Small Cap Fund
|As of 9/29/2022|
|Total Net Assets:||$774.29 Million (6/30/22)|
|Morningstar Category:||Small Cap Growth|
|Benchmark Index:||Russell 2000 Growth|
Fund Fact Sheet Q2 2022
PM Commentary Q2 2022
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
“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
Listen to the Portfolio Managers discuss their Investment Philosophy
Overall Morningstar Rating™ of BUFSX based on risk-adjusted returns among 583 Small Growth funds as of 8/31/22.
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 Russell 2000 Growth Index.
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.
- Kiplinger Top-Performing Mutual Fund (3 Years) – January 24, 2022
- Kiplinger Top-Performing Mutual Fund (3 Years, 20 Years) – November 18, 2021
- Kiplinger Top-Performing Mutual Fund (20 Years) – October 20, 2021
- Kiplinger Top-Performing Mutual Fund (20 Years) – September 21, 2021
- 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
Featured Articles & Reports
|As of 8/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||5.88||-22.84||-27.84||14.13||14.10||12.48||9.08||11.45||11.89|
|BUFFALO SMALL CAP FUND - Institutional||5.92||-22.75||-27.76||14.31||14.27||12.65||9.24||11.62||12.06|
|Russell 2000 Growth Index||3.33||-22.29||-25.26||5.93||6.69||10.16||7.70||9.78||5.95|
|Morningstar U.S. Small Growth Index||-0.15||-28.06||-31.74||2.60||6.14||9.52||7.44||-||-|
|Lipper Small Cap Growth Fund Index||-0.72||-23.46||-24.55||7.79||10.24||11.25||7.97||9.68||7.14|
|Morningstar Small Growth Category||-0.31||-24.57||-25.92||7.80||9.31||10.85||8.16||10.14||7.24|
|As of 6/30/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||-19.18||-31.94||-38.09||8.87||11.44||11.16||8.02||9.83||11.40|
|BUFFALO SMALL CAP FUND - Institutional||-19.15||-31.86||-38.00||9.04||11.61||11.33||8.18||9.99||11.57|
|Russell 2000 Growth Index||-19.25||-29.45||-33.43||1.40||4.80||9.30||6.80||8.34||5.57|
|Morningstar U.S. Small Growth Index||-22.41||-32.79||-36.23||-0.14||4.97||9.05||6.84||-||-|
|Lipper Small Cap Growth Fund Index||-18.71||-28.43||-27.91||4.53||9.06||10.76||7.32||8.47||6.90|
|Morningstar Small Growth Category||-19.80||-29.98||-30.57||4.24||7.79||10.26||7.44||8.92||6.96|
|BUFFALO SMALL CAP FUND - Investor||19.93||44.15||-6.55||-4.46||6.22||27.07||-5.78||40.97||66.36||4.85|
|BUFFALO SMALL CAP FUND - Institutional||20.11||44.36||-6.41||-4.32||6.37||27.26||-5.64||41.17||66.60||4.97|
|Russell 2000 Growth Index||14.59||43.30||5.60||-1.38||11.32||22.17||-9.31||28.48||34.63||2.83|
|Morningstar U.S. Small Growth Index||14.50||41.86||2.46||-0.18||9.61||23.77||-5.67||27.60||43.52||-1.00|
3 Year Risk Metrics
|BUFSX vs Russell 2000 Growth Index (As of 6/30/22)|
Hypothetical Growth of $10,000
|(As of 6/30/22)||
|# of Holdings||79|
|Median Market Cap||$2.03 B|
|Weighted Average Market Cap||$2.62 B|
|3-Yr Annualized Turnover Ratio||63.33%|
|% of Holdings with Free Cash Flow||76.32%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net
|Air Transport Services Group||ATSG||Industrials||2.31%|
|Halozyme Therapeutics||HALO||Health Care||2.23%|
|Everi Holdings||EVRI||Consumer Discretionary||2.18%|
|Privia Health Group||PRVA||Health Care||2.18%|
|TOP 10 HOLDINGS TOTAL||19.73%|
CAPITAL MARKET OVERVIEW
(As of 6/30/22) — The stock market extended year-to-date losses during the 2nd quarter. Inflation, rising interest rates, and economic uncertainty continued to be major headwinds for investors as recession talks gained traction. The S&P 500 Index fell -16.10% during the quarter, bringing the total return for the first half of the year to -19.96%. News headlines, which included energy shortages, the war in Ukraine, China’s COVID lockdowns, and the potential for softer corporate earnings next quarter, added to the pessimistic market sentiment. However, the Federal Reserve’s hawkish stance on inflation, expectations for additional interest rate increases, and a reduction in the size of its balance sheet, continued to signal confidence in the U.S. economy moving forward.
The broad-based Russell 3000 Index declined -16.70% in the quarter. Value stocks fell less than growth stocks as the Russell 3000 Value Index returned -12.41%, versus a return of -20.83% for the Russell 3000 Growth Index. Relative performance slightly favored market cap size as large caps outperformed small caps in the quarter. Larger cap stocks, as measured by the Russell 1000 Index, returned -16.67% compared to the smaller cap Russell 2000 Index return of -17.20% and the Russell Microcap Index return of -18.96%. There were no advancing economic sectors for the quarter, but Consumer Staples, Energy, Utilities, and Healthcare held up better on a relative basis. Consumer Discretionary, Information Technology and Communication Services areas lagged.
(As of 6/30/22) — The Buffalo Small Cap Fund (BUFSX) produced a return of -19.18% in the quarter, a result that was in-line with the Russell 2000 Growth Index return of -19.25%. The Fund produced solid relative performance in Healthcare, Industrials, and Financials, while Technology, Consumer Discretionary, and Materials underperformed.
The largest contributor to Fund performance for the quarter was Transmedics, a healthcare equipment company with burgeoning product cycles around its Organ Containment System (“OCS”). OCS is used to transport hearts, livers, and lungs for organ transplants, and its National OCS Program (“NOP”), which provides organ explant and logistics services using its OCS product. The company is seeing excellent uptake of its product and services and remains in the early stages of its growth potential, by our analysis.
Privia Health was also a contributor to performance results. Privia, a healthcare services provider that partners with practitioners and helps them move to a value-based care model from fee for service, continued to differentiate itself from its peers due to its capital-light model and higher cash flow margins. The move to value-based care is still in its infancy, and we believe Privia will be a solid player in this growing industry.
Technology weakness was largely due to the underperformance of TaskUs, a Business Process Outsource (BPO) company that provides outsourced services, largely for other technology companies. The company reported better than expected results for the March quarter but failed to raise full year estimates due to an offshore transition from its largest customer, which lowers revenues in the near term. We believe the TaskUs offering can help companies looking to lower their costs by moving these functions offshore and should eventually garner more attention due to the weaker macroeconomic environment. As a result of the share price pullback, we believe the stock is undervalued and remains in the portfolio.
(As of 6/30/22) — With the worst first half performance for small cap stocks since 1973 now in the books, we believe that investors are close to pricing in a recessionary scenario for small companies that may or may not happen over the next 12 months. Historically, small caps underperform large caps going into a recession and outperform coming out of one. If small cap stocks have indeed nearly priced in a recession, as the historical data suggests, we could be entering a period where allocators might want to warm up to the asset class.
According to data from Jefferies (the investment banking and financial services firm), the small cap market as a percent of the total market is now less than 4% — a level unseen since the 1930s and a sharp contrast from the peak of nearly 14% in 1984/1985. When relative performance between small caps and large caps has been this low, it is typically followed by a five-year period where the small cap asset class outperforms. Additionally, according to BofA Securities, the Russell 2000 Index’s price-to-earnings ratio (P/E) is at 11.6x, the lowest since the market bottom of the global financial crisis in February/March of 2009.
There has also been a severe correction in high valuation areas such as medical technology and software. As a result, our investment opportunity universe has increased as many of those companies are now trading at more reasonable price levels. We believe near-term market volatility will remain high, especially entering the second quarter reporting period, where estimates for many companies will need to come down. For patient capital, willing and able to ride out near-term volatility, the market could be setting up a nice entry point into the small cap asset class.
At the portfolio level, we continue to focus on companies that benefit from long-term trends with a focus on higher quality characteristics, as measured by return on equity and balance sheet strength, that can withstand a period where access to capital may be constrained. We continue to look for companies with unique product cycles, pricing power, and those that can take market share, which should produce additional opportunities for growth.
As always, thank you for your continued trust and conviction in our capabilities over the long haul. We look forward to proving updates on better times.
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.
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