Diamond Hill Investment Group, Inc.

Reported fund returns for the quarter included the Diamond Hill Small Cap Fund Class I up 4.93% versus the Russell 2000 Index, the small/mid-cap strategy trailing the Russell 2500 Index by over 200 basis points, the large-cap fund roughly in line with the market, the All Cap Select Fund up roughly 4.5% in line with the Russell 3000, the Long-Short Fund down about 0.5% versus 2.78% for its blended 60/40 benchmark, the Research Opportunities Fund down 1.2% versus 4.6% for the Russell 3000, and the Financial Long-Short Fund up 2.97% versus 3.96% for its blended benchmark. For the Research Opportunities Fund, five-year return was 10.1% versus 14.2% for the Russell 3000 and 10.7% for the blended benchmark. Praxair and Linde were described as a $73 billion merger, DowDuPont as a $130 billion merger, and DowDuPont said it intended to realize $3 billion in cost synergies within 18 to 24 months. In terms of positioning, small/mid-cap cash was between 9% and 10%, mid-cap cash was about 9.5%, large-cap cash was just under 2%, and Research Opportunities had net exposure of 79.5% and gross exposure of 126%.

No single CEO addressed the call, but the lead strategic message was that Diamond Hill’s managers see long-term opportunity in industry consolidation and in owning businesses with pricing power, strong assets, or spin-off upside. Bobby Murphy framed the chemical sector as still fragmented, with consolidation likely to continue across coatings and industrial gases, and said the firm would be ready to act if future opportunities arise. The tone was patient and selective rather than aggressive, with repeated emphasis on long-term intrinsic value and waiting for attractive entry points.

No CFO spoke on the call. Financial commentary instead came from the portfolio managers, who highlighted specific portfolio statistics and cash levels: small/mid-cap cash was 9% to 10%, turnover was 19%, and only five new securities were bought in the first nine months versus a typical 10 to 15 in a normal year. The large-cap portfolio had cash just under 2% and turnover of 21%, while Research Opportunities had net exposure of 79.5% and gross exposure of 126%; John Loesch also said the Financial Long-Short Fund’s underperformance stemmed partly from lower net exposure and hurricane impacts. Managers also pointed to valuation discipline, such as selling names like Stryker, Eastman Chemical, and Government Properties when they reached intrinsic value or recovered.

The only question on the webcast asked whether consolidation in coatings is likely to continue. Bobby Murphy answered yes, saying the industry remains very fragmented, the top four coatings firms control less than 50% of the global market, and there are still more than 5,000 firms outside those leaders. He also said PPG could reengage Akzo Nobel, Axalta could be an acquisition target, and industry CEOs themselves expect consolidation to continue over the next several years. There were no phone questions.