Small Cap Fund
|As of 2/7/2023|
|Total Net Assets:||$803.58 Million (12/31/22)|
|Morningstar Category:||Small Cap Growth|
|Benchmark Index:||Russell 2000 Growth|
Fund Fact Sheet Q4 2022
PM Commentary Q4 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 576 Small Growth funds as of 12/31/22.
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 1/31/23||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||0.89||10.01||-8.28||9.93||11.61||11.42||10.25||11.96||11.67|
|BUFFALO SMALL CAP FUND - Institutional||0.95||10.02||-8.12||10.10||11.78||11.58||10.42||12.12||11.84|
|Russell 2000 Growth Index||4.56||9.95||-6.50||4.26||4.68||9.54||8.64||10.17||6.02|
|Morningstar U.S. Small Growth Index||6.19||10.67||-13.81||1.64||3.95||8.90||8.28||-||-|
|Lipper Small Cap Growth Fund Index||7.41||10.36||-8.37||7.42||8.22||10.88||9.06||10.19||7.27|
|Morningstar Small Growth Category||5.55||9.52||-9.35||7.22||7.69||10.55||9.15||10.68||7.31|
|As of 12/31/22||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||-0.67||-30.01||-30.01||6.88||10.15||10.91||8.96||11.14||11.28|
|BUFFALO SMALL CAP FUND - Institutional||-0.66||-29.88||-29.88||7.04||10.31||11.08||9.12||11.31||11.45|
|Russell 2000 Growth Index||4.13||-26.36||-26.36||0.65||3.51||9.20||7.26||9.50||5.64|
|Morningstar U.S. Small Growth Index||1.75||-33.31||-33.31||-1.78||2.66||8.42||6.76||-||-|
|Lipper Small Cap Growth Fund Index||5.21||-26.54||-26.54||3.92||7.09||10.45||7.59||9.50||6.87|
|Morningstar Small Growth Category||4.18||-27.77||-27.77||4.05||6.60||10.20||7.81||10.02||6.94|
|BUFFALO SMALL CAP FUND - Investor||44.15||-6.55||-4.46||6.22||27.07||-5.78||40.97||66.36||4.85||-30.01|
|BUFFALO SMALL CAP FUND - Institutional||44.36||-6.41||-4.32||6.37||27.26||-5.64||41.17||66.60||4.97||-29.88|
|Russell 2000 Growth Index||43.30||5.60||-1.38||11.32||22.17||-9.31||28.48||34.63||2.83||-26.36|
|Morningstar U.S. Small Growth Index||41.86||2.46||-0.18||9.61||23.77||-5.67||27.60||43.52||-1.00||-33.31|
3 Year Risk Metrics
|BUFSX vs Russell 2000 Growth Index (As of 12/31/22)|
Hypothetical Growth of $10,000
|(As of 12/31/22)||
|# of Holdings||79|
|Median Market Cap||$2.06 B|
|Weighted Average Market Cap||$2.85 B|
|3-Yr Annualized Turnover Ratio||59.64%|
|% of Holdings with Free Cash Flow||68.83%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net
|Privia Health Group||PRVA||Health Care||2.57%|
|MGP Ingredients||MGPI||Consumer Staples||2.43%|
|Halozyme Therapeutics||HALO||Health Care||2.19%|
|Evolent Health||EVH||Health Care||2.07%|
|TransMedics Group||TMDX||Health Care||2.03%|
|TOP 10 HOLDINGS TOTAL||23.98%|
CAPITAL MARKET OVERVIEW
(As of 12/31/22) — Capital markets rallied modestly in the 4th quarter as the S&P 500 Index gained 7.56%, the only positive quarter for 2022. Cooler inflation readings, resilient consumer spending, and better-than-expected corporate earnings buoyed markets during the first two months of the 4th quarter before pulling back in December. Much of the focus remains on the path of future interest rates, recession fears, and the economic and market impact those events may generate in 2023.
Despite the 4th quarter advance, the stock market recorded its worst calendar year since 2008, with a decline of -18.11% for the S&P 500 Index, and a loss of -32.54% for the growth-oriented and technology-heavy Nasdaq Composite Index. Large cap technology stocks and the more interest-rate sensitive assets suffered the most, while value stocks outperformed. In the end, nine of the S&P 500 Index’s 11 economic sectors declined. Energy stocks were the bright spot, recording a gain of 65.72% for the sector while Utilities eked out a gain of 1.57% in 2022.
The damage wasn’t isolated to the stock market as the investment-grade bond indices suffered double-digit losses for the year as well. In fact, a traditional balanced investment portfolio of 60% stocks and 40% bonds suffered the 4th worst drawdown in the past 100 years.
Recapping quarterly results, the broad-based Russell 3000 Index advanced 7.18% in the period. Value stocks significantly outperformed growth stocks to close out 2022, as the Russell 3000 Value Index returned 12.18% versus a return of just 2.31% for the Russell 3000 Growth Index. Relative performance was mixed going down in market cap size as small caps advanced less than large caps in the quarter, while mid cap stocks outperformed both large and small caps. Larger cap stocks returned 7.24%, as measured by the Russell 1000 Index, compared to the smaller cap Russell 2000 Index return of 6.23%, while the Russell Midcap Index produced a return of 9.18% in the quarter.
(As of 12/31/22) — The Buffalo Small Cap Fund (BUFSX) produced a return of -0.67% for the quarter, a result that trailed the Russell 2000 Growth Index return of 4.13%. Disappointing stock selection was responsible for most of the relative underperformance, but the Fund’s sector allocation impact also weighed on results due to our typical underweight in Energy and Consumer Staples, two of the strongest performing benchmark sectors during the quarter.
The Fund’s results in the Technology area and Industrials were the largest detractors from performance results from a sector breakdown perspective. Within Technology, the portfolio experienced weakness among IT Service holdings including DoubleVerify and Grid Dynamics. Stock selection in Software also lagged on declines by BigCommerce Holdings and Varonis Systems, Inc. Performance within the portfolio’s Industrials exposure weighed on overall results due to declines from Advanced Drainage Systems and PGT Innovations. Both stocks performed poorly as higher interest rates are beginning to impact the companies’ construction markets.
Partially offsetting the lagging areas above was stronger stock selection within Health Care, particularly among the portfolio’s health care equipment and biotechnology companies. TransMedics Group was once again a top contributor to Fund performance as shares advanced nearly 50% during the period. The company’s innovative Organ Containment System (“OCS”) and National OCS Program (“NOP”) continued to see rapid uptake translating to accelerating revenue growth of about 378% year-over-year.
Establishment Labs Holdings, Inc. and Inspire Medical Systems, Inc. that also operate in the health care equipment area were strong performers in the quarter. Within biotechnology, Halozyme Therapeutics advanced over 40%.
Overall, the largest detractors from performance results during the quarter were Privia Health and Palomar Holdings. Privia, a technology-driven platform that enables medical groups, health plans, and health systems transition to value-based care arrangements, performed poorly during the quarter due to sector rotation within Health Care. Also, Privia’s multiple compressed during the period as investor speculation of an imminent buyout of the company waned. Palomar, a specialty insurance company, underperformed during the quarter as its reinsurance costs could potentially increase due to Hurricane Ian in Florida. Additionally, the company’s 3rd quarter earnings were negatively impacted by higher attritional losses. Our view of both companies remains favorable.
(As of 12/31/22) — The direction of the market overall will likely continue to depend on inflation’s trajectory and the amount of economic damage caused by higher interest rates. The inflation picture continues to ebb and flow. While we are seeing a decline in logistics costs, shipping rates, and some commodity prices, component shortages continue to persist. Generally, it seems price increases are moderating but the sustainability of this moderation is questionable.
While the Federal Reserve has already increased interest rates by 425 basis points, market expectations forecast another 50 to 75 basis point increase in this tightening cycle. In response, there has been a growing chorus for the Federal Reserve to slow its pace of tightening and allow previous hikes to make their way through the economy. Meanwhile, global economies continue to slow, especially in Europe where energy prices remain high. While many companies have already lowered financial guidance for the year, we could be in store for another earnings season of decreasing estimates which may possibly bring more market volatility.
Throughout 2022, small cap stocks re-rated for the prospect of a significant slowdown in economic growth in 2023. As a result, we are taking advantage of stocks that are oversold by our analysis. At the same time, we are being cautious with unfamiliar management teams and their ability to navigate a less predictable economy and market volatility. Portfolio positioning is fairly defensive within Technology, with a focus on a steadier IT Services industry and the Communications Equipment industry, which has unique demand drivers due to government subsidies.
The portfolio continues to be underweight Semiconductors and Software relative to the benchmark. We’ve added slightly to Energy sector exposure with higher quality energy-related companies, but the portfolio remains underweight relative to the benchmark. Larger positions within the Fund continue to be companies with recurring revenue streams, or those with strong demand and good visibility into future earnings.
As always, we believe all of our investments could benefit from long-term growth trends and trade at attractive valuations – the cornerstone of our investment process. We thank you for your continued support.
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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