Dividend Focus Fund

(As of 12/31/17) — Equity markets ended 2017 on a strong note. The 4th quarter saw a continuation of trends that have influenced the market all year. Investor optimism about continued global economic growth and strong corporate earnings led to another quarter of higher stock prices. Strong holiday sales and the passage of tax reform legislation also provided tailwinds to equity markets. The CBOE Volatility Index continued to hover near record lows, and, for the first time since 1958, U.S. equities delivered positive returns in every single month of the year.

The S&P 500 Index produced a total return of 6.64% in the 4th quarter. Growth continued to outperform value, with the Russell 3000 Growth Index up 7.61%, beating the 5.08% return from the Russell 3000 Value. Large companies generally outperformed smaller companies during the quarter. The Russell 1000 returned 6.59%, the Russell Midcap Index returned 6.07%, the Russell 2000 returned 3.34%, and the Russell Microcap Index returned 1.80%. Consumer discretionary and technology were the best performing sectors in the fourth quarter. Utilities, health care, and consumer staples underperformed.

(As of 12/31/17) — The Buffalo Dividend Focus Fund posted a return of 6.47% for the quarter, which slightly underperformed the S&P 500 Index return of 6.64%. The Fund’s underperformance was primarily driven by relative weakness in the energy, consumer discretionary, and utility areas of the portfolio.

The top contributors on an individual security basis were Microsoft, Apple, and Bank of America while General Electric, Edison International, and Merck were the top detractors.

The Fund’s cash position was also a slight drag on performance given the strong quarterly advance for the index.

Within the energy sector, the Fund’s relative underperformance was primarily driven by security selection as Hess Midstream declined by roughly 10%. The fall in Hess Midstream’s shares reflected investor concerns surrounding energy prices and the growth outlook in the Bakken basin. Schlumberger and EQT Midstream were down marginally during the quarter.

The Fund’s relative underperformance in consumer discretionary was driven by security selection. The primary detractor was Hanesbrands which lowered guidance due weakness in its innerwear segment which is facing challenging conditions in the mass merchandise channel.

The underperformance within the utility sector was due to security selection as Edison International was negatively impacted by the recent California wildfires. While it is early in the process, and EIX has not been assigned any blame for the fires, investors are concerned about EIX’s liability due to California’s inverse condemnation policy — CA utilities can be held liable for fires because they socialize the costs via higher future rates.

(As of 12/31/17) — We believe the market could experience more volatility in the coming quarters as the Federal Reserve continues its plan 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 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 greater 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. We continue follow our process of finding new investment ideas and are ready when market declines provide better opportunities.