Diamond Hill Select Fund commentary for the fourth quarter ended December 31, 2014.

The Fund increased 6.17% (Class I) during the quarter, compared to a 5.24% increase in the Russell 3000 Index.

The Fund’s holdings in the consumer discretionary, financials, and health care sectors provided the largest contributions to absolute return, while holdings in the energy sector detracted from return.

The Fund’s outperformance relative to the Russell 3000 Index was primarily the result of security selection in the consumer discretionary sector, while security selection in the information technology and industrials sectors detracted from relative return.

Diamond Hill Select Fund

Diamond Hill Select Fund: Best Performers

•Shares of household durables manufacturer Whirlpool increased as the company released good underlying results during the quarter highlighted by continued domestic strength.

•Consumer products manufacturer Jarden rose after it released strong third quarter results highlighted by solid organic growth, driven by the Branded Consumables and Consumer Solutions divisions, and continued margin expansion.

•Food products company Post Holdings rose sharply during the quarter after the company assured investors that recent business disruptions were temporary in nature.

•Insurance brokerage firm Willis Group Holdings reported worse than anticipated third quarter earnings with organic revenue growth in the company’s Global segment hurt by a soft reinsurance market and tough comparisons in the prior year period. However, expenses stabilized and the company appears poised to show meaningful margin improvement over the next several quarters.

•Medical device manufacturer Boston Scientific rose after the company reported strong third quarter results, showing continued signs of revenue acceleration and good execution on margin expansion goals.

Diamond Hill Select Fund: Worst Performers

•Diversified information technology company International Business Machines declined after the company reported disappointing third quarter earnings and management indicated that it would fail to meet the 2015 earnings guidance detailed in the company’s much-publicized 2015 Roadmap.

•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 Cimarex Energy and EOG Resources underperformed the broader market.

•Freight transportation management company Hub Group declined after it reported weak third quarter earnings. The company also lowered guidance for the remainder of the year due to poor service levels from its rail partners, as well as a legal settlement with drayage drivers in California. We believe rail service levels should begin to improve in 2015 as railroads are currently making investments to add additional capacity.

•Diagnostic systems provider Alere declined after installing a new CEO during the quarter, while weathering an unsolicited attempt by the previous CEO to take the company private. Subsequently, the company announced that it would sell its Health Management business in a first sign of the implementation of a new agenda focused on asset sales and debt paydown.

Diamond Hill Select Fund: New Positions

We took advantage of the stock market’s over-reaction to food products company Post Holdings’s weak quarterly results to initiate a position in the Fund. We also initiated a position in Vantiv as the company’s shares traded lower after a mild third quarter disappointment in the financial institution segment of its business. The shares then rebounded during the fourth quarter as investors focused on the long-term growth story and attractive valuation. We believe Vantiv has an attractive growth profile and should continue to generate high single digit organic revenue growth and mid-teens earnings per share growth.

Diamond Hill Select Fund: Eliminated Positions

We eliminated our position in consumer snack & beverage manufacturer PepsiCo during the fourth quarter market sell-off to provide funds for more attractive investment opportunities. PepsiCo shares were very close to our estimate of intrinsic value at the time of sale. We eliminated our position in oil and gas exploration and production company EOG Resources, Inc. (EOG) as a result of what we believe to be structural changes in the competitive dynamics of the global oil industry and subsequent change to our estimate of intrinsic value. 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.

Diamond Hill Select Fund

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