Her Buffalo fund co-manager Dave Carlsen usually takes the lead on industrials and information technology stocks while a third co-manager, Clay Brethour, has a background in the oil, material and industrial sectors. “We complement each other,” she says. “This team has been together for 14 years, which is truly unique in this industry.”
The team does its work from KCM’s home base in Mission, Kan., a Kansas City suburb with less than 10,000 residents whose website posts things like Rotary Club plant sale announcements and warnings about diseased raccoons. But Jones views this location, far from the din of Wall Street and Silicon Valley, as an advantage.
“If we were a hedge fund trading on data points, this wouldn’t be a good place to be,” she says. “But that’s not what we are. We invest in high-quality companies over the long term, find innovation and trim positions when they get stretched. So for us, it’s an advantage to be removed from all the noise that might influence our decisions.”
Like other actively managed mutual funds, the Buffalo Fund family has lost assets over the last few years to index-based exchange-traded funds and mutual funds. At the same time, many investors abandoned the firm’s flagship small-cap fund when performance lagged. Assets in the firm’s mutual funds total about $4 billion, down from a peak of $8 billion a few years ago.
Jones admits that while indexing is here to stay, she sees today’s increased market volatility as an opportunity for a well-managed, actively managed mutual fund to add value to advisor portfolios. “Nine years into the bull market, it’s a good idea to be in a fund that offers some downside protection,” she says. “There’s more risk in passive investing than a couple of years ago.” Over the three years ending March 31, the fund has captured 93% of its benchmark’s upside and 86% of its downside.
Widening the Playing Field
Launched in 2001 as the Science & Technology Fund, the Buffalo Discovery Fund’s focus was once limited to mostly technology and health-care stocks. When the current management team took over in 2004, they decided to gradually expand the portfolio’s range to include other sectors in its benchmark, the Russell 3000 Index. By the time the fund changed its name to “Buffalo Discovery” in 2012, it already had a fairly diversified portfolio, and it has spread its bets even more over the last few years.
“Innovative companies can be found beyond the health-care and technology sectors, and the portfolio reflects that,” says Jones. “Broader diversification also helps lower volatility and offers the potential for better downside protection.”
The innovation demonstrated by a potential Buffalo portfolio company can take a variety of forms, depending on the sector. For some companies, it means offering a new product or service that drives their top-line growth. For others, it may be a new manufacturing or distribution strategy.
Jones emphasizes that the diversified portfolio keeps a comfortable distance from the benchmark and avoids closet indexing. It has an 81% active share and a three-year annualized turnover ratio of 51%, which testifies to the co-managers’ willingness to hang on to their off-the-beaten track picks over the long haul.