Small Cap 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 Small Cap Fund (BUFSX) produced a return of 43.88% during the quarter, outperforming the Morningstar U.S. Small Growth Index’s advance of 32.84%. Strong stock selection in Information Technology, Health Care, and Consumer Discretionary were the biggest drivers of outperformance relative to the Index. During the broad market selloff of the 1st quarter, small cap growth stocks declined by about 9% more than large cap growth. This reversed itself in the 2nd quarter, when small caps rebounded more strongly and outperformed large cap growth.

TOP CONTRIBUTORS

Livongo Health was the best performing stock for the Fund during the quarter, returning 164%. The company is a leading provider of technology solutions for remote monitoring of patients with chronic medical conditions. In the current environment of COVID-19 quarantines, demand for the company’s solutions has accelerated. Strong operating performance along with increased investor willingness to pay higher multiples for companies with solutions that benefit from the pandemic, helped drive the stock to all-time highs in the quarter.

Lovesac, a maker of comfortable modular sofas and seats, was another strong performing position during the quarter, and the stock climbed 350%. Shares sold off sharply in the 1st quarter due to investor fears that its business would suffer if its retail showrooms could not operate during business closures. However, the company pivoted towards e-commerce during the pandemic and subsequently reported very strong growth in its online channel. The company has also benefited as many consumers increased spending on home-related items during the quarantine.

TOP DETRACTORS

After several consecutive quarters of very strong performance, eHealth was the biggest detractor from Fund performance during the quarter. The company is a market leader in helping seniors select the best Medicare Advantage, Supplemental Medicare, and/or Part D health care insurance options. The company’s share price took a step back during the quarter due, in part, to investor concerns about increased churn as the company pushed more consumers to their online channels. However, we believe the long-term outlook for the company and its business model remains strong.

(As of 6/30/20) — The first two quarters of 2020 were turbulent for investors, and we expect the trend of elevated volatility to continue into the 2nd half of the year. We believe the trajectory of the COVID-19 pandemic will be a key driver of market direction. The gradual reopening of the U.S. economy has coincided with a surge of virus cases in Sunbelt states and California. Investors will closely watch evolving data on infection rates, hospitalization rates, and deaths, and, while we believe that state and federal governments will resist shutting down economies again, any signs that the U.S. is returning to broad-based quarantines would likely lead the stock market downward.

We are also closely watching for news on treatments, as well as indications of a promising vaccine, and expect to see more data within the next several months. Any sign that an effective vaccine could be rolled out in the near term would be a binary event, and we would expect the market, especially the value stocks that have lagged growth in the 1st half of 2020, to rerate and trade sharply upward.

The trajectory of the U.S. economy and potential recovery in the job market remains another question mark. While jobless claims in June have pointed to a sharp recovery in the U.S. job market, employment remains far below pre-pandemic levels, and any efforts to reinstate quarantines could derail the recovery.

We are also paying close attention to the upcoming elections in November. Recent signs suggest larger Democratic Party gains than what we would have predicted at the start of 2020. Large Democratic gains could lead to factors such as higher corporate taxes, an increased focus on prescription drug prices, and regulatory pressure on the business models of the mega-cap technology companies that have been market leaders in recent years.