The Fund increased 3.08% (Class I) during the quarter, compared
to a 1.97% increase in the Russell 3000 Index.
During the quarter, the Fund's holdings in the health care,
information technology, and industrials sectors provided the
largest contribution to absolute return. Holdings in the financials
sector detracted from return.
The Fund's outperformance relative to the Russell 3000 Index was
primarily driven by security selection in the health care, energy,
and industrials sectors. Security selection in the financials
sector was the primary detractor from relative return.
* Generic drug manufacturer Teva Pharmaceutical Industries Ltd. (
) benefitted from the addition of a well-respected CEO and the
continued successful transition of patients to a new,
patent-protected version of the company's multiple sclerosis drug.
* Shares of Southwest Airlines Co. (
) increased as a result of strong revenue trends and moderating
non-fuel costs which led to significant margin expansion.
* Medical device manufacturer Boston Scientific Corp. (
) benefitted from continued revenue acceleration and the launch of
a new high margin stent with the potential for sizeable share
* Oil and gas exploration and production company Cimarex Energy Co.
) outperformed reflecting stronger commodity prices and an
improving growth outlook based on favorable results in the Delaware
* Household durables company Whirlpool Corp. (
) reported strong quarterly results driven by the North America
division and Brazil. The company continues to benefit from volume
growth and margin expansion.
* Shares of investment manager Fortress Investment Group LLC
declined during the quarter as Nationstar Mortgage Holdings, Inc. (
), one of the firm's larger private equity holdings, performed
poorly. In addition, the firm's macro hedge fund has experienced
disappointing near-term results.
* Rental and leasing services company Aaron's, Inc. (
) declined due to recent lower traffic and weaker comparable store
sales trends, which led to downward revisions in the company's
* Banking and financial services provider Citigroup, Inc. (
) continues to deal with litigation issues and a sluggish trading
environment. The company's request to increase capital return to
shareholders was denied during the most recent regulatory
assessment. Despite these challenges, the company continues to
improve its earnings potential and balance sheet.
* Shares of oil and gas exploration and production company Apache
) responded to the company's weakened competitive position relative
to the domestic oil and gas industry.
* Property and casualty insurer Endurance Specialty Holdings Ltd.
(ENH) reported higher than expected crop losses due to the cold
weather and a decline in corn pricing. In addition, expenses
continued to increase as a result of the reorganization initiated
by new CEO John Charman. Over the next five years, we believe these
changes will position Endurance for significant growth in premiums.
We initiated new positions in several securities during the
quarter. Brown & Brown, Inc. (BRO) is a mid-sized insurance
broker. We view the insurance brokerage industry as highly
attractive with good secular growth prospects, low capital
requirements, and the ability to generate high free cash flow. In
addition, the management team has been successful purchasing
smaller brokers and operating within a highly decentralized
business model. Investor skepticism related to recent large
acquisitions, which we believe will prove unfounded, created an
Oil and gas exploration and production company EOG Resources, Inc.
(EOG) is positioned to generate strong production growth over the
next five years and benefits from domestic exposure to productive
shale oil acreage.
Global pharmaceutical company GlaxoSmithKline PLC (GSK) has several
attractive franchises and pipeline drug candidates that have the
potential to add significant value.
Tobacco product manufacturer Philip Morris International, Inc. (PM)
is the world's second largest tobacco company and owns half of the
leading international cigarette brands. The strength of the product
portfolio enables the firm to be the price leader in many
Household durables company Whirlpool Corp. (
) benefits from the normalization of domestic demand and increased
penetration of home appliances in developing markets.
We eliminated our positions in Southwest Airlines Co. (LUV) and
medical device manufacturer Medtronic, Inc. (MDT) as these
companies' share prices approached our estimates of intrinsic
value. We sold rental and leasing services company Aaron's, Inc. (
) due to recent lower traffic and weaker comparable store sales
trends, which led to downward revisions in the earnings outlook. We
sold our position in investment manager Fortress Investment Group
LLC (FIG) to redeploy funds toward other opportunities where we
have a higher degree of confidence. We also eliminated oil and gas
exploration and production companies Apache Corp. (
) and Occidental Petroleum Corp. (OXY) and reinvested the proceeds
into other opportunities that presented a larger discount to our
estimate of intrinsic value. We closed our position in drug
manufacturer Forest Laboratories, Inc. (FRX) as the market reacted
positively to the news that Actavis, Inc. PLC would buy Forest
Laboratories at a significant premium, and the share price
approached our estimate of intrinsic value.
Austin Hawley, CFA
Rick Snowdon, CFA
Because this Fund expects to hold a concentrated portfolio of a
limited number of securities, a decline in the value of these
investments would cause the Fund's value to decline to a greater
degree than a less concentrated portfolio. There are specialized
risks associated with small capitalization issues, such as market
illiquidity and greater market volatility, than large
The views expressed are those of the portfolio managers as of
March 31, 2014, are subject to change and may differ from the views
of other portfolio managers or the firm as a whole. These opinions
are not intended to be a forecast of future events, a guarantee of
results, or investment advice. The performance data quoted
represents past performance; past performance does not guarantee
future results. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. The
Fund's current performance may be lower or higher than the
performance data quoted. Investors may obtain performance
information current to the most recent month-end, within 7 business
days, at diamond-hill.com.
Performance returns assume reinvestment of all distributions.
Returns for periods less than one year are not annualized. Class Y
shares include Class A share performance achieved prior to the
creation of Class Y shares. These total return figures may reflect
the waiver of a portion of a Fund's advisory or administrative fees
for certain periods. Without such waiver of fees, the total returns
would have been lower. The total return figures reflect the maximum
sales charge applicable to each class. The maximum sales charge for
A shares is 5.00%; C shares have a maximum contingent deferred
sales charge of (CDSC) of 1.00% for redemptions with the first year
of purchase; I shares and Y shares have no sales charge.
Fund holdings subject to change without notice.
The Russell 3000 is an unmanaged market capitalization-weighted
index comprised of the 3,000 largest U.S. companies by total market
capitalization. This index does not incur fees and expenses (which
would lower the return) and is not available for direct
An investor should consider the Fund's investment objectives,
risks, and charges and expenses carefully before investing or
sending any money. This and other important information about the
Fund(s) can be found in the Fund's(s) prospectus or summary
prospectus which can be obtained at diamond-hill.com or by calling
Please read the prospectus or summary prospectus carefully
before investing. The Diamond Hill Funds are distributed by BHIL
Distributors, Inc. (Member FINRA), an affiliated company. Diamond
Hill Capital (Trades, Portfolio) Management, Inc., a registered
investment adviser, serves as Investment Adviser to the Diamond
Hill Funds and is paid a fee for its services. Like all mutual
funds, Diamond Hill Funds are not FDIC insured, may lose value, and
have no bank guarantee.
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