Diamond Hill Select Fund Commentary - Q4 2013
During the quarter, the Fund's holdings in the financials, industrials, consumer discretionary, and health care sectors provided the largest positive contribution to absolute return. No sectors detracted from return.
The Fund's performance relative to the Russell 3000 Index was primarily driven by security selection in the consumer discretionary sector. Security selection in the information technology sector and the Fund's cash position detracted from relative return.
• Airline Southwest Airlines Co. reported stronger revenue and improving operating margins due to better demand, continued network improvements, and recent investments in the fleet.
• Drug manufacturer Forest Laboratories, Inc. (FRX) announced results for the most recent quarter that surpassed expectations. More importantly, the company's new CEO announced aggressive cost cutting targets and a $1 billion share buyback plan.
• Consumer goods manufacturer, V.F. Corp. (VCF), continues to benefit from a shift towards its higher margin lifestyle brands. • Consumer products manufacturer Jarden Corp. announced strong, broad-based organic growth and closed on the acquisition of Yankee Candle.
• Mobile communication and media device company Apple, Inc. (AAPL) reported revenue and earnings that were higher than consensus expectations, indicating a good start to the sale of the newly launched iPhone 5S. Additionally, Apple also announced that it has reached an agreement with China Mobile - China's largest wireless carrier - to sell iPhones on its latest network in China.
• 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 companies Apache Corp. (APA) and Occidental Petroleum Corp. (OXY) did not keep pace with the equity rally, due to concerns around domestic oil prices as Brent-WTI differentials widened during the quarter.
• Asset management company Franklin Resources, Inc. (BEN) is a new position that was added late in the quarter and as a result, did not contribute to performance.
• Freight transportation management company Hub Group, Inc. (HUBG) declined after reporting earnings below Wall Street analysts' expectations.
We initiated a new position in asset management company Franklin Resources, Inc. during the quarter. The company 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 life insurer Prudential Financial, Inc. and banking and financial services provider JPMorgan Chase & Co. as these companies' stock prices approached our estimates of intrinsic value.
Risk Disclosure: 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 capitalization issues.
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 Y shares include Class A share performance achieved prior to the creation of 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 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 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.