Dividend Focus Fund

(As of 9/30/18) — U.S. economic strength and solid corporate earnings growth drove healthy equity returns in the 3rd quarter. The widely-followed S&P 500 Index had a total return of 7.71%, its best quarterly gain since 2013. In September, initial jobless claims fell to the lowest level since 1969, wages grew at the fastest rate since 2009, consumer confidence reached the highest level since 2000, and the National Federation of Independent Business (NFIB) survey of small business optimism was at an all-time high (the survey dates back to 1974). Against this strong economic backdrop, the Federal Reserve raised the targeted federal funds rate by another 25 basis points to a range of 2.00% to 2.25%. Slowly rising interest rates led to flat bond returns.

The divergence between domestic and international equity market performance continued during the quarter, with the MSCI EAFE Index advancing just 1.35%. The Russell 3000 Index gained 7.12% in the 3rd quarter. By style, growth continued to outperform value, with the Russell 3000 Growth Index increasing 8.88% compared to the Russell 3000 Value Index’s advance of 5.39%. Large caps did better than small caps as the Russell 1000 Index returned 7.42%, the Russell Midcap Index returned 5.00%, and the Russell 2000 Index returned 3.58% in the quarter. Every economic sector was positive this quarter, with Health Care and Industrials the top performers, while Materials and Energy lagged the indexes.

(As of 9/30/18) — The Buffalo Dividend Focus Fund posted a return of 7.68%, which slightly outperformed the Morningstar U.S. Large-Mid Cap Index return of 7.48% and above the Lipper Equity Income Funds Index return of 5.55%. The Fund’s performance was aided by sector weightings and security selection. Sectors with highest weightings in the Fund, including Financials, Health Care, and Information Technology, contributed to positive returns. The Fund’s least-weighted sector, Materials, was the only sector to produce negative returns.

Top Contributors
Specific securities that contributed most positively to performance include AMC Entertainment Holdings (AMC), Microsoft (MSFT), and Apple (AAPL). Shares of AMC improved on a strong earnings report, a robust summer box office, and healthy enrollment in its movie subscription service program (Stubs A-List). Microsoft advanced on a favorable earnings release led by its cloud services segment. Apple was up on a solid earning’s result and anticipation of new product releases.

Top Detractors
Specific securities that detracted most from performance include Twenty-First Century Fox (FOXA), Kraft Heinz (KHC), and Cedar Fair (FUN). FOXA stock had a strong run during the previous quarter as Disney and Comcast battled to acquire certain FOXA assets; however, the stock traded off in the 3rd quarter as Comcast dropped out of the bidding. Kraft Heinz declined due to fading merger and acquisition expectations and a large equity investor selling some of their holding. Cedar Fair declined on a weakened earnings outlook due to soft attendance levels.

(As of 9/30/18) — We expect the market to experience continued volatility in the coming quarters as the Federal Reserve continues to normalize interest rates. Other concerns include acceleration in inflation, potential strengthening of the U.S. dollar, geopolitical issues, increase protectionism efforts from the Administration, evolving geopolitical risks, and the mid-term elections.

Valuation metrics are also above historical market averages, leading us to believe that stocks, broadly speaking, 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, all of which could lead to higher Gross Domestic Product (GDP) growth.

Despite the expectation of continued volatility, we continue to focus on wide-moat, large-capitalization companies trading at reasonable valuations, in our view. As always, the Fund will continue to focus on competitively-advantaged companies that can be purchased at a fair value, in our opinion. As the stock market has continued to climb, it has become more difficult to find companies that fit our investment criteria, but we continue to follow our disciplined investment process and will be ready when market declines provide better opportunities.