Dividend Focus Fund

(As of 9/30/20) — Equity markets sustained their momentum in the 3rd quarter, with the S&P 500 Index returning 8.93%. Macro data continued to improve, and companies broadly reported earnings that proved to be more resilient than expectations. While the U.S. experienced another spike in COVID-19 cases during the quarter and tragically surpassed 200,000 deaths, positive news on vaccines and therapy fronts continued to provide hope for investors.

The Russell 3000 Index increased 9.21% in the quarter. Growth continued to outperform value, as the Russell 3000 Growth Index advanced 12.86%, compared to the Russell 3000 Value Index return of 5.41%. Relative performance was correlated with market cap size in the quarter, with the large cap Russell 1000 Index delivering a return of 9.47%, compared to the Russell Mid Cap Index return of 7.46%, the smaller cap Russell 2000 Index return of 4.93%, and the Russell Micro Cap Index return of 3.69%. More cyclically-exposed Consumer Discretionary, Materials, and Industrial sectors performed best in the quarter. Energy was the sole declining sector, hurt by lingering weakness in oil demand.

(As of 9/30/20) — The Buffalo Dividend Focus Fund (BUFDX) posted a return of 6.54%, underperforming the Morningstar U.S. Large-Mid Cap Index return of 9.56% and the S&P 500 Index return of 8.93%. With the exception of our Energy and Utilities holdings, all sectors in the Fund and benchmark posted positive returns. The Fund’s sectors with the highest weightings had mixed performance relative to the benchmark index. Health Care and Financials posted favorable relative performance compared to the benchmark’s sectors performance, while Information Technology experienced lagging relative returns. Our holdings in the Energy, Real Estate, and Telecommunication Service sectors delivered constructive performance relative to the benchmark. Sectors including Consumer Discretionary, Consumer Staples, Industrials, Materials, and Utilities detracted from the Fund’s performance.

Top Contributors

Specific securities that contributed most positively to performance include Apple (AAPL), Horizon Therapeutics (HZNP), and Nuance Communications (NUAN). Apple advanced on solid quarterly results, anticipated growth from 5G iPhone sales, and announcement of a stock split. 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). Nuance Communications (speech recognition software and artificial intelligence) climbed on healthy quarterly results and favorable traction in new healthcare products.

Top Detractors

Viper Energy Partners (VNOM), BioMarin Pharmaceutical (BMRN), and Intel (INTC) diminished the Fund’s performance. Viper Energy, which holds mineral interests in the Permian Basin, declined on weak earnings due to falling energy prices and reduction in its dividend distribution. BioMarin Pharmaceutical fell after the U.S. Food & Drug Administration (FDA) failed to approve its hemophilia therapy. The regulator recommends two years of data from final-stage study. Intel, which develops and manufactures microprocessors and chipsets, dropped as the company issued a weak earnings outlook and delayed its next generation of computer chips.

(As of 9/30/20) — The stock market reached a record high during the quarter on the expectations that the economy can recover from the COVID-19 pandemic. The market fell from the peak as investors became concerned regarding a second wave of COVID-19 cases, the prospects for passage of a fiscal stimulus was bogged down by partisan politics, anxiety around the presidential election, lack of an agreement on Brexit, and rhetoric around new anti-trust regulation regarding the large technology companies. As the current quarter unfolds, the market will likely be impacted as some of these issues play out. Studies on vaccines and drug therapies to treat COVID-19 are likely to be released. In addition, the election will occur; nevertheless, the results may be delayed and contested. Additionally, Brexit deadlines will force decisions on an agreement or further delays. Resolution of these issues will likely influence the prospects, timing, and size of additional fiscal stimulus measures needed to support the economy over the intermediate term and sustainable growth over the longer term. Monetary policy continues to remain accommodative, as Central Banks reiterate their policies of not raising interest rates, continue debt-buying programs, and expand inflation tolerance levels.

Despite the uncertainty created by the pandemic, 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.