Dividend Focus Fund

(As of 6/30/18) — Supportive economic data drove positive domestic equity performance in the 2nd quarter. The unemployment rate declined to 3.8%, the lowest level in 18 years. Wages have continued to rise, with average hourly earnings up 2.7% as of May. Corporate earnings growth continued to be robust. The Federal Reserve increased their target rate by 0.25% and raised their forecast for growth and inflation again in June. Meanwhile, economic growth outside the U.S. slowed, with the divergence driving strength in the U.S. dollar. Increasing trade protectionism along with the dollar’s strength, led to the relative outperformance of domestically focused industries and smaller capitalization companies, which generally do less international business than large caps. Crude oil prices continued to rise, despite the strong dollar, driven by lower stockpiles in the U.S. and President Trump’s decision to withdraw from the Iran nuclear accord.

The Russell 3000 Index returned 3.89% in the quarter. Growth continued to outpace value, with the Russell 3000 Growth Index up 5.87% and the Russell 3000 Value Index up 1.71%. By size, the Russell Microcap Index led the way with a return of 9.97%, followed by the small cap Russell 2000 Index at 7.75%. The large cap Russell 1000 Index was up 3.57%, and the Russell Midcap Index was up 2.82%. Energy was the best performing sector, driven by strength in crude oil prices. The Consumer Discretionary, Information Technology, and Real Estate sectors also had strong quarters. Meanwhile, trade fears and rising input costs caused the underperformance of Industrials, and Financials were weaker as a result of the yield curve flattening.

(As of 6/30/18) — The Buffalo Dividend Focus Fund posted a return of 3.18% for the quarter, which slightly underperformed the S&P 500 Index return of 3.43%. While disappointing, the modest underperformance this quarter is not surprising given continued strong outperformance of growth over value. The Fund’s relative underperformance was primarily a result of portfolio positioning decisions and security selection within the Information Technology sector. The Fund was underweight technology during the period, and that area was one the best performing sectors within the index. We reduced some exposure to the cyclical semiconductor industry during the quarter, which caused a larger underweight position than we had entering the period. Relative performance was also negatively impacted by several non-dividend payers within the benchmark like Facebook, which produced strong returns during the quarter.

The Health Care sector was another area of modest weakness for the portfolio during the period. The two biggest detractors were McKesson and CVS Health Corporation. Both of these stocks were negatively impacted on concerns that Amazon will enter their markets and investors fear that development could result in pricing pressure and lost market share for both companies.

Overall the top contributors on an individual security basis were Twenty-First Century Fox, Microsoft, and Hess Corp while Carnival, Bank of America, and JPMorgan were the top detractors.

(As of 6/30/18) — We expect the market to experience continued volatility in the coming quarters as the Federal Reserve continues to normalize interest rates. Other concerns include inflation growth acceleration, potential strengthening of the U.S. dollar, geopolitical issues, and increasing protectionism efforts from the White House. Valuation metrics are also above historical market averages, leading us to believe the stock market may have a hard time achieving further multiple expansion. On the other hand, 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.

Despite the expectation of continued volatility, we continue to focus on wide moat, large capitalization companies 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 to follow our process of finding new investment ideas and to be ready when market declines provide better opportunities.