Dividend Focus Fund

(As of 12/31/18) — The 4th quarter of 2018 was a rough period for equity markets, with steep declines dragging full year returns into negative territory. The S&P 500 Index declined -13.52% during the quarter, driven by fears of tightening monetary policy, escalating trade tensions, slowing global economic growth, and margin pressure from higher labor and freight costs. Investors sought safety in government bonds, driving the yield on the 10-year Treasury down from 3.06% at the end of the 3rd quarter to 2.68% at the end of the 4th quarter.

In a reversal of the year-to-date trend, value outperformed growth in the period, as the Russell 3000 Value Index declined -12.24% compared to a -16.33% drop in the Russell 3000 Growth Index. Large companies held up better than smaller companies during the quarter, as the Russell 1000 Index fell -13.82%, the Russell Midcap Index was down -15.37%, and the small cap Russell 2000 Index was down -20.20%. The only sector to post a positive return in the 4th quarter was Utilities. Real Estate, Consumer Staples, and Health Care were down but outperformed the market. Energy was the worst performing sector, driven by steep declines in crude oil. Technology, Industrials, and Consumer Discretionary also underperformed the broad market.

(As of 12/31/18) — The Buffalo Dividend Focus Fund (BUFDX) posted a return of -12.77% for the quarter, outperforming the Morningstar U.S. Large-Mid Cap Index return of -13.68% and the S&P 500 Index return of -13.52%.

While the Fund’s absolute performance for the period was disappointing, the Fund’s relative performance was aided by sector weightings and security selection. Investments in sectors with our highest weightings, Financials, Health Care, and Information Technology posted favorable returns relative to comparable index sectors. The Fund’s least weighted sectors, Materials, Real Estate, and Utilities (sectors comprising only about 9% of fund assets combined), had returns lower than their corresponding index sectors.

Top Contributors
Specific securities that contributed most positively to performance included Starbucks, CME Group, and Procter & Gamble. Starbucks improved on a strong earnings report with favorable comparable store sales growth. CME Group advanced on rising earnings expectations due to higher contract trading and recent acquisitions. Shares of Procter & Gamble rose on a positive earnings release with healthy organic sales growth.

Top Detractors
Specific securities that detracted from performance included Activision Blizzard, Hess Corporation, and Conagra. Activision Blizzard fell on weak earnings forecast, as a new video game release missed lofty expectations and a new game received poor reviews. Shares of Hess dropped primarily due to falling oil prices during the period, and Conagra declined on a soft earnings release and weak performance of recent acquisitions.

(As of 12/31/18) — We expect the market to experience continued volatility in the coming quarters as the Federal Reserve seeks to normalize interest rates. Other concerns include inflation growth acceleration, potential strengthening of the U.S. dollar, increased protectionism efforts from the U.S. Administration, evolving geopolitical risks, and a divided Congress. Valuation metrics, while off recent highs, are still above historical market averages, leading us to believe the stock market may have a difficult time achieving further multiple expansion. On the other hand, prospective tailwinds for the economy include further job growth, wage increases, lower tax rates, robust business and consumer confidence, and lower energy prices, all of which could lead to higher Gross Domestic Product (GDP) growth.

Despite the expectation of continued volatility, we remain focused on wide moat, large-capitalization, dividend- paying companies trading at what we view as reasonable valuations. As always, the Fund will continue to place emphasis on competitively-advantaged companies that can be purchased at a fair value, as determined by our internal analysis. As stock market volatility has continued to climb, we will look for opportunities to find companies that fit our investment criteria. We will continue following our process of finding new investment ideas and to be ready when market declines provide better entry points.