such as voice assistants and unified communications as a service (UCaaS). After coming public with a fairly small market cap in late 2017, Bandwidth continued to attract more attention from Wall Street as it grows in size and is reminiscent of the success of peer companies, such as Twilio.
Inogen was the largest detractor from performance during the period. However, as a newer investment in the Fund, its smaller weighting limited the negative impact. We initiated a position last quarter after the stock corrected to a more attractive valuation, by our analysis. On their 4th quarter earnings call, Inogen admitted to seeing some weakness from a home medical equipment customer, which further reduced investor sentiment for the company’s shares. We continue to own this stock as we believe the company is an industry leader in portable oxygen concentrators, and increased investments made last year in their direct-to-consumer sales force will accelerate growth and improve investor enthusiasm for the stock.
(As of 3/31/19) — To date, we are pleased with the start of the year. While large gains in a short period of time can cause investor angst, we note that small caps would still require another 12% increase to reclaim the previous high watermark made in early September 2018. Meanwhile, market fundamentals remain mostly positive. U.S. investors appear to have resigned themselves to slower economic growth expectations. However, we feel that the economy could accelerate if the Trump administration concludes the trade war with China, which seems likely to happen this summer. In Europe certain regions are showing signs of slowing, however most U.S. companies are not yet claiming that the continent has taken a leg down in economic activity. This is clearly an area to watch.
In the U.S., the Federal Reserve has moved to a more neutral position regarding monetary policy and is doing a much better job communicating its intentions relative to last year. Growth investing remains in favor compared to value investing, as slower economic activity means investors should continue to place a premium on faster growing companies that require less of an economic tailwind to excel. Furthermore, the market has historically performed well in the 3rd year of a presidential cycle.
As always, we remain steadfast to our process of identifying investment opportunities in smaller, faster-growing companies with the potential to benefit from long term trends, which are trading at attractive valuations, by our analysis. We appreciate your continued support and confidence in our investment capabilities over the long term.
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 4 stars among 587 for the three-year, 3 stars among 524 for the five-year, and 1 stars among 393 Small Growth funds for the ten-year period ending 4/30/19.
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.