Dividend Focus Fund

(As of 9/30/19) — The U.S. stock market continued to advance in the 3rd quarter, as expectations for accommodative monetary policy appeared to outweigh concerns of slowing economic growth. The S&P 500 Index returned 1.70% in the period, bringing the year-to-date return to 20.55% through quarter-end. Weak economic data led the Federal Reserve to cut interest rates twice in the quarter, driving rates lower and bond prices higher. U.S. markets outperformed international markets on the strength of the U.S. dollar.

The Russell 3000 Index gained 1.16% in the quarter. Value narrowly outperformed growth, with the Russell 3000 Value Index up 1.23% and the Russell 3000 Growth Index advancing 1.10%. Large caps generally outperformed small caps in the quarter. The Russell 1000 Index returned 1.42%, the Russell Midcap Index returned 0.48%, and the Russell 2000 Index posted a loss of 2.40%. Defensive sectors led the way in the period, with Utilities up 9.34%, Real Estate up 7.69%, and Consumer Staples up 6.12%. Energy was the worst performing sector with a total return of -6.61%. Health Care was also weak, returning -2.25% on increasing political concerns.

(As of 9/30/19) — The Buffalo Dividend Focus Fund posted a return of 2.53%, outperforming the Morningstar U.S. Large-Mid Cap Index return of 1.51% and the S&P 500 Index return of 1.70%. Sector weightings and security selection influenced the Fund’s relative performance. Portfolio sectors with highest weightings – Information Technology, Financials, and Consumer Discretionary – posted positive absolute returns and the latter two sectors had favorable relative performance to comparable benchmark sectors. Some of the Fund’s least weighted sectors – Energy and Telecommunication Services (sectors comprising less than 11% of the Fund) – had negative returns with only Telecom lagging the comparable benchmark sector.

Top Contributors

Specific securities that contributed most positively to performance included Medicines Company (MDCO), Apple (AAPL), and Edison International (EIX). Medicines Company gained on favorable results from Phase 3 trial studies evaluating its LDL-cholesterol lowering drug, inclisiran. Apple rallied on new product announcements (iPhone 11 series) and services (Apple TV) with favorable price points. In addition, investors now expect a robust 5G phone launch next year. Meanwhile Edison International rose on passage of wildfire legislation in California and a secondary equity offering.

Top Detractors

Specific securities that detracted from performance include Anthem (ANTM), UnitedHealth Group (UNH), and 8×8 (EGHT). Anthem and UnitedHealth Group declined on reports health insurers are paying out a higher percentage of the premiums they take in to cover patients’ medical claims (medical-loss ratio or MLR) and presidential candidates pushing forms of single payer systems or “Medicare For All”. 8×8 dropped on concerns regarding customer acquisition costs and cash flow outlook.

(As of 9/30/19) — The modest gain in the stock market for the quarter was primarily driven by investor uncertainty regarding trade policies (U.S.–China, Brexit, etc.) and the Federal Reserve’s (the “Fed”) monetary policy. The lack of agreements on major trade deals (rhetoric regarding tariffs and no deal strategies) are curtailing companies from making long-term capital spending plans, which could lead to slowing or negative growth. Certain indicators such as yield curve inversions are already signaling a recession 6-18 months out. Resolving the trade deals (especially U.S.–China) would provide companies with more certainty to make capital investment decisions, boost consumer confidence, and accelerate gross domestic product and revenue growth. Lack of progress could raise the prospects for an economic slowdown. The Fed will need to adjust their policy accordingly. During the quarter, the Fed delivered on their dovish outlook by cutting rates twice and growing the balance sheet. They indicated they are data-dependent, with trade policies creating economic uncertainties. With the federal funds rate below 2%, there is only limited ability to cut rates (before going negative). The Fed will likely have to use its balance sheet if it needs to be aggressive with its policy.

Despite the uncertainty regarding trade policies and the Fed reaction, we remain focused on wide moat, large capitalization companies trading at reasonable valuations, in our view. As always, the fund will continue to emphasize on competitively advantaged companies that can be purchased at a fair value, in our opinion. As stock market volatility spikes, we will look for opportunities to find companies that fit our investment criteria, as we continue to follow our process of finding new investment ideas and to be ready when market declines provide better entry points.