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 573 Small Growth funds as of 10/31/19.
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, that, at the time of purchase, have 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.
Bob Male, Portfolio Manager
Featured Articles & Reports
THE WALL STREET JOURNAL
November 4, 2019
|As of 10/31/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||-1.30||29.49||13.35||17.98||9.81||11.78||8.71||11.56|
|BUFFALO SMALL CAP FUND - Institutional||-1.22||29.68||13.54||18.16||9.98||11.95||8.88||11.73|
|Morningstar U.S. Small Growth Index||-4.16||19.72||7.78||14.73||9.27||13.91||9.35||6.02|
|Lipper Small Cap Growth Fund Index||-4.09||21.84||9.78||15.86||9.87||13.34||8.83||6.99|
|Morningstar Small Growth Category||-3.52||18.97||6.66||14.24||8.87||13.12||9.01||7.20|
|As of 9/30/19||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||-3.79||24.76||-5.93||14.21||9.76||10.53||8.79||11.42|
|BUFFALO SMALL CAP FUND - Institutional||-3.72||24.95||-5.75||14.39||9.93||10.70||8.96||11.59|
|Morningstar U.S. Small Growth Index||-4.45||16.94||-8.13||11.47||9.88||12.85||9.42||5.93|
|Lipper Small Cap Growth Fund Index||-3.90||20.21||-4.38||13.30||10.69||12.56||8.93||6.95|
|Morningstar Small Growth Category||-4.17||16.80||-7.52||11.52||9.63||12.29||9.06||7.13|
3 Year Risk Metrics
|BUFSX vs Morningstar U.S. Small Growth Index (As of 9/30/19)|
Hypothetical Growth of $10,000
|(As of 9/30/19)|| |
|# of Holdings||74|
|Median Market Cap||$2.17 B|
|Weighted Average Market Cap||$2.79 B|
|3-Yr Annualized Turnover Ratio||48.55%|
|% of Holdings with Free Cash Flow||60.27%|
|% of Holdings with No Net Debt||49.32%|
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
(As of 9/30/19) — The U.S. stock market continued to advance in the 3rd quarter, as expectations for accommodative monetary policy appeared to outweigh concerns of slowing economic growth. The S&P 500 Index returned 1.70% in the period, bringing the year-to-date return to 20.55% through quarter-end. Weak economic data led the Federal Reserve to cut interest rates twice in the quarter, driving rates lower and bond prices higher. U.S. markets outperformed international markets on the strength of the U.S. dollar.
The Russell 3000 Index gained 1.16% in the quarter. Value narrowly outperformed growth, with the Russell 3000 Value Index up 1.23% and the Russell 3000 Growth Index advancing 1.10%. Large caps generally outperformed small caps in the quarter. The Russell 1000 Index returned 1.42%, the Russell Midcap Index returned 0.48%, and the Russell 2000 Index posted a loss of 2.40%. Defensive sectors led the way in the period, with Utilities up 9.34%, Real Estate up 7.69%, and Consumer Staples up 6.12%. Energy was the worst performing sector with a total return of -6.61%. Health Care was also weak, returning -2.25% on increasing political concerns.
(As of 9/30/19) — The Buffalo Small Cap Fund declined by 3.79% during the quarter, a result that outperformed the Morningstar U.S. Small Cap Growth Index, which declined 4.45%. Stock selection in Financials and Industrials were key drivers of outperformance relative to the Index. These strong sources of return were offset, in part, by poor stock selection in Consumer Staples and a portfolio overweight position in Health Care.
CyrusOne was the Fund’s top contributor, with the stock increasing 37% during the period. The company is a leading data center operator and has generated strong and consistent operating performance in a favorable demand environment. The stock spiked during the quarter on reports it could be a buyout target at a high premium relative to its then-current share price.
MasTec was another strong contributor to results as the company’s stock increased by 26% for the quarter. Mastec continues to post solid results in its pipeline construction division. Its telecom division, which installs fiber for telecom and cable companies, looks to accelerate growth in 2020 in anticipation of 5G wireless networks that require additional fiber for small cell sites. Furthermore, its power generation and electric transmission businesses seem poised for improved results in coming years, setting up the company for stronger growth than many other players in the engineering and construction space.
Palomar was also among the top contributors in the quarter, increasing 64%. The company is a property and casualty insurer, which completed an initial public offering in April 2019. It has produced solid results with best-in-class underwriting margins, strong premium growth, and improved investment income, and we are optimistic about its long-term growth prospects.
CareDx was the worst-performing position during in the quarter. The company is a player in diagnostic solutions for organ transplant patients, and its AlloSure product is a leader in transplant centers with strong growth prospects. The stock has been weak due to investor fears over the potential threat from a competing product.
(As of 9/30/19) — Looking forward into the 4th quarter of 2019 and beyond, we remain cautiously optimistic about the long-term outlook for small cap stocks but believe they could be poised for continued volatility. Factors we believe will drive this volatility include the ongoing unresolved trade dispute with China. While there is no obvious end in sight for the trade war, we believe President Trump has a strong incentive to reach an agreement in order to prevent a sinking of the U.S. economy and a decline in the stock market going into the 2020 election year. We continue to see mixed signals about the health of the U.S. economy as the job market has remained relatively strong, but some data has pointed to slowing economic growth. The Federal Reserve cut rates twice in the 3rd quarter, but the timing and direction of more easing is unclear. We expect political concerns to drive market volatility as the Democrat-led House of Representatives explores an impeachment process against President Trump. While small cap names have lagged large cap names year-to-date (the Morningstar U.S. Large Growth Index has advanced nearly 21% year to date versus the Morningstar U.S. Small Growth Index advance of 17%), we believe small cap valuations remain favorable compared to large cap, which could lead to outperformance for small caps in coming quarters, if these valuations converge.
Within this context, we have been managing the Fund actively, seeking to deploy capital into investments we believe have the most favorable risk/reward trade-offs. The portfolio finished the quarter with 73 investment positions (excluding cash), down from 77 at the beginning of the period. We continue to identify investment opportunities in small companies with strong secular growth opportunities with the potential to benefit from long-term growth trends and trade at attractive valuations. As always, we appreciate your continued support and confidence in our investment capabilities over the long haul.
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.
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.