Small Cap Fund
Finding Premier Growth Companies
Portfolio Managers Jamie Cuellar and Bob Male discuss the foundation for the Buffalo Small Cap Fund investment strategy — finding companies that are rapidly growing and can benefit from long term trends.
“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 575 Small Growth funds as of 8/31/21.
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 Morningstar U.S. Small Growth Index. As of June 30, 2021 the range of market capitalizations of the Morningstar U.S. Small Growth Index was $543 million to $20.4 billion.
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.
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
- 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
- FinancialPlanning.com Best Performing Small Cap Funds – December 1, 2020
- Kiplinger Top-Performing Mutual Fund (20 Years) – October 15, 2020
- Kiplinger Top-Performing Mutual Fund (1 Year; 20 Years) – September 15, 2020
Featured Articles & Reports
|As of 8/31/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||2.91||12.10||47.16||24.76||26.22||18.36||12.87||12.37||14.01|
|BUFFALO SMALL CAP FUND - Institutional||2.99||12.26||47.44||24.96||26.42||18.54||13.04||12.54||14.18|
|Morningstar U.S. Small Growth Index||5.97||4.34||31.30||14.00||17.83||15.33||11.38||9.82||7.67|
|Lipper Small Cap Growth Fund Index||5.94||12.82||37.68||16.63||19.83||15.81||11.29||9.69||8.76|
|Morningstar Small Growth Category||4.27||13.56||41.90||16.34||19.38||15.57||11.50||10.54||8.96|
|As of 6/30/21||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||8.45||15.27||66.42||29.96||28.99||17.16||13.08||12.44||14.26|
|BUFFALO SMALL CAP FUND - Institutional||8.51||15.37||66.62||30.16||29.19||17.33||13.25||12.61||14.43|
|Morningstar U.S. Small Growth Index||4.79||4.34||43.51||17.33||19.37||13.86||11.21||8.71||7.73|
|Lipper Small Cap Growth Fund Index||5.32||10.41||48.87||19.21||20.87||14.03||10.86||8.92||8.73|
|Morningstar Small Growth Category||4.88||12.40||55.69||19.34||20.72||13.98||11.21||9.98||8.99|
|BUFFALO SMALL CAP FUND - Investor||-4.66||19.93||44.15||-6.55||-4.46||6.22||27.07||-5.78||40.97||66.36|
|BUFFALO SMALL CAP FUND - Institutional||-4.52||20.11||44.36||-6.41||-4.32||6.37||27.26||-5.64||41.17||66.60|
|Morningstar U.S. Small Growth Index||-1.04||14.50||41.86||2.46||-0.18||9.61||23.77||-5.67||27.60||43.52|
3 Year Risk Metrics
|BUFSX vs Morningstar U.S. Small Growth Index (As of 6/30/21)|
Hypothetical Growth of $10,000
|(As of 6/30/21)|| |
|# of Holdings||82|
|Median Market Cap||$2.53 B|
|Weighted Average Market Cap||$3.46 B|
|3-Yr Annualized Turnover Ratio||62.16%|
|% of Holdings with Free Cash Flow||60.24%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Ligand Pharmaceuticals||LGND||Health Care||2.13%|
|Cambium Networks Corp||CMBM||Technology||2.09%|
|GenMark Diagnostics||GNMK||Health Care||2.05%|
|Advanced Drainage Systems||WMS||Industrials||1.62%|
|TOP 10 HOLDINGS TOTAL||18.55%|
CAPITAL MARKET OVERVIEW
(As of 6/30/21) — Equity markets moved higher for the fifth consecutive quarter, as the S&P 500 Index returned 8.55%, raising the year-to-date return to 15.25%. The COVID-19 vaccine rollout has helped fuel an economic comeback while corporate earnings are improving. The vaccine adoption around the world is encouraging, and over 50% of the U.S. population is now vaccinated. Capital markets continued to be supported by significant spending from Congress and aggressive monetary policy from the Federal Reserve (the Fed). The 2nd quarter was marked by outperformance of growth stocks, overcoming investor concerns of rising inflation and potential interest rate hikes in the prior quarter. Hawkish comments from the Fed replaced inflation worries with concerns about the magnitude and duration of the economic recovery. Long duration growth companies were beneficiaries as yields on the 10-Year and 30-Year Treasuries declined during the period after climbing for the previous four months.
The broad market Russell 3000 Index advanced 8.24% in the quarter. Growth stocks outperformed Value stocks, as the Russell 3000 Growth Index surged 11.38% compared to the Russell 3000 Value Index gain of 5.16%. Relative performance was correlated with market cap size in the quarter, as the large cap Russell 1000 Index returned 8.54%, the Russell Midcap Index advanced 7.50%, the small cap Russell 2000 Index returned 4.29%, and the Russell Microcap Index finished 4.14% higher.
All economic sectors produced positive returns during the period with the exception of Telecom Services. Real Estate, Information Technology, and Energy led the advance followed by Financials and Health Care. More defensive areas, such as Telecom Services, Utilities, and Consumer Staples, trailed on a relative basis.
(As of 6/30/21) — As interest rates moved lower in the quarter, a rotation back into growth stocks quickly followed. Small cap stocks continued to advance in the 2nd quarter but not at the pace of larger cap indices. The Morningstar U.S. Small Growth Index generated the largest total returns in Consumer Staples, Real Estate, Information Technology, and Financials with all sectors except for Utilities and Energy experiencing a positive return.
The Buffalo Small Cap Fund generated a return of 8.45% during the 2nd quarter, outperforming the Morningstar U.S. Small Growth Index, which increased 4.79%. Strong stock selection in Consumer Discretionary, Health Care, and Information Technology were the biggest contributors to outperformance relative to the index. The Fund outperformed the index in every sector except in Consumer Staples and Telecommunication Services which underperformed slightly. During the quarter, stock selection drove the outperformance, with a slight detraction due to allocation effect.
Everi Holdings develops game content and gaming machines and financial technology products (Fintech) for land-based and iGaming operators. The company reported strong 1st quarter revenue and EBITDA growth, exceeding consensus expectations. The company benefited from the continuation of healthy demand trends, as COVID restrictions have been lifted and people are returning to land-based casinos. Longer-term, we believe Everi will take market share in gaming equipment and benefit from the movement to cashless wagering with their mobile wallet solution.
Lovesac designs, manufactures, and sells high quality furniture. The company’s product offering includes modular couches called “Sactionals,” premium foam beanbag chairs called “Sacs,” and associated home decor accessories. Lovesac continued to benefit from a strong housing market and reported an impressive 1st quarter, with 53% year-over-year revenue growth and better-than-expected profitability. Longer-term, we believe the company will increase share as they introduce new differentiated products and expand their omnichannel strategy to build brand awareness and touch more consumers.
Array Technologies, the producer of solar tracker systems that optimize the efficiency of solar panels for utilities, was the largest detractor from performance this quarter. The company was unable to affirm its guidance for the full year 2021 due to cost increases in steel and freight, as well as an ongoing review of open contracts to assess what costs they can pass on to customers, which negatively impacted the stock price. Although clearly a negative, the company believes the cost increases are temporary and the outlook for solar is very favorable, with the demand for Array’s products remaining very strong. We remain positive on the shares and believe the company has a significant opportunity to further penetrate a fast-growing market.
(As of 6/30/21) — Looking forward into the 2nd half of 2021, we remain optimistic about small cap growth stocks but recognize the potential for volatility. As vaccination rates continue to improve, COVID restrictions have been lifted, and economic growth is beginning to accelerate, as pent-up demand is being realized. To complicate the improving economic picture, the country is experiencing a labor shortage, a highly infectious COVID delta variant, and supply chain issues, which could negatively-impact the growth narrative. Furthermore, higher input costs are increasing the threat of inflation, and there is an ongoing debate over its duration and economic impact leading to uncertainty over the timing of the removal of bond purchases and future interest rate increases. All of this has produced angst among investors, creating a rotation back into growth out of more cyclically-sensitive sectors. At this time, we are evaluating the impact of all of these factors on each company we hold in the portfolio.
Regarding the Fund positioning, we believe we have a good balance of growth and cyclical stocks with a tilt toward growth. We continue to manage the portfolio using valuation to both buy and sell stocks that we believe have the best risk/reward tradeoff. Furthermore, we will sell positions that have traded above a market cap that we believe no longer represents a small cap company. As always, we continue to invest in premier companies that could benefit from the long-term trends we have identified and establish positions only when the risk/reward is attractive. Thank you for your continued support as shareholders.
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. ©2021 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.
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.