Diamond Hill Large Cap Fund Commentary Q4 2013
During the quarter, the Fund's holdings in the financials, consumer discretionary, and industrials sectors provided the largest positive contribution to absolute return. No sectors detracted from return. The Fund's underperformance relative to the Russell 1000 Index was primarily driven by security selection in the information technology, health care, and energy sectors. Security selection in the consumer discretionary and financials sectors contributed to relative return.
• Life insurer Prudential Financial, Inc. (PHR) reported stronger than expected third quarter earnings driven by higher fees in the variable annuity business and increased earnings in its International segment. The company also benefitted from a robust equity market and higher interest rates.
• V.F. Corp. (VFC), a consumer goods manufacturer, continued to benefit from a shift towards its higher margin lifestyle brands.
• Investment broker Morgan Stanley (MS) was a strong performer during the quarter as the company reported another period of improving margins and generally stronger profitability. Additionally, its capital levels continue to improve.
• Airline Southwest Airlines Co. (LUV) reported stronger revenue and improving operating margins due to better demand, continued network improvements, and recent investments in the fleet.
• JPMorgan Chase & Co. (JPM), a banking and financial services provider, outperformed after announcing another quarter of improving fundamental results along with several key regulatory settlements.
• Medical diagnostic testing provider Quest Diagnostics, Inc. (DGX) underperformed due to weakness in both volumes and pricing.
• Networking and communications company Cisco Systems, Inc. (CSCO) disappointed investors by issuing weaker than expected guidance. The shortfall was linked to some loss of share in low-end routing as well as a pause in demand ahead of new product introductions.
• Oil and gas exploration and production company EOG Resources, Inc. (EOG) did not keep pace with the equity rally during the quarter due to concerns around domestic oil prices as Brent-WTI differentials widened during the quarter.
• Property and casualty insurance company Progressive Corp. (PGR) reported strong earnings, but the threat of increased competition weighed on shares.
• Tobacco product manufacturer Philip Morris International, Inc. (PM) declined after the company lowered its full-year earnings guidance due to weaker than expected volume and the negative effect of foreign currency translation.
We initiated new positions in two financial services companies. Insurance brokerage and consulting firm Marsh & McLennan Co., Inc. (MMC) is one of the largest insurance brokers in the world, with a very strong position among large corporate clients. The insurance brokerage business is very attractive, with high free cash flow generation and strong global growth opportunities. Additionally, Franklin Resources, Inc. (BEN) is a large global asset manager with a long history of shareholder-friendly capital allocation, diversified assets under management, great brands, a strong and growing international footprint, and a solid balance sheet.
We sold apparel and footwear manufacturer Nike, Inc. (NKE), property and casualty insurance company Hartford Financial Services Group, Inc., and investment brokerage Charles Schwab Corp. (SCHW) as these companies' stock prices reached our estimates of intrinsic value.
Risk Disclosure: Overall equity market risks may affect the value of the fund.
The views expressed are those of the portfolio managers as of December 31, 2013, are subject to change and may differ from the views of other portfolio managers or the ﬁ rm 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 ﬂ uctuate 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 C, Class I and Class Y shares include Class A share performance achieved prior to the creation of Class C, Class I shares and Class Y shares. These total return ﬁ gures may reﬂ ect 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 ﬁ gures reﬂ ect 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 ﬁ rst year of purchase; I shares and Y shares have no sales charge. Fund holdings subject to change without notice.
The Russell 1000 Index is an unmanaged market capitalization-weighted index comprised of the smallest 1,000 companies by market capitalization in the Russell 3000 Index, which is 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 investment.
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 888.226.5595. Please read the prospectus or summary prospectus carefully before investing. The Diamond Hill Funds are distributed by BHIL Distributors, Inc. (Member FINRA), an afﬁ liated 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.