Dividend Focus Fund

Equity markets got off to a strong start in the first quarter of 2017, thanks to an improving economic outlook. In February, small business optimism, as measured by the National Federation of Independent Businesses, was at its highest level in 12 years. In addition, the University of Michigan’s March consumer confidence survey showed that consumers were more confident in the economy than they have been at any time since 2000. Against this backdrop, growth stocks outperformed value stocks, led by technology, health care, and consumer discretionary companies. The recent strength in infrastructure companies, banks, and high-tax-rate stocks stalled late in the quarter when, following Congress’s failure to agree on a health care reform bill, investors began to question the Trump administration’s ability to enact elements of its pro-growth agenda. Within commodities, the price of West Texas Intermediate (WTI) crude oil fell 6% during the quarter in response to better than expected U.S. oil inventories and production.

The Russell 3000 Index advanced 5.74% in the first quarter and larger cap stocks outperformed smaller cap stocks. The Russell 1000 Index returned 6.03%, followed by the Russell Mid Cap Index return of 5.15%, and the Russell 2000 Index result of 2.47%. The Russell Micro Cap Index advanced just 0.38% in the quarter. The Russell 3000 Growth Index outperformed the Russell 3000 Value Index by 5.64%. Technology was the best performing sector during the quarter while the energy sector was the worst performer, driven by the decline in crude oil.

The Buffalo Dividend Focus Fund posted a return of 6.56% for the quarter and outperformed the S&P 500 Index return of 6.07%. For the quarter, the Fund’s relative outperformance was driven by the Financials, Real Estate and Energy sectors while the top detracting sector was Information Technology. The top contributors on an individual security standpoint were Apple, Inc., Noble Midstream Partners and CoreCivic while Hess Corp., ExxonMobil Corp. and QUALCOMM, Inc. were the top detractors. Within the Financials sector, the Fund’s relative outperformance during the quarter was driven by stock selection as S&P Global, Inc. gained 22.13% and Visa, Inc. rose 14.14%. S&P Global’s performance was driven by strong fourth quarter earnings as each of its business segments (Ratings, Market Intelligence and Index) reported better than expected revenue results while margins also improved relative to expectations. Visa’s performance also reflected strong fourth quarter earnings driven by the continued shift towards electronic payments as well as the consolidation of Visa Europe.

Information Technology was a drag on relative results during the period due to the sector allocation impact. While the Fund’s holdings performed slightly better than the Index during the quarter the portfolio was underweight the second best performing benchmark sector which detracted from relative results. Taking a closer look at this area we note that most of the underperformance within the Information Technology sector was specific to the Internet Software & Services subsector, which does not consist of many dividend paying companies that meet our investment criteria.

We expect the market to experience continued volatility in the coming quarters as the Federal Reserve continues to normalize interest rates along with a focus on the ability of the Trump administration to enact infrastructure spending, deregulation, and corporate tax reform. Prospective tailwinds for the economy include further job growth, wage increases, lower tax rates, and simply more optimism from both businesses and consumers; all of which could lead to higher Gross Domestic Product (GDP) growth. On the other hand, potential headwinds include potential strengthening of the U.S. dollar, further increases in interest rates, and valuation metrics that are above historical market averages leading us to believe that the stock market may have a hard time achieving further multiple expansion.

Despite the expectation of continued volatility we continue to focus on wide moat, large capitalization companies that are trading at reasonable valuations, in our view. As always, the Fund will continue to focus on competitively advantaged companies that can be purchased at a fair price, in our opinion. As the stock market has continued to climb, it is getting harder to find companies that fit our investment criteria, but we continue follow our process of finding new investment ideas and to be ready when market declines provide better opportunities.