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Diamond Hill Capital Large Cap Fund Q3 Commentary

Holly LaFon

Holly LaFon

248 followers

The Fund increased 5.42% (Class A, without sales charge) during the quarter, compared to a 6.02% increase in the Russell 1000 Index.

During the quarter, the Fund's holdings in the industrials, energy, and financials sectors provided the largest positive contribution to return. Holdings in the consumer staples sector detracted from return. The Fund's underperformance relative to the Russell 1000 Index was primarily driven by security selection in the information technology sector, as well as security selection and an overweight position in the consumer staples sector. Security selection in the energy and industrials sectors contributed to relative return.

Best Performers

• Exploration and production company EOG Resources, Inc. (EOG) continues to be a leader in the horizontal development of oil plays in the U.S. Results continued to improve and exceed expectations as productivity increased and costs are managed.

• Building and aerospace technology conglomerate United Technologies Corp. (UTX) experienced surprisingly strong order growth in the Otis, Carrier, and Pratt & Whitney segments. Lower pension costs and synergies from the Goodrich acquisition bode well for future financial performance.

• Boston Scientific Corp. (BSX), a medical device manufacturer, recently reported its first quarter of growth in more than three years, while also raising its earnings outlook. An emerging pipeline of new products offers the potential for continued improvement and the potential to return to mid-single digit revenue growth.

• Exploration and production company Cimarex Energy Co. (XEC) benefited from improving well results in the Delaware Basin in West Texas. Cimarex has a sizeable acreage position in the Wolfcamp Shale which we believe can help sustain strong production growth at very good economics if the development is successful.

• Diversified machinery manufacturer Dover Corp. (DOV) responded favorably to renewed organic sales growth, improving margins, and an improved outlook for its Communications Technologies business.

Worst Performers

• ConAgra Foods, Inc. (CAG), a packaged food manufacturer, fell as it reported volume declines in its branded foods businesses and higher-promotional spending.

• Sysco Corp. (SYY), a food distributor, announced disappointing earnings as weakness in its end markets has made it difficult to achieve anticipated revenue growth targets.

• Software provider Microsoft Corp. (MSFT) reported a number of noteworthy events during the quarter. Investors reacted positively to the announcement that Microsoft will appoint a new CEO within the next 12 months to replace Steve Ballmer. However, shares retreated after the company announced the purchase of Nokia's phone business along with certain patent rights for $7.2 billion as many investors question whether that market will ever prove profitable.

• Drug manufacturer Abbott Laboratories (ABT) reported revenue growth that was below expectations due to its exposure to the slower growth economies in Europe and the emerging markets. Despite the recent weakness, Abbott is a high-quality company with shares that we believe to be attractively priced. In addition, its management team has a strong record of investing capital prudently.

• Baxter International, Inc. (BAX), a medical supply manufacturer, declined during the quarter due to concerns that it could lose more market share than expected in the hemophilia market. 

New Positions

We initiated a new position in office products retailer Staples, Inc. (SPLS). Our view is that the company has a market leading position, the ability to generate strong free cash flow, and a strong balance sheet. Additionally, strategic initiatives to close stores and focus efforts on driving sales online and industry consolidation further support our thesis.

Eliminated Positions

There were no positions eliminated during the third quarter.


Rating: 3.0/5 (4 votes)

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