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 578 Small Growth funds as of 7/31/20.
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
- Kiplinger Top-Performing Mutual Fund (1 Year; 20 Years) – July 17, 2020
- Kiplinger Top-Performing Mutual Fund (20 Years) – May 15, 2020
- Kiplinger Top-Performing Mutual Fund (20 Years) – February 13, 2020
- Kiplinger Top-Performing Mutual Fund (1 Year; 20 Years) – January 16, 2020
- Kiplinger Top-Performing Mutual Fund (20 Years) – December 12, 2019
- Kiplinger Top-Performing Mutual Fund (20 Years) – November 15, 2019
Featured Articles & Reports
THE WALL STREET JOURNAL
November 4, 2019
|As of 7/31/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||27.61||21.82||30.90||20.50||14.45||13.95||9.70||11.58||12.57|
|BUFFALO SMALL CAP FUND - Institutional||27.74||21.95||31.13||20.69||14.62||14.13||9.86||11.74||12.74|
|Morningstar U.S. Small Growth Index||21.55||9.80||12.16||13.08||10.44||13.95||9.37||5.72||6.56|
|Lipper Small Cap Growth Fund Index||22.90||7.53||10.60||14.47||10.71||13.50||8.72||6.09||7.43|
|Morningstar Small Growth Category||20.48||5.47||8.82||11.69||9.42||12.92||8.81||7.49||7.51|
|As of 6/30/20||3 MO||YTD||1 YR||3 YR||5 YR||10 YR||15 YR||20 YR||Since Inception|
|BUFFALO SMALL CAP FUND - Investor||43.88||15.23||25.26||18.61||13.69||13.71||9.75||11.15||12.34|
|BUFFALO SMALL CAP FUND - Institutional||44.02||15.36||25.49||18.80||13.87||13.89||9.92||11.32||12.51|
|Morningstar U.S. Small Growth Index||32.84||4.35||8.79||11.67||9.51||14.09||9.47||5.06||6.34|
|Lipper Small Cap Growth Fund Index||34.39||1.87||6.40||12.86||9.67||13.49||8.75||5.45||7.20|
|Morningstar Small Growth Category||32.19||-0.10||4.46||10.08||8.28||12.94||8.85||7.00||7.29|
3 Year Risk Metrics
|BUFSX vs Morningstar U.S. Small Growth Index (As of 6/30/20)|
Hypothetical Growth of $10,000
|(As of 6/30/20)|| |
|# of Holdings||75|
|Median Market Cap||$2.92 B|
|Weighted Average Market Cap||$3.78 B|
|3-Yr Annualized Turnover Ratio||56.55%|
|% of Holdings with Free Cash Flow||56.00%|
|% of Holdings with No Net Debt||58.67%|
Top 10 Holdings
|Name of Holding||Ticker||Sector||% of Net|
|Quidel Corp||QDEL||Health Care||2.46%|
|Ligand Pharmaceuticals||LGND||Health Care||2.28%|
|Air Transport Services Group||ATSG||Industrials||2.25%|
|Livongo Health||LVGO||Health Care||2.18%|
|TOP 10 HOLDINGS TOTAL||24.47%|
CAPITAL MARKET OVERVIEW
(As of 6/30/20) — Equity markets rebounded sharply in the 2nd quarter following steep losses in the previous period. The S&P 500 Index produced a return of 20.54%, marking the best quarterly performance results in 20 years. Stimulus efforts by the Federal Reserve (the “Fed”) and the U.S. Treasury Department to limit COVID-related economic damage helped equity markets find a floor in late March. Declining COVID-19 case counts, optimism about treatment and potential vaccines, along with better-than-expected economic data also contributed to improved investor sentiment during the period. Although confirmed virus cases began spiking again in the final days of June, it was not enough to undo the best quarterly market results since the dot-com boom.
The broad market Russell 3000 Index advanced 22.03% in the quarter, and Growth outperformed Value as the Russell 3000 Growth Index moved up 27.99% during the period, compared to the Russell 3000 Value Index’s advance of 14.55%. Relative performance was inversely-correlated by market cap as the Russell Micro Cap Index advanced 30.54%, well above the large cap Russell 1000 Index’s return of 21.82%. Meanwhile the small cap Russell 2000 Index and the Russell Mid Cap Index were up 25.42% and 24.61%, respectively. The best performing sectors were Technology, Consumer Discretionary, and Energy while the less cyclically exposed, more defensive areas like Utilities, Telecommunication, and Consumer Staples lagged in the quarter.
(As of 6/30/20) — The Buffalo Small Cap Fund (BUFSX) produced a return of 43.88% during the quarter, outperforming the Morningstar U.S. Small Growth Index’s advance of 32.84%. Strong stock selection in Information Technology, Health Care, and Consumer Discretionary were the biggest drivers of outperformance relative to the Index. During the broad market selloff of the 1st quarter, small cap growth stocks declined by about 9% more than large cap growth. This reversed itself in the 2nd quarter, when small caps rebounded more strongly and outperformed large cap growth.
Livongo Health was the best performing stock for the Fund during the quarter, returning 164%. The company is a leading provider of technology solutions for remote monitoring of patients with chronic medical conditions. In the current environment of COVID-19 quarantines, demand for the company’s solutions has accelerated. Strong operating performance along with increased investor willingness to pay higher multiples for companies with solutions that benefit from the pandemic, helped drive the stock to all-time highs in the quarter.
Lovesac, a maker of comfortable modular sofas and seats, was another strong performing position during the quarter, and the stock climbed 350%. Shares sold off sharply in the 1st quarter due to investor fears that its business would suffer if its retail showrooms could not operate during business closures. However, the company pivoted towards e-commerce during the pandemic and subsequently reported very strong growth in its online channel. The company has also benefited as many consumers increased spending on home-related items during the quarantine.
After several consecutive quarters of very strong performance, eHealth was the biggest detractor from Fund performance during the quarter. The company is a market leader in helping seniors select the best Medicare Advantage, Supplemental Medicare, and/or Part D health care insurance options. The company’s share price took a step back during the quarter due, in part, to investor concerns about increased churn as the company pushed more consumers to their online channels. However, we believe the long-term outlook for the company and its business model remains strong.
(As of 6/30/20) — The first two quarters of 2020 were turbulent for investors, and we expect the trend of elevated volatility to continue into the 2nd half of the year. We believe the trajectory of the COVID-19 pandemic will be a key driver of market direction. The gradual reopening of the U.S. economy has coincided with a surge of virus cases in Sunbelt states and California. Investors will closely watch evolving data on infection rates, hospitalization rates, and deaths, and, while we believe that state and federal governments will resist shutting down economies again, any signs that the U.S. is returning to broad-based quarantines would likely lead the stock market downward.
We are also closely watching for news on treatments, as well as indications of a promising vaccine, and expect to see more data within the next several months. Any sign that an effective vaccine could be rolled out in the near term would be a binary event, and we would expect the market, especially the value stocks that have lagged growth in the 1st half of 2020, to rerate and trade sharply upward.
The trajectory of the U.S. economy and potential recovery in the job market remains another question mark. While jobless claims in June have pointed to a sharp recovery in the U.S. job market, employment remains far below pre-pandemic levels, and any efforts to reinstate quarantines could derail the recovery.
We are also paying close attention to the upcoming elections in November. Recent signs suggest larger Democratic Party gains than what we would have predicted at the start of 2020. Large Democratic gains could lead to factors such as higher corporate taxes, an increased focus on prescription drug prices, and regulatory pressure on the business models of the mega-cap technology companies that have been market leaders in recent years.
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. ©2020 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.