Dividend Focus Fund

(As of 12/31/19) — The combination of a U.S. Federal Reserve (Fed) interest rate cut, an improving economic outlook, and easing trade tensions, sent equity markets sharply higher in the 4th quarter. The S&P 500 Index advanced 9.10% during the period, which brought the full-year (2019) gain to 31.49%. The Fed cut interest rates three times in 2019, erasing the brief yield curve inversion and assuaging fears of a recession. The economy continued to add new jobs at a strong pace and unemployment declined to 3.5%. Consumer spending remained healthy, and there is optimism for better business investment following the announced “phase one” trade deal with China.

Similar to the S&P 500 Index, the broad-based Russell 3000 Index returned 9.04% during the quarter. Growth outperformed value, as the Russell 3000 Growth Index returned 10.62% compared to a return of 7.41% for the Russell 3000 Value Index. Smaller companies outperformed larger companies, as one would expect in a “risk-on” period. The Russell Microcap Index surged 13.45% and the Russell 2000 Index advanced 9.94%. Large company benchmarks such as the Russell 1000 Index advanced 9.04% while the Russell Midcap Index produced a return of 7.06%. Technology and Health Care were the best performing sectors in the quarter, while more defensive areas of the market lagged such as Real Estate and Utilities. Higher long-term interest rates weighed on high-quality bond proxies – the safe haven 10-year U.S. Treasury Bond produced a return of -1.74% during the quarter.

(As of 12/31/19) — The Buffalo Dividend Focus Fund posted a return of 7.89% for the quarter, underperforming the Morningstar U.S. Large-Mid Cap Index return of 9.01% and the S&P 500 Index return of 9.07%. Sector weightings and security selection curtailed the Fund’s performance relative to the benchmark. The Fund’s sectors with highest weightings – Information Technology, Health Care, and Financials – posted positive, low double-digit returns, and the latter two sectors had positive contribution to comparable index sectors due the Fund’s overweight position and investment performance. Information Technology, a strong performing benchmark sector for the quarter, detracted from relative performance due to a portfolio underweight within, along with weaker security selection for the Fund. Information Technology averaged a weighting of nearly 27% during the quarter compared to the Fund’s 23%. The Industrial sector also detracted from relative performance for the portfolio.

Top Contributors

Specific securities that contributed most positively to performance included Apple Inc., Medicines Company, and Microsoft Corporation. Shares of Apple advanced on solid quarterly results, guidance on iPhone sales, strength in services and wearables, better trends in China, and reduced trade tensions. Microsoft improved on growing momentum from its cloud services and enterprise products which boosted quarterly results above analyst estimates. The company also won the Pentagon’s JEDI cloud contract, and shares experienced valuation multiple expansion on all the good news. Meanwhile, drug development company Medicines Co. jumped on favorable study results for Inclisiran (cholesterol therapy), which led to an acquisition agreement with Norvartis.

Top Detractors

Specific securities that detracted from performance included Boeing Company, AMC Entertainment Holdings, and Vistra Energy. Shares of Boeing fell due to uncertainty regarding the delayed and growing costs related to the return to service of its grounded 737Max planes. The movie theater chain AMC Entertainment dropped on lagging box office results and concerns regarding its high debt leverage. Meanwhile, Vistra Energy, a retail and wholesale electricity production and distribution company, declined due to a large shareholder selling some of their position, as well as a negative Capacity, Demand and Reserves report by the Electric Reliability Council of Texas (ERCOT).

(As of 12/31/19) — The healthy gains in the stock market during the quarter were primarily driven by expansion in market valuation metrics, as corporate earnings have been relatively flat. Aiding the valuation expansion was the Fed, which cut short-term interest rates during the quarter and indicated a pause in further rate actions, possibly for an extended period. Trade tensions have also been reduced with agreements reached on the USMCA (United States, Mexico, and Canada) and the phase one pact with China. Key drivers for further stock market advancement are likely to be driven by how the Middle East conflicts play out, the upcoming domestic election cycle, and improved corporate earnings growth.

Despite the uncertainty primarily related to non-economic events, we remain focused on finding wide moat, large-capitalization companies trading at reasonable valuations, in our view. As always, the Fund will continue to emphasize competitively-advantaged companies that can be purchased at a fair price, by our analysis. If and when 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.