Dividend Focus Fund

(As of 6/30/20) — Equity markets rebounded sharply in the 2nd quarter following steep losses in the previous period. The S&P 500 Index produced a return of 20.54%, marking the best quarterly performance results in 20 years. Stimulus efforts by the Federal Reserve (the “Fed”) and the U.S. Treasury Department to limit COVID-related economic damage helped equity markets find a floor in late March. Declining COVID-19 case counts, optimism about treatment and potential vaccines, along with better-than-expected economic data also contributed to improved investor sentiment during the period. Although confirmed virus cases began spiking again in the final days of June, it was not enough to undo the best quarterly market results since the dot-com boom.

The broad market Russell 3000 Index advanced 22.03% in the quarter, and Growth outperformed Value as the Russell 3000 Growth Index moved up 27.99% during the period, compared to the Russell 3000 Value Index’s advance of 14.55%. Relative performance was inversely-correlated by market cap as the Russell Micro Cap Index advanced 30.54%, well above the large cap Russell 1000 Index’s return of 21.82%. Meanwhile the small cap Russell 2000 Index and the Russell Mid Cap Index were up 25.42% and 24.61%, respectively. The best performing sectors were Technology, Consumer Discretionary, and Energy while the less cyclically exposed, more defensive areas like Utilities, Telecommunication, and Consumer Staples lagged in the quarter.

(As of 6/30/20) — The Buffalo Dividend Focus Fund (BUFDX) posted a return of 19.93% during the period, a result that slightly trailed the Morningstar U.S. Large-Mid Cap Index return of 21.76% and the S&P 500 Index return of 20.54%. All sectors in the Fund and benchmark Index posted positive returns. The Fund’s sectors with the highest weightings had mixed performance relative to the Index. Health Care and Financials posted favorable relative performance compared to the benchmark’s sectors, while Information Technology experienced lagging relative returns. Smaller-weighted sectors like Industrials, Energy, and Utilities also delivered constructive performance relative to the benchmark, while Consumer Discretionary, Consumer Staples, Materials, and Telecommunications Services experienced weaker stock selection.

Top Contributors

Specific securities that contributed most positively to performance include Apple Inc. (AAPL), Microsoft Corporation (MSFT), and Horizon Therapeutics Investments Ltd. (HZNP). Apple advanced on solid quarterly results, guidance on iPhone sales, strength in services, and the expected rebound in COVID-19 disruptions. Microsoft improved on growing momentum from cloud services and enterprise products, which boosted quarterly results above analyst’s estimates and drove expansion in the company’s valuation metrics. Meanwhile, shares of the biopharmaceuticals company Horizon Therapeutics rose on strong quarterly results, driven by the launch of Tepezza for thyroid eye disease and favorable study data on Krystexxa in combination with immunomodulation (methotrexate).

Top Detractors

Conversely, Delta Airlines Inc. (DAL), Elanco Animal Health, Inc. (ELAN), and Otis Worldwide Corp. (OTIS) were the largest detractors from the Fund’s performance. Delta declined on reduced demand for airline travel due to COVID-19. Elanco Animal Health fell on poor quarterly results due to distributor inventory destocking. While OTIS, the elevator and escalator manufacturing and installation company, dropped as the investor base digested the shares from the spin out from United Technologies (now Raytheon Technologies). All three positions were liquidated during the quarter in favor of more attractive risk-reward opportunities.

(As of 6/30/20) — The primary driver of the sharp rise in the stock market during the quarter was the expectations that the economy can recover from the COVID-19 pandemic. Central Banks have cut benchmark lending rates and expanded their balance sheets as they buy various assets of eligible securities. Investors have reacted by accumulating more risk assets as they have been driven by the need to boost returns as well as the perception that Central Banks stand ready as a backstop to bail them out. The fiscal stimulus and financial aid programs passed by governments have begun to work their way into the economy. If the economy does not recover, politicians appear to be reluctantly willing to pass additional stimulus as needed. In addition, during the quarter, COVID-19 cases started to decline from peak levels, allowing domestic and international regions to reduce shelter in place orders and slowly get back to work. Nevertheless, as the restrictions are relaxed, the COVID-19 case count has begun to accelerate from trough levels. However, policy makers appear reluctant to re-impose shelter in place orders. Several promising therapies appear to lessen the death rate of the virus, but, over the intermediate term, for the economy to recover and generate sustainable growth, the pandemic will need to be contained through vaccine development, which still appears several quarters out.

Despite the uncertainty, we remain focused on wide-moat, large-capitalization companies trading at reasonable valuations, in our view. As always, the Fund will continue to place an emphasis 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.