Diamond Hill Small Cap Fund commentary for the fourth quarter ended December 31, 2014.
The Diamond Hill Small Cap Fund increased 2.84% (Class I) during the quarter, compared to a 9.73% increase in the Russell 2000 Index.
The Fund’s holdings in the financials and consumer discretionary sectors provided the largest contributions to absolute return, while holdings in the energy sector detracted from return.
The Fund’s underperformance relative to the Russell 2000 Index was primarily the result of an overweight position in the energy sector, higher levels of cash, and security selection in the health care and industrials sectors. No exposure to the materials sector modestly contributed to relative return.
Diamond Hill Small Cap Fund: Best Performers
•Shares of car rental company Avis Budget increased after reporting solid third quarter profits on continued pricing increases and high utilization.
•Property and casualty insurance company Navigators Group rose after reporting better than anticipated third quarter earnings, with continued double-digit premium growth and strong underwriting profitability.
•Personal care products and services provider Steiner Leisure Ltd. (STNR) saw its stock price recover slightly in the fourth quarter, though it still experienced a negative return for the year. No major fundamental developments occurred.
•Aircraft rental and leasing company Aircastle Ltd. (AYR) rose after reporting strong third quarter earnings, as core leasing revenue increased and cash interest margins improved due to lower financing costs. The company also increased its quarterly dividend and announced a share repurchase authorization.
•Shares of healthcare products manufacturer Natus Medical, Inc. (BABY) increased after announcing a modestly better than expected quarterly report.
Diamond Hill Small Cap Fund: Worst Performers
•A combination of domestic oil production growth, an increase in the supply of oil from Libya, weakening demand trends in Europe and Asia, and OPEC’s unwillingness to reduce output to mitigate anticipated over-supply led to a significant decline in oil prices as well as a decline in the oil price outlook over the next few years.
As a result, oil and gas exploration and production companies Rosetta Resources, Whiting Petroleum, Cimarex Energy and Denbury Resources all underperformed the broader market.
•Railroad service company Trinity Industries declined, as the railcar segment is heavily influenced by demand for tank cars to transport oil. Weaker oil pricing puts this demand at risk. The company also suffered a setback in a large lawsuit.
Diamond Hill Small Cap Fund: New Positions
We did not initiate any new positions during the quarter.
Diamond Hill Small Cap Fund: Eliminated Positions
We completed the sale of transportation and logistics services provider XPO Logistics. Most of our shares were sold in the 2014 third quarter as the stock price approached our estimate of intrinsic value.
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