Dividend Focus Fund

(As of 3/31/20) — Global equity markets fell sharply in the 1st quarter of 2020 in reaction to the global spread of COVID-19. As the case count increased exponentially, the only effective response was for countries to go into lockdown. The economic impact of these actions became clear as the quarter progressed and virtually all asset classes suffered as a result. From February 19 through March 23, the U.S. stock market, as measured by the S&P 500 Index, declined around 34%, which was the fastest meltdown in history. Central banks and governments responded quickly to this event, with the U.S. Federal Reserve (the “Fed”) cutting interest rates twice in March and announcing unlimited quantitative easing. The U.S. Senate passed a $2 trillion stimulus package, providing assistance to individuals and businesses in distress. Optimism around these efforts helped the market rally into quarter end, leaving the S&P 500 Index down 19.60% from the start of the year.

The broad market Russell 3000 Index declined 20.90% in the 1st quarter. Growth outperformed value, with the Russell 3000 Growth Index declining 14.85% compared to the Russell 3000 Value Index decline of 27.32%. By capitalization size, large cap stocks held up best, with a -20.22% return in the quarter, represented by the Russell 1000 Index. The Russell Mid Cap Index fell -27.07%, followed by the smaller cap Russell 2000 Index which declined -30.61%. Best performing sectors were the Technology, Health Care, and Consumer Staples sectors. The Energy sector was hit hardest as falling demand and rising supply from Saudi Arabia caused oil prices to crater. The economically-sensitive Financial and Industrial sectors were also among the worst performing sectors in the quarter.

(As of 3/31/20) — The Buffalo Dividend Focus Fund (BUFDX) posted a return of -20.35%, slightly underperforming the Morningstar U.S. Large-Mid Cap Index return of -19.75% and the S&P 500 Index return of -19.60%. All sectors in the benchmark index posted double-digit
negative returns. The Fund’s sector performance experienced similar negative returns, with the exception of the Real Estate sector, which delivered a single-digit positive return. The Fund’s sectors with the highest weightings had mixed performance relative to the Index. Information Technology and Financials posted favorable relative performance compared to the benchmark, while Health Care experienced lagging relative returns. In addition to Real Estate, our Consumer Discretionary and Consumer Staples holdings also delivered constructive performance relative to the benchmark. Areas of the Fund that
detracted from performance included Utilities, Industrials, and Energy.

Top Contributors

Specific securities that contributed most positively to performance included Community Healthcare Trust (CHCT), Amazon (AMZN), and Digital Realty Trust (DLR). Fund management initiated a new position in Community Healthcare Trust, a health care real estate company, in the quarter during the general market sell-off. Shares of Amazon advanced, as the company’s operations are expected to benefit from the trend in consumers increasingly shifting to on-line buying as they work from home due to shelter-in-place orders. Digital Realty Trust, a provider of data centers, is another recently-added position that contributed to Fund results through timely purchases of
shares during the volatile quarter.

Top Detractors

Specific securities that detracted from performance included Energy Transfer, L.P. (ET), Viper Energy Partners L.P. (VNOM), and Truist Financial Corporation (TFC, formerly known as BB&T). Energy Transfer, an energy transportation services company, and Viper Energy Partners, a leased oil and gas properties company, dropped as energy prices plunged in response to the failure of an agreement between the Organization of the Petroleum Exporting Countries (OPEC) members on production cutbacks as well as the drop in demand caused by the Coronavirus pandemic. Meanwhile shares of Truist Financial Corporation fell on general economic decline and as a result of lower interest rates, as the Fed cut its benchmark lending rate to zero.

(As of 3/31/20) — The primary driver of the sharp decline in the stock market during the quarter was the Covid-19 pandemic and efforts to contain it, which has inflicted economic damage. Governments and healthcare experts have responded to the crisis by issuing stay at home orders to try to curtail the spread of the disease, new infections, and fatalities. The economic impact has resulted in a sharp decline in spending and an explosion in unemployment. To limit the economic damage, governments have passed and
are passing various financial aid programs in addition to health care measures to combat the pandemic. Central Banks have also cut benchmark lending rates and have expanded their balance sheets as they buy various assets of eligible securities. The fiscal and monetary response to the pandemic has been relatively swift and expansive, with indications that, if conditions do not improve, they will do “whatever it takes.”
Their efforts so far are encouraging and markets have begun to rebound. Over the intermediate term, the pandemic will need to be contained through a combination of better testing, improved therapies, vaccine development, and seasonal curtailment.
Hopefully, through these measures, the economy may begin to recover and generate sustainable growth.

Despite the uncertainty, we remain focused on wide moat, competitively-advantaged large capitalization companies trading at reasonable valuations, in our view. As stock market volatility spikes, we will look for opportunities to buy shares of 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.